The Decision Environment

In preparing for my Principles of Microeconomics I am reminding myself to clearly deliver one message about the “economic way of thinking.”  To think like an economist one must see two things: (1) a decision environment and (2) a goal.

The decision environment is the benefit/cost “space” where a rational decision maker must exercise reason.  In economics we often measure  benefits and costs in dollars but they could be measured in time and/or effort or any of a million other metrics.

I found the second paragraph (extracted here) of the following post to be useful in attempting to understand the approach.

From yahoo answers

Explain how the principles of economics affect decision-making, interaction, and the workings of the economy?

Economics can be used to explain just about any decision. Consider trade for example. This can be on a macro level such as trade between countries or on a micro level such as me buying a can of Pepsi at the store. Why do people engage in trade? In both examples, there is a mutual benefit for both parties to trade. In the Pepsi example, I value a can of Pepsi most likely because I am thirsty and I like the taste of it. The store owner values the money that he can make by selling the can of Pepsi. Thus a trade between me and the store owner takes place and both of us end up happier in the end – I got my can of soda that I wanted and the store owner made a profit, otherwise why else would he have sold the can to me?

This also encompasses how economics can influence interactions between people. People generally make decisions in an effort to create a benefit for themselves. There will always be a need for resources, which can be anything from the water you drink to the computer you are using right now. Because all resources are scarce, people need to allocate how they want to spend their time, and by extension, their money on resources. Economics is the study of this. So this means people must interact with their environment and other people and come to rational decisions to obtain the best allocation of resources for themselves. This is also how the economy as a whole works. As described above, countries trade with one another because there is a mutual benefit for them to do so. On a national level, firms, the government, and people make decisions/interactions everyday on how to allocate resources and how they spend their time & money doing it. For example, people choose to spend their time working for firms because there is an incentive to do so just as there is an incentive for the firms to employ them.

We can graph the “decision environment” which we will do often in Principles of Microeconomics.  Finally, it is important to remember that economics provides a model of human behavior.  There are many other models of human behavior.  Knowing and applying/interrogating these models is the primary job of the social scientist.


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