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The basic principles that inspire individual decision-making involve the consideration that in order to purchase a good or service the cost of something is what you give up getting it. In addition, trade-offs limit an individual’s amount of money thus; there is a need to forego buying a non-necessary good when deciding to pick first the essential goods (Sowell, 2010). Incentive also influences consumers’ decision as it influences a change in consumer behavior, in the way they spend the money. Finally, people make decisions based on the margin benefit and buy goods when it is extremely valuable.
Both the marginal benefits and the marginal costs offer the appropriate measurement of costs and benefits at a definite level of consumption. For example, purchasing new equipment by a manufacturing company the management will check its benefit to the company and evaluate whether they will choose the cheaper product or not. In case the prices of the two products are the same, the executive will choose the one with a higher benefit. The marginal benefits in the purchase of the machine include the efficiency, productiveness and savings on labor cost due to machine use while the marginal costs include the economies of scale as the production level's increases with a lower cost incurred. Incentives, including an after-sales service warranty besides offering a discount led to the decision to purchase the equipment from the dealer (Tucker, 2008). The principles of economics relate to interaction, decision-making, and the mechanisms of the economy as a whole such that as the quantity of money increases the price of goods rises, especially as the government prints a lot of money. Phillips curve expounds that decrease demand for goods due to higher prices of commodity leads to lay off workers thus, results to inflation and unemployment. A country's standard of living will depict its ability to create products.
The market economy is whereby the prices of goods and services are laissez-faire; thus, prices are determined by the interactions between households and firms (Mankiw, 2011). While, the government influences centrally planned economy as it makes most economic decisions thus, influences the prices of products. Mixed economy exists as a mix of free-market economy and planned economy. In a free market-based system, people interact voluntarily when buying and selling commodities, while in a planned economic system, interaction is involuntarily as the government controls the market thus; free markets produce higher standards of living, and faster growth in the economy than planned systems.