How and why do people make decisions? This was our main focus throughout our economics unit. If you think about it, we make decisions all the time and sometimes even unconsciously. People make decisions when they are choosing what to wear in the morning, what to eat for dinner, which college to go to, where to go for vacation, and much more!
One way people can make decisions is by going through a process called PACED which stands for problem, alternatives, criteria, evaluate and decision. In this method, you will weigh the best cost and benefits from the decisions and chose the best choice according to the criteria. Take choosing where to go for spring break an example. The problem in this case will be; Where should I go for spring break? My alternatives or the options available for me are; Nara (Japan), Boston, or Hawaii . The criteria or what characteristics I will be looking forward to and will base my opinions on are; the cost, the distance I will have to travel, and the entertainment at that place. Now for the criteria that are more important will weigh more than the others. For me, the cost and entertainment will weigh more than the distance I have to travel. So , the graph will look like this:
To evaluate my findings, I would have to fill in my chart and see which alternative would best meet my criteria:
The alternative with the most positive points and had best met my criteria was Nara, Japan, which is my final decision. As you can see from the chart, this alternative has the most positive bars and has the best characteristics I was searching for.
Now, choices have financial costs and non-financial costs. Financial costs are when they literary take money and non-final costs are what you have to give up in order to get. In every economic decision, it involves giving up something in order to get your own choice (second best choice), which is called opportunity cost. For example; Giving up watching t.v to do homework. On another note, trade off is when you give up a little bit of something in order to get more of something else. You can get a little of each but not to it’s fullest extent. It can be as simple as “I gave up a little bit of ice cream in order to get more peaches.
Another reason why people make decisions is because of the incentives. Many people respond to incentives in predictable ways. Basically, incentives are something that motivates people to do something (both positively and negatively). E.g. The incentives for people to buy Uniqlo jeans are because they are cheap and good quality. Just like incentives, there are always positive and negative consequences in the future after making any economic decision. These consequences usually help economists look for the best profit possible in the future. We can conclude: “Historians look back, economists look forward.”
Salesmen or producers may make decisions that will help provide their company to make a profit. They will choose methods in which they can produce products at a low cost and yet sell them for a high price to be able to make a profit. Profit = Total revenue – Total cost where Total revenue = # of items sold x selling price.
As shown, there are many reasons and methods in which people make decisions. But in most cases, people do not go through the long process of making a PACED diagram or calculating the numbers to search for making a profit. It just happens in our daily lives. For instance I, am making the decision to finish this blog post before break than to finish it at the last minute because there will be a more positive consequence lying in the future ahead of me (I can enjoy my break)!