Economics and Business Decisions Discussion Essay

Economics and Business Decisions Discussion Essay

Instructions/Descriptions

Economics and Business Decisions Discussion Essay

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Instructions

Write a post of 1 to 2 paragraphs

Consider content from other parts of the course where appropriate. Use proper citation methods for your discipline when referencing scholarly or popular sources.

Then, address the following as part of your response:

Imagine you own your own business and have to make daily decisions about how to allocate available resources such as input of production, time, purchasing decisions, and so forth. What role do you think microeconomics has in running a business?

Which of the principles of economics outlined in your reading would you be more likely to apply when making business decisions? Provide at least two to three examples

How People Make Decisions

There is no mystery to what an economy is. Whether we are talking about the economy of Los Angeles, the United States, or the whole world, an economy is just a group of people dealing with one another as they go about their lives. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, our first four principles concern individual decision making.

1-1aPrinciple 1: People Face Trade-Offs

Economics and Business Decisions Discussion Essay

You may have heard the old saying, “There ain’t no such thing as a free lunch.” Grammar aside, there is much truth to this adage. To get something that we like, we usually have to give up something else that we also like. Making decisions requires trading off one goal against another.

Consider a student who must decide how to allocate her most valuable resource—her time. She can spend all of her time studying economics, spend all of it studying psychology, or divide it between the two fields. For every hour she studies one subject, she gives up an hour she could have used studying the other. And for every hour she spends studying, she gives up an hour she could have spent napping, bike riding, playing video games, or working at her part-time job for some extra spending money.

Consider parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of their income for retirement or their children’s college education. When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good.

When people are grouped into societies, they face different kinds of trade-offs. One classic trade-off is between “guns and butter.” The more a society spends on national defense (guns) to protect itself from foreign aggressors, the less it can spend on consumer goods (butter) to raise its standard of living. Also important in modern society is the trade-off between a clean environment and a high level of income.

Laws that require firms to reduce pollution raise the cost of producing goods and services. Because of these higher costs, the firms end up earning smaller profits, paying lower wages, charging higher prices, or doing some combination of these three. Thus, while pollution regulations yield a cleaner environment and the improved health that comes with it, this benefit comes at the cost of reducing the well-being of the regulated firms’ owners, workers, and customers.

Another trade-off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources.  hours a day but whether to spend an extra hour reviewing your notes instead of playing video games. Economists use the term  years ago. In 1965, Ralph Nader’s book Unsafe at Any Speed generated much public concern over auto safety. Congress responded with laws requiring seat belts as standard equipment on new cars.

How does a seat belt law affect auto safety? The direct effect is obvious: When a person wears a seat belt, the likelihood of surviving an auto accident rises. But that’s not the end of the story. The law also affects behavior by altering incentives. The relevant behavior here is the speed and care with which drivers operate their cars. Driving slowly and carefully is costly because it uses the driver’s time and energy.

When deciding how safely to drive, rational people compare, perhaps unconsciously, the marginal benefit from safer driving to the marginal cost. As a result, they drive more slowly and carefully when the benefit of increased safety is high. For example, when road conditions are icy, people drive more attentively and at lower speeds than they do when road conditions are clear.

Consider how a seat belt law alters a driver’s cost–benefit calculation. Seat belts make accidents less costly by reducing the risk of injury or death. In other words, seat belts reduce the benefits of slow and careful driving. People respond to seat belts as they would to an improvement in road conditions—by driving faster and less carefully. The result of a seat belt law, therefore, is a larger number of accidents. The decline in safe driving has a clear, adverse impact on pedestrians, who are more likely to find themselves in an accident but (unlike the drivers) don’t have the benefit of added protection.

Economics and Business Decisions Discussion Essay

At first, this discussion of incentives and seat belts might seem like idle speculation. Yet in a classic 1975 study, economist Sam Peltzman argued that auto-safety laws have had many of these effects. According to Peltzman’s evidence, these laws give rise not only to fewer deaths per accident but also to more accidents. He concluded that the net result is little change in the number of driver deaths and an increase in the number of pedestrian deaths.

Peltzman’s analysis of auto safety is an offbeat and controversial example of the general principle that people respond to incentives. When analyzing any policy, we must consider not only the direct effects but also the less obvious indirect effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior.

Economics and Business Decisions Discussion Essay

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