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Economic Decision Making

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April 20, 2019

 Economic Decision Making

sDecision-making is a logical selection being done from the available set of alternatives.
Decision making comprised of three aspects (Mankiw, 2014):
● Numerous options and choices produced supported by certain knowledge and logic
during the decision making
● The decision can only be made if there are present some alternative, if there is no
alternative available then decision-making process will not work
● One of the significant parts of the process of decision making is purposefulness, an
individual who is involved in making the decision should have some purpose in his mind.
What are those important principles regarding how individuals will make decisions?
For decision making on a personal level, there are four basic economic principles. These four
principles act as the guiding elements to acknowledge the motivational aspects that make the
customers enabled to collaborate in the markets (Mankiw, 2014).
People Face Trade-offs
This particular principle shows the decision-making process that has been experienced by
a person before starting any activity. Whenever a customer goes to the market for buying
products, then he always makes sure that the money he spent for buying that particular product
represents that price which she or he could never pay for another need or product. This behavior
makes a vital reality check on the customer's spending pattern and somehow force the customer
to choose and prioritize in their spending (Mankiw, 2014). This practice forces the consumer to
buy the necessities first before buying luxury or unnecessary items or needs. Companies, as well
as the marketing professionals, have acknowledged this principle that's the reason they are
marketing those items which are connected to their particular needs (Mankiw, 2014).
The Cost of a Product Is What You are Ready to Give Up to Have It
All those buyers who only check the pricing tags of items are those who usually take
wrong decisions and often don’t estimate the real value of the products. The wise and rational
consumer will consider the less than tangible and non-tangible costs involved in the purchases at
hand (Mankiw, 2014). For example, a product whose cost is less but need a range of long-term
maintenance services, then that item would become more expensive due to maintenance cost in
long-run as along with money the customer needs to spend his efforts and time to take the
product to workshops. Take the case of a person who purchased motorcycle of low quality may
need to take it to the workshop very often and hence the maintenance cost will make it expense
rather than purchasing motorbike from the good manufacturer (McConnell, Brue and Flynn,
2009).
Rational People mostly think at the Margin
Mankiw explains the willingness of a rational individual who wants to buy a product
depending on the marginal benefit that can be enjoyed by that person due to one additional
feature of that product. Mankiw highlighted the difference in worth between diamonds and
water. The marginal increase in the water supply of an individual rarely comes at a noticeable
cost, while the marginal increase in the price of diamonds is really valuable (McConnell, Brue
and Flynn, 2009).
People Usually Respond to different Incentives
There exist a reason behind the saving of hard-earned income by the consumer until there
has been the announcement of the big sale. Marketing tactics are used by retailers to incentivize
the behavior of the consumer, compelling them to bring out money to earn or save reward for the
future (McConnell, Brue and Flynn, 2009).
How People collaborate with one other?
Anyone can become rich by trading
● You cannot compare trade with sports, in which the team is a winner, and the other one
is not.
● Trade even takes place in your home. You or your family must be associated with
some trade with other people or families. Several families don’t grow their food, make
clothes or build their houses (Gallos, Rybski, Liljeros, Havlin and Makse, 2012).
● Just like that, countries also get benefits by trading with other ones.
● Trading can be of particular products that profits the country, same goes for the
families.
Economic activities can be improved by this kind of markets
Those countries that used to have the planned economies are now abandoning or have
already ended these systems. They are now focusing on establishing market economies.
● A market economy can be defined as an economy which deals with the assets over the
redistributed judgments of many companies or household as they interrelate with each other
for services and goods (Zavadskas and Turskis, 2011).
● Market prices reveal the resources costs which are used in its production as well as the price
of the goods for the consumers.
● The markets got failed because of the centrally planned economy because they didn’t let the
markets to work.
● Adam Smith and the Invisible Hand, in 1776, the work of Adam Smith suggested that the
individuals are enthusiastic by their interests though, but there is an invisible hand that guides
the self-interest to promote the economy of the society (Zavadskas and Turskis, 2011).
The market outcomes are sometimes improved by the government. Government has mainly
two reasons to deal with the economy: to promote equality and efficiency.
