How do People Make Decisons?...Rationality, Incentives, and Trade-offs

    For every case, there are multiple options to choose from because our resources are scarce. But what makes us decide this option, and not the other one? The answer that is we are rational , and we decide according to our incentives and trade-offs. So, let's discover what these terms mean in economics in this article.

    Rationality means that people use logic and reason to make the best choices for themselves. Rational people compare the benefits and costs of different options and choose the one that has the highest net benefit (benefit minus cost). Rational people also think at the margin, which means they consider the additional or incremental effects of their actions. For example, if you are deciding whether to study for another hour or watch a movie, you should compare the marginal benefit of studying (how much your grade will improve) and the marginal cost of studying (how much you will enjoy the movie less).

    Incentives are things that motivate people to act or change their behavior. Incentives can be positive or negative, depending on whether they reward or punish an action. For example, a positive incentive for studying is getting a good grade, while a negative incentive for comitting a crime is going to prison. 

     Incentives can also be monetary or non-monetary, depending on whether they involve money or other things that people value. For example, a monetary incentive for working is getting a salary, while a non-monetary incentive for working is getting recognition or satisfaction.

    Trade-offs are the sacrifices that people make when they choose one option over another. Trade-offs are inevitable because of scarcity, which means that we have limited resources but unlimited wants. Trade-offs involve giving up something that we like to get for something else that we like more. For example, if you choose to buy a pizza for $10, you are giving up the opportunity to buy something else with that $10, such as a book or a movie ticket. The opportunity cost of buying the pizza is the value of the next best alternative that you give up.

    The concepts of rationality, incentives, and trade-offs help us understand how people make decisions and how they respond to changes in their environment. They also help us predict how people will behave in different situations and how they will react to different policies.