Life is about choices, and economics is about how incentives affect choices and shape our lives. All of economics rests on one simple priniciple:
Changes in incentives influence human behavior in predictable ways. Both monetary and non-monetary factors influence incentives. If something becomes more costly, people will be less likely to choose it. Correspondingly, when an option becomes more attractive, people will be more likely to choose it. This simple idea, sometimes called the basic postulate of economics, is a powerful tool because it applies to almost everything we do.
There Is No Such Thing As A Free Lunch
The reality of life is that productive resources are limited, while the human desire for goods and services is virtually unlimited. However, we are constrained by the scarcity of resources, including a limited availability of time.
Because we cannot have as much of everything as we like, we are forced to choose among alternatives. There is no free lunch. Doing one thing makes us sacrifice the opportunity to do something elsewe value. This is why economists refer to all costs as opportunity costs.
Decisions Are Made At the Margins
If we want to get the most out of our resources, we should undertake actions that generate more benefits than costs and refrain from actions that are more costly than they are worth. Nearly all choices are at the margin. That means that they almost always involve additions to, or subtractions from, current conditions rather than all-or-nothing decisions. The word additional is a substitute for marginal. All these decisions are marginal because they involve additional costs and additional benefits.
We don’t make all-or-nothing decisions like eating or wearing clothes. Instead we choose between having a little more food at a cost of a little less clothing. In making decisions we don’t compare the total value of food and the total value of clothing, but we compare their marginal values.Share It