How People Make Economic Decisions
How People Make Economic Decisions
Business Dictionary.com defines consumer decision making as “the process by which consumers identify their needs, collect information, evaluate alternatives, and make the purchase decision. These actions are determined by psychological and economical factors, and are influenced by environmental factors such as cultural, group, and social values.” (BusinessDictionary.com, 2007)
Four major economic forces drive the decision a consumer makes when purchasing goods or services that are taking tradeoffs, price, margin of benefits, and incentives and are the first four principles in the study of economics.(Mankiw, 2006)
The first of these is taking tradeoffs by which the consumer gives up something for something that is desired more or has a better value. If, for example, the consumer is trying to decide what kind of vehicle to buy between a sedan or a sports model that only seats two occupants. The trade off is the number of passengers the consumer could haul in the vehicle and make the decision based on that or the fuel efficiency rating between the two vehicles. A sports car would consume less fuel because the vehicle would not be weighed down with the extra passengers than a family car but a sports model may have a high performance engine which needs special maintenance or premium gas. The trade off would be the speed and less passenger space. A rational consumer would consider all the tradeoffs when deciding what make, model, and size of a vehicle to purchase as well as status and fuel efficiency.
The second force in decision making by the consumer is the price or cost of the goods or services. Price plays a crucial role in the decision making process because it determines how much can be afforded to make that purchase and the value the consumer realizes from purchasing at a certain price. It is not only the price of something that drives the decision to buy a sedan or a sports vehicle a consumer should consider the
Business Dictionary.com defines consumer decision making as “the process by which consumers identify their needs, collect information, evaluate alternatives, and make the purchase decision. These actions are determined by psychological and economical factors, and are influenced by environmental factors such as cultural, group, and social values.” (BusinessDictionary.com, 2007)
Four major economic forces drive the decision a consumer makes when purchasing goods or services that are taking tradeoffs, price, margin of benefits, and incentives and are the first four principles in the study of economics.(Mankiw, 2006)
The first of these is taking tradeoffs by which the consumer gives up something for something that is desired more or has a better value. If, for example, the consumer is trying to decide what kind of vehicle to buy between a sedan or a sports model that only seats two occupants. The trade off is the number of passengers the consumer could haul in the vehicle and make the decision based on that or the fuel efficiency rating between the two vehicles. A sports car would consume less fuel because the vehicle would not be weighed down with the extra passengers than a family car but a sports model may have a high performance engine which needs special maintenance or premium gas. The trade off would be the speed and less passenger space. A rational consumer would consider all the tradeoffs when deciding what make, model, and size of a vehicle to purchase as well as status and fuel efficiency.
The second force in decision making by the consumer is the price or cost of the goods or services. Price plays a crucial role in the decision making process because it determines how much can be afforded to make that purchase and the value the consumer realizes from purchasing at a certain price. It is not only the price of something that drives the decision to buy a sedan or a sports vehicle a consumer should consider the
References: BusinessDictionary.com. (2007). http://www.businessdictionary.com Mankiw, N. G. (2006). Principle of Economics, Fourth Edition (4th ed.). : South-Western Pub.