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By the end of
Economic decisions
explain what an ‘economic decision’ is;
this chapter list the main influences on individuals in making economic decisions;
you should be list the main influences on firms in making economic decisions.
able to:

Concept map Economic decisions

sectors in the economy

individuals firms government

other factors affecting

individuals’ and
firms’ decisions

Economic decisions
The economy is dynamic. Individuals or households are constantly choosing on
what goods and services to spend their income. They are choosing whether to
save or to spend. They are even considering where to work. Firms are constantly
choosing what goods to produce in what quantities, and at what prices to sell
economic decisions • those goods. These activities all involve economic decisions where an individual
is faced with options and chooses one course of action.

Influences on economic decisions

Factors influencing the economic decisions of households
(consumers)
Households or individuals in the economy are the consumers of goods and
services and the owners of the factors of production. These individuals make
economic decisions, such as what goods or services to buy, or where to
work. Individuals are not isolated – each interacts with others and with the
environment. The following factors influence the economic decisions of
households.
• Personal choice. Personal choice is a desire for a product that is acted upon.
People acquire goods and services that they want or need. Mr Chai might
choose to buy a set of pliers but Mrs Chai might choose to buy a matching
brooch and scarf.
• Size of income. Generally, growing incomes allow for the purchase of more
goods and services, and, conversely, declining incomes mean that fewer
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Satisfaction.

purchases are possible. A

higher income also allows
the individual to buy
better quality goods and
services.
bandwagon effect • • Bandwagon effect.
Some people might buy
an item because everyone
else is buying it. This is
the case with a fad.
Nowadays, many
residents in the Caribbean
want to own a cell phone
or an iPod. It is a form of
peer pressure where
consumers of all ages try
to keep up with the
purchases of their peers. Across the Caribbean, communication is easier
You might not feel as if if you own a cell phone. For many people it is a
you are part of the crowd necessity as well as a fashionable accessory.
unless you, too, own a cell
phone or an iPod. It is also called the ‘keeping up with the Joneses effect’.
• Type of work. This could influence the type of clothes the individual wears
or the type of car he owns. It could also affect the decision about where to
live. Some people prefer to live near to their workplace. Others prefer to be
at a distance. Some have no choice in the matter.
ITQ1 • Level of education. This influences the type of items we like to own, such
Mr Ali decides to buy a sports utility vehicle as books or a laptop computer. Students have different needs from those of
(SUV). What factors might have influenced his other individuals. Your education can also affect your interests. A geography
economic decision?
teacher might subscribe to the National Geographic magazine, while a beauty
salon owner might buy Vogue magazine.
• Rate of interest. If the rate of interest offered by banks on saving accounts
is high, individuals will tend to save more. If the rate of interest is low,
people will save less and spend more. They will even borrow to purchase
consumer durables, such as cars, computers and television sets.
• Climate and weather conditions. The weather will affect economic
decisions of households, as it has a direct influence on comfort and
safety. Hot Caribbean weather means that more and more individuals are
purchasing air conditioning units for their homes. The threat of hurricanes
makes individuals more cautious about purchasing beachfront properties. In
September 2004, Hurricane Ivan did a great deal of damage in Grenada and
ITQ2 Grand Cayman; some individuals lost their livelihood. In such a situation,
Which factors would influence you in choosing people do not have the means or the desire to purchase goods and services,
between a cell phone and an MP3 player? but are only concerned with obtaining the necessities of life.
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Factors influencing the economic decisions of firms

