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Accounting-Economics
Decision Making
Each decision we make has risks that associated with it. Because of these risks that are involved, making decisions is often very difficult. When one makes decisions it is important to keep in mind four basic principles: Principle 1- One should never risking more than they can afford to give. One should never take any risk that demands more of themselves or their resources than you are willing and able to give. Principle 2 -- A person should never use more resources than they have available. Any decision uses one or more resources, but no action should deplete all available resources. Principle 3- Take a risk only when you can profit from it. Principle 4- This principle simply means that you should feel good about your decision (Principles of Decision Making, n.d).
When people make decisions they often face tradeoffs. Most of the time in order to get one thing, you have to give up something else. Making decisions requires trading off one goal in order to obtain another. The cost of something is what you have to give up in order to get something else. Those who make decisions have to consider both the obvious and implicit costs of their actions. Rational people think on the brink of the margin. This means that a rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. People tend to always respond to incentives. Behavior often changes when costs or benefits change (Principles of Economics, 2006).
People make decisions based upon two things. What they are going to get out of the decision and how much is the decision going to cost. People weigh decisions by comparing the marginal benefits against the marginal costs (Marginal Analysis, n.d.) And since people strive to get the most bangs for their buck, making less risky and thus less costly decisions will most often win out. The economic system as a whole relies heavily on the fact that people are going to take some risks and make some decisions.
Works Cited
"Marginal Analysis." n.d. 16 May 2009
http://sorrel.humboldt.edu/~economic/econ104/marginal/
"Principles of Decision Making." n.d. 16 May 2009
"Principles of Economics." 2006. 16 May 2009 http://www.slembeck.ch/principles.html
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