● At the time of the market failure, the policies by the government are beneficial.
● Market failure means a condition when the market is left for it fails to give the resources
proficiently.
● Market failure examples are:
● An externality is defined as the impression of the actions of one person on the prosperity of
the non-participant (for example Pollution)
● Market power means: the capabilities of a solitary economic player or the group of players
and their impact on market values (Zavadskas and Turskis, 2011).
● That is because the economy of the market rewards the individuals for their capabilities to
produce such things that people like to buy those products, so there is an uneven supply of
economy’s prosperity (Zavadskas and Turskis, 2011).
● But remember that according to the principle, the government may be responsible for
improving the market outcomes. But it is not always necessary that the government will
adjust these outcomes (Zavadskas and Turskis, 2011).
The concepts about how the economy works as a whole?
The decisions and the interactions between the people concerning the goods and
investments altogether make up the economy (Zeleny, 2012). The concepts or principles concern
with the economy working in one piece. A standard of the country depends on how good is its
capabilities of services and the production of goods.
The variation in standards of living is surprising all over the world. In 2003, about
$37,000 was the income of an average American (Zeleny, 2012). And an average Mexican used
to earn $8,950 while a Nigerian earned about $900 in the similar year. And it is not a surprise to
know that this difference has reflected the life quality in many countries because the high-income
citizens of a country have more cars, TV sets, better healthcare, better nutrition and a long-term
expectancy of life rather than the low-income citizens of a nation (Zeleny, 2012).
Modifications in the standards of living are changing and increasing by time. The
incomes have been grown for about 2% per year in the USA after the costs of revenues were
modified. And after 35years, this average income increases to its double (Zeleny, 2012).
What are the significant differences and what it explains about overtime and the living
standards? There is a simple answer that these changes in the living standards are attributable to
the variations in the countries' productivity, i.e., the number of goods and the services that
produce from every hour of work. Those nations in which the workers produce a large number of
products and services in time, they enjoy high living standards while those where the workers are
less efficient they have a meager existence (Mumford and Norton,1984). So, the country’s
productivity determines the nation’s growth rate of average income.
The relation between living standards and productivity is average, but the implications
are wide-ranging. If productivity is considered to be the main factor of the living standards, then
its descriptions have minor importance. For instance, some reporters claim that countries like
Japan have increased competition that reduces the growth of the incomes of the US from 1970 to
1980 (Frederiks, Stenner and Hobman, 2015).
The living standards and productivity relationship have also thought about the effects of
public policy, how these policies will affect the production of goods. To raise the standards of
living policymakers need to hire well-educated employees, have proper tools for the production
of goods and have innovative technology (Frederiks, Stenner and Hobman, 2015).
When the government prints a lot of money, then the prices increase
In Jan 1921, a newspaper’s rate was 0.30 marks in Germany. And in 1922, it costs about
a few hundred (Frederiks, Stenner and Hobman, 2015). Everything was raised by the respective
values. It is one of the most well-known cases of inflation.
Even though the USA has never gone through such bad experience of inflation such as it
happened in Germany in 1920s, but inflation has always been a problem for the economy. For
instance, in 1970, the overall prices were doubled, and it was called as public’s enemy by
President Gerald Ford. And in the 1990s, the inflation rate was about 3% annually, and this rate
would take 20 years or more to increase the values to double its previous standards.
Policymakers around the globe have similar goals to keep the level of inflation at a lower level.
What are the causes of inflation? The most common reason for rising is the increase in the
amount of money. When the quantity of money is increased by the government, the worth of
money falls. In the 1920s in Germany, the value of the cash was growing over three times
because the amount of money was also multiple by three every month. The history of the US
economy states that in the 1970s the reason behind inflation was the increase in the amount of
money while in 1990s, the low inflation was related to the slow growth of the amount of cash
(Kenrick, Griskevicius, Sundie, Li and Neuberg, 2009).
Question # 2
When determining education policy goals, political ambitions and high expectations can
often be at odds with limited resources. Policy-making seeks to reconcile both of these
opposing forces by engaging in trade-offs.