(producers)
As do individuals, firms also make economic decisions, such as what to produce
and how to produce. Firms are affected by factors internal to the firm, and the
external environment. Some influences on firms in making economic decisions
are:
• Costs of production. Increasing costs can reduce a firm’s output, unless the
prospects for profits are high. In such a case, the firm will produce even if
costs are increasing.
supernormal profit • • Profits. Supernormal profit is the excess of total revenue over total costs.
Once there is a potential for profits, firms will invest. In economics, we
ITQ3 assume that producers are rational and that they are attracted by profits.
Why do firms need profits? • Resource base. The resource base is the quality and type of resources
available to a firm. The availability of resources will affect the firm’s decision
to produce a particular good. If resources are not available, then the firm will
not be able to produce.
industrial relations • • Industrial relations. The relationship between the management of a firm
and the workers (usually represented by a trade union) is called ‘industrial
relations’. Cordial industrial relations will make the firm willing to employ
more labour. Poor industrial relations will make the firm more inclined to
use capital instead of labour.
ITQ4 • Changing demand for the product. If a firm is faced with falling demand for
the good it produces, the firm will make a decision to cut back on production.
Snack Time, a small firm catering party snacks,
opened in October 2005. What factors might If there is increasing demand, then the firm will produce more, provided that
have influenced its decision to provide this it is able to obtain all the factors of production to produce the given goods.
good and when it chose to open its business?
Government influences on economic decisions
The government influences economic decisions in a number of ways. These
include:
• Laws and grants to induce firms to locate in a particular region of the
country.
ITQ5 • Taxes on the production and consumption of goods that impose a cost on
How can gasoline impose a cost on society? society; for example, cigarettes and gasoline. Taxes increase the price the
consumer has to pay for the good, and so they tend to curb consumption
and production of such goods. In Trinidad and Tobago, there are excise
duties on cigarettes, alcohol and gasoline.
• Setting up of industrial zones to encourage and facilitate the activities of
firms.
• Provision of infrastructure, such as roads, bridges and ports. In Trinidad
and Tobago, the opening up of the port at Point Lisas encouraged many
firms to locate there. These firms located there to take advantage of the port
facilities for importing raw materials, and for easy transportation of finished
bulky goods.
• General laws to direct firms’ activities; for example, the setting of the
minimum wage of TT$9 per hour in March 2005 by the government of
Trinidad and Tobago. This will affect the numbers employed by firms. In this
country, the government also wants to close down casinos to discourage
gaming and gambling. The government enforces its laws to regulate firms.
• Laws concerning the employment of disabled persons. Section 8
of the Equal Opportunity Act, 2000, Trinidad and Tobago, states that
an employer shall not discriminate against any person when offering
employment. However, the Act further states that this will not apply if
the person’s disability will prevent him from carrying out his job, or if his
ITQ6 disability will result in risk to others or to himself; or if, to carry out the job,
Give some examples of occupations where such the person requires facilities that other workers do not need that will cause
exceptions might apply. the employer hardship. Employers are therefore governed by this law.
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›› Factors affecting the decisions of individuals are:

• personal choice;
• size of income;
• bandwagon effect (peer pressure);
• type of work;
• level of education;
• rate of interest;
• climate and weather conditions.
›› Factors affecting the decisions of firms are:
• costs of production;
• profits;
• resource base;
• industrial relations;
• changing demand.
›› The government and other factors in the economy influence the decisions
of the households and firms.

1 Mr Ali might be influenced by:

• an increase in the level of his income;
• his transport needs;
• the changing trend in the economy towards SUV ownership;
• the fact that his neighbour or close friends already own a SUV.
2 Some factors that will influence you in buying a cell phone or an MP3
player are:
• whether your friends own one;
• your allowance;
• and, for the MP3 player, whether you enjoy listening to music.
3 Firms need profits to reward their investors. Profits can also be ploughed
back into the business to expand the business.
4 Snack Time might be influenced by:
• the prospects of high profits;
• availability of resources – land, labour, capital and entrepreneurship;
• increasing demand for the snacks;
• increasing demand for party snacks during the Christmas season, leading
them to open at this time of year.
5 Gasoline imposes a cost on society when drivers use their vehicles
and cause congestion and air pollution. This discussion will be further
developed when you study market failure in Chapter 13.
6 Pilots need 20–20 vision. School bus drivers need to have sound eyesight
and hearing. Construction workers must have all limbs intact.

Examination-style
Multiple choice questions
questions
1 Which of the following does not influence a cement-manufacturing
firm in making economic decisions?
a the level of costs
b the availability of resources
c the strength of the workers’ trade union
d the government spending on tourism

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2 Sheldon purchases the latest Harry Potter best-selling book. His

decision may be determined by all of the following except:
a level of education
b the profits of the publisher
c personal choice
d bandwagon effect

3 Firms will produce more when:

a costs are increasing
b they expect profits to increase
c sales are declining
d resources become difficult to obtain

4 When governments want to encourage firms to set up and produce, it

will do all of the following except:
a place subsidies on the goods the firm produces
b set up industrial zones
c provide infrastructure like roads and bridges
d place taxes on the goods the firm produces

5 The rate of interest affects economic decisions in that:

a The higher the rate of interest, the greater will be borrowing to
buy cars and consumer durables.
b The lower the rate of interest, the higher will be the level of
savings in banks.
c The higher the rate of interest, the lower will be borrowing to
buy cars and other consumer durables.
d The lower the rate of interest, the lower will be borrowing to
buy goods.

6 Under what conditions will a firm employ less labour?

a when industrial relations are poor
b when labour is relatively cheap compared to other resources
c when there is changing demand for the product
d when the price of the product is falling

Structured question
1 Alight Candles is a small firm manufacturing candles in Jamaica.
It employs 40 workers, 35 of whom work on the production line.
These 35 workers are paid the minimum wage of $80 per hour. The
government increases the minimum wage to $100 per hour.
a Suggest three other occupations that the other five workers
could perform within the firm. [3]
b Explain two courses of action that the manager of Alight
Candles could take, given the change in the minimum wage. [6]
c It is suggested that the firm can produce more candles per week.
Explain two factors that will affect this firm’s decision whether
or not to do so. [6]

Essay question [20]

a Using examples, explain four factors that influence the economic
decisions of households. [12]
b How can government influence the economic decisions of firms? [8]

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