Rational Decision Making Decision making refers to the process in which rational consumers seeking their own happiness or utility will make choices. The process begins by defining the list options that are possible. The next steps are to evaluate the costs, benefits and trade offs involved in each choice and reach a decision. Since not everyone has the same preferences or the same situations, so there is no expectation that everyone will make the same decisions.
An incentive is a cost or benefit that motivates a decision or action by consumers, workers, firms or other participants in the economy. Higher or lower prices can provide incentives: specifically, higher prices give consumers an incentive to buy less and business an incentive to produce more. Higher and lower wages provide incentives: many people will work longer harder for higher wages, but firms will try to hire a lower quantity of workers if wages are higher. Interest rates provide incentives as well. People have a greater incentive to borrow money to purchase a home or a car if interest rates are lower. The first incentive for businesses is to earn a greater profit. Incentives matter in every decision. |
Financial Plan for the Future |
An individual has only two choices about their income: they can spend it on current consumption or saving for future investment. From the point of view of a single individual, saving becomes a form of investing since it goes into a bank account, stocks, bonds, or mutual fund that pays a rate of return. In general investing, postponing a reward to pursue an activity with expectations of greater benefits in the future. Financial investments can be referred to the decisions by individuals and business to invest their money in financial assets such as bank accounts, certificates of deposits, stocks, bonds, and mutual funds. Financial investments are crucial to obtaining personal achievement such as wealth. Real investments, also known as physical capital investments is the aggregate demand that backs up decisions made by businesses to purchase equipment and physical plant, or a new home for consumers. The amount of real investment is needed for economic growth. Financial investment and real investment are interconnected, but are not the same.
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