Decision Making and Economics

People Face Trade-Offs: Mankiw's Ten Principles Of Economics The first principle of Mankiw's Ten Principles of Economics is People Face Tradeoffs. This principle suggests that there is always a tradeoff in obtaining something -- one thing must be given up in order for you to have the other thing. This principle applies perfectly to the situation of choosing one of three electives -- all of which would be useful, but only one of which can be taken.

Thus, in order to have one of the useful electives, I must give up enjoying the other two. In order to graduate, I have to limit myself to one course now and not think about the other two. This is the first decision-making principle that I would use to help me make my choice and be more at peace with it.

Knowing that tradeoffs are a common practice in economic theory, this principle would help me to justify the fact that even though all three would be good for me, presently there is only room in my life for one -- and any one will do. The second economic principle that I would use to help me make this choice would be People Respond to Incentives.

In this case, the incentive of making a choice is that I will be able to graduate if I simply take any of the three electives. Therefore, the important thing is not that I pick the right elective since any of them will do but rather that by picking any elective, I will have sufficient credits to graduate. Thus, the choice of an elective should be viewed as a joyous occasion because it will mean I am choosing to finally graduate -- this is the incentive of choosing.

It should not be viewed as a stressful decision since all that matters is that I have the necessary credits to graduate. This principle will help to make the choice easier. Each of these two economic decision-making principles are extremely helpful not just in economics, obviously, but in all of life wherever decision-making is required.

As in the examples provided above, one can see that the principle of People Face Tradeoffs and People Respond to Incentives (both principles within Mankiw's Ten Principles of Economics) are useful in making a decision about college courses. The principles could be applied in any number of ways.

For example, if you are at your job and the choice given you is between a week off to go hunting with your friends (you have scheduled this vacation well in advance) or stay at work and fulfill your manager's request to work on an extra-special activity that will help get you the promotion you have been seeking -- this would be a clear case of a tradeoff.

You could give up the extra work that would make you a more suitable candidate for promotion, or you could give up the week hunting with friends. You cannot have both at the moment -- and each yields a positive good -- so you must trade one for the other. Or, perhaps your manager wants you to come in on the weekend to do.