Economic Decisions

There are a wide range of factors that impact making economic decisions by individuals, businesses and government. Individuals mainly have to make decisions based on their personal income. Businesses usually make decisions to increase the total revenue of the business. Governments make decisions to stabilise the economy and make decisions in order to gain the most votes/supporters to win the election.

Individual consumers usually make decisions to satisfy their basic needs and wants. This level of satisfaction is adjusted to their level of disposal income, the accumulation of past savings, level of education and type of work. Individuals that are professional have higher levels of qualifications and education will earn a higher potential income. This can be seen in the life cycle consumption hypothesis where we spend more than we earn at the beginning and end of our lives, and have a period where we can accumulate our savings for later in life. When our level of income increases, individuals can spend more money on goods and services. This leads to higher standards of living as they have immediate satisfaction. In order to continue of have basic goods/services when a person retires and stop full time work, employers need to contribute about 9% of the employee’s income towards their superannuation. Individuals also make economic decisions based on incentives from the government like tax incentives making employees likely to put more savings into their superannuation.

Businesses make decisions in order to maximise profits. These decisions are made and will directly impact consumers. Some things that may affect their decisions include: the pricing of resources, demand from consumers and the highest price their product can sell for. If the price of that resource is increasing, they would have to increase the prices of the goods in order to maintain their maximum profits. The decisions made are also dependent on the most efficient employment of resources for production often the cheaper one of labour or capital. Businesses often make decisions like choosing to make more of a product that leaves another opportunity cost as a risk based on the current demand of consumers. If they maintain an adequate supply of the goods that is in high demand, they would make more sales. Their decisions are also dependent on how much power/control they have over the market for their industry. If they have the majority of the control over the market, they will have more power in adjusting the standard price. If there is more competition, prices are more likely to be more competitive hence go lower which will better for consumers. Businesses also have to take in account the current state of the economy. For example, if the economy is experiencing rising inflation, the value of money goes down, demand/prices of goods go up and businesses are more likely to sell less because consumers buy less goods/services for the same amount of money.

The economic decisions made by government are dependent upon the government’s policies to gain the most votes to win the election. Individuals are taxed according to the level of income they earn. If the government supports the lower class, they are more inclined to tax the rich to a greater extent for the redistribution of income to the community. Economic decisions are made according to the government budget where they allocate specific amounts of money that is appropriate to each sector. If the government needs more money to spend, they would increase the tax. The taxes are used to pay off the country’s debt and finance basic services to the community such as healthcare, law and order, education and defence. In Australia, The Reserve Bank of Australia (an Independent Government Agency) makes decisions to stabilise economic activity by regulating the amount of money in the economy in order to control total demand. The Federal government may reduce interest rates for example if it believes unemployment is on the rising to increase economic activity. Reducing the interest rate makes credit cheaper as we are more inclined to spend and invest money, businesses sell more and hence economies speed up.

Finally, there are many factors that affect the decisions we make in an economy. For individual consumers, this is dependent of spending, work, level of education and retirement. Businesses make decisions to maximise profits/productivity by efficiently allocating resources to the most highly valued/demanded goods and make prices which is dependent on industry competition. Governments make decisions to stabilise the economy, redistribute income to the community for basic services, and gain the most supporters for the election. Furthermore, these three layers of the economy interact with each other. If the Government increases the interest rate, it leads to businesses selling less; businesses will put prices up, and consumers pay higher prices for the same products.