Economics and Decision Making

Economics and Decision Making

SECTION7

  • Module 18: Making Decisions
  • Module 19: Behavioral Economics
  • Module 20: Maximizing Utility

GOING BACK TO SCHOOL

In the spring of 2010, Ashley Hildreth, a class of 2008 journalism major at the University of Oregon, was deeply frustrated. After working for 18 months in what she described as a “dead-end, part-time job” in the food industry, she decided to apply to a master’s degree program in teaching.

In explaining her decision, she pointed to the many job applications she submitted without a single call back for an interview. What she hoped for was an entry-level opportunity in advertising and marketing or an administrative position with a nonprofit. What she got instead was silence or gentle rejections. After considering her options, she decided to apply for graduate school.

Hildreth was far from alone in her decision. In the spring of 2010, colleges and universities across the country were reporting a record number of applications for bachelor and associate degree programs. And as Hildreth’s story illustrates, they also soared for graduate and continuing education programs.

Why did so many people make a similar choice in the spring of 2010? We’ll answer that question shortly. Before we do, note that every year millions of people—just like you—face a choice about work versus continued schooling: should I continue another year (or semester, or quarter) in school, or should I get a job? That is, they are making a decision.

This section is about the economics of making decisions: how to make a decision that results in the best possible economic outcome. Economists have formulated principles of decision making that lead to the best possible—often called “optimal”—outcome, regardless of whether the decision maker is a consumer or a producer.

We start by examining three different types of economic decisions. For each of these types, there is a corresponding principle, or method, of decision making that leads to the best possible economic outcome. We’ll also see why economists consider decision making to be the very essence of microeconomics.

Despite the fact that people should use the principles of economic decision making to achieve the best possible economic outcome, they sometimes fail to do so. In other words, people are not always rational when making decisions. For example, a shopper in pursuit of a bargain may knowingly spend more on gasoline than he or she saves. In this section, we’ll learn about these tendencies when we discuss behavioral economics, the branch of economics that studies predictably irrational economic behavior.

The section concludes with a discussion of utility, a measure of satisfaction from consumption, and how individuals make consumption decisions when faced with a limited budget.