There are four principles associated with individual decision making: facing trade-offs, giving up something to get something else, decision making is done at the margins, and people respond to incentives (Mankiw, 2009). An example of decision making comparing marginal benefit and marginal cost is driving farther to pay less for gas.
Gas close to my home is usually 20 cents per gallon more than at a station 8 miles away. My car gets 22 mpg, so if I buy 10 gallons, I save $2.00 and drive 16 miles out of my way. If gas is $4/gallon at the "cheap" station, the drive costs me $2.90 (16/22 * 4) plus the time to make the drive. Incentives that could change my decision would be if I have other business in that direction so I am not making a special trip, or if the price of gas itself were lower so that saving 20 cents a gallon when gas is $1/gallon makes the trip worthwhile.
Principles of economics that relate to interaction include the idea that trade makes both parties better off, that markets are among the best way to allocate resources, and that governments can sometimes improve market outcomes. With regard to the economy as a whole, the standard of living depends on a country's ability to produce goods and services, too much money results in inflation, and society must balance the conflicting factors of inflation and unemployment (Briggs, n.d.).
All three economic systems address the issues of what is produced, how it is produced, and how the products are distributed in the economy. A market economy determines these solely through the interaction of buyers and sellers without government interference. In a centrally planned economy, the government makes these decisions. Most economies are mixed, meaning that the market makes some decisions while the government makes others (Market, Planned and Mixed Economies, 2011).
The type of economic system affects economic in
...