Scarcity exists and it doesn’t go away. Because resources are limited, people must make choices. |
People choose the alternatives that they perceive to offer the greatest excess of benefits over costs. |
The opportunity cost of a choice is the foregone alternative, the (benefits of the) alternative that was given up.
It’s only the “next-best” alternative that matters. |
Decisions are made in light of an unknown future, based on expected costs and expected benefits. |
All-or-nothing decisions are extremely rare. Most decisions are best made by weighing the expected benefits and expected costs of the next increment: For example, the decision is not “Should we paint the house?” but “Should we paint the house this summer or wait a year?” or “Should we paint the house ourselves or hire someone to do it?” |
Incentives are rewards or punishments that influence people’s decisions. When incentives change, people’s behavior changes in predicable ways. |
Prices change in dynamic economies as the relative demands for and supplies of goods, services, and resources changes. The changing prices change people’s opportunity costs and thus, the choices they make.
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Voluntary trade occurs only when both parties expect to benefit from the exchange. Specialization allows people to produce more by concentrating on what they do best and trading their surplus goods or services to obtain other goods and services. Society benefits as producers specialize in what others value. |
Market institutions, the written and unwritten rules governing exchange in the economy, enhance personal freedom by allowing people to make decisions in light of their perceptions of the expected costs and expected benefits they face. |
Externalities, lack of competition, defining and enforcing property rights, free-rider problems, and the desire to promote social goals like equity, bring the government into the economy. The pertinent question when considering government action is “Do the benefits outweigh the costs?” |
Increased labor productivity raises incomes and standards of living. Productivity levels can be changed over time, with improvements in education and technology. |