When it is about measuring the budgetary parameters, the education policy goals may be
inevitable through identifications. It includes the realistic goals which mean that achieving them
can be opted out as an option. The education policy trade-offs include the different scenarios
process of weighing the focus within the sector of education. It means that when there is a need
for the education level – starting from childhood until high school education – there will be a lot
of costs related to it (Verger, Altinyelken & Novelli, 2018). These need to be assessed with the
proper education policy with estimating the cost keeping the IIEP Pôle de Dakar in consideration
within the national staff team members. The assessment for needs should be exercised to
determine the financial simulations which can be the leading indicators of an education system.
There are many possibilities with the model which help reach the need through objectives
successfully (Verger, Altinyelken & Novelli, 2018).
TRANSITIONING FROM THEORY TO PRACTICE
When need assessment is conducted, it is always based on the fact orientation. It means
that when there is a certain level of education sector covered, for example about 100% of
children are in the school for primary schools. It will also determine the count of high school
buildings and the teachers within that school along with that the teaching facilities. Additionally,
there will be an assessment of the play facilities as well as the admin staff hired or should be
employed in that specific school. The estimation for the financial resources will also be there to
keep the education policy goals aligned. There are different scenarios to achieve the goals which
are quantified and defined with the construction of the school, salaries of staff and teachers, total
hours of teachers working, scholarships amount and much more (Verger, Altinyelken & Novelli,
2018). The primary variable for all these concerns is the ration for student and teacher.
When you are trying to achieve the means for smaller classes, then you need to have
more teachers along with other expenditures included. It is necessary to have a competitive
salary so that you can retain the teachers who provide quality services to the school. They need
to attain the standards and maintain where the base will be their good salary. If both of these
needs are not addressed, then it will be challenging to regulate the system, or the student and
teacher ratio will move towards the upside on the other side. The recruitment of the teachers will
be done by the school, but through the parents, they will be paid which means that it can turn
into a huge problem in the long term (Verger, Altinyelken & Novelli, 2018).
An Exercise in Financial but also Political Sustainability
If you talk about the financial and technical questions that how the school will be
working on the need of courses during the rise of education policy tradeoffs, then it is not just the
concern of the technical experts. The emphasis should be both by the political dimension and
technical experts. For example, if 60% of the country completion rate is over primary education,
then it needs to reach 100% with committing to the government entering the target. Along with
that, the objective will be non-negotiable. The response will be a delay in its achievement with
the compatibility of target date along with resources on hand. However, the goal politically will
always be the responsibility of the government (Dlouhá and Pospíšilová, 2018). When the
country is making its own decisions about modeling, then the scenario should be over the future
or the results regarding the education policies. The government takes credibility with selecting
options along with making sure that the aims of the policy are based on realism through the
instrumental sustainability of the model.
When there is a thought of opening a new factory by the company’s president, their
decisions are based upon the profitability of the firm with opting out for alternatives. For
example, he/she wants to upgrade the existing factory or the equipment. The main point here is:
what type of method are you going to use to expand the production of the company to increase
profits?
 The president will be deciding upon the factors of tradeoffs that funds are needed to bring
up a new factory whether it is for the technological upgrade or raising the wages of the
employees. When you are thinking to attend a graduate school, the deciding factor remains the
same with keeping the tradeoffs in mind — earning the benefit of getting an education, and
bachelors degrees will eventually bring you high-end results with getting a good job in future.
Students face the tradeoff when it is about spending the money on their studies or the leisure they
wish to have in life (Dlouhá and Pospíšilová, 2018). They will also face the same tradeoff when
it is about taking a loan for studies, home or car.
There are psychological benefits related to it such as if you want to go on a vacation, you
have to determine the cost first and then decide (Dlouhá and Pospíšilová, 2018). You can think
of two ways regarding the benefits. The first one is to compare the vacation spot and what you
would do there or is worth it or not. The second one is that you have worked hard to earn this
money which you are going to spend on leisure time for a vacation. So, the decision will be
based on the psychological benefits keeping the cost and vacation both in mind.
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