1. Economic Choices

2. Incentive Economics focuses on the choices people make Economic reasoning is used everywhere People make choices based on their perceptions of what is best for them People’s choices reflect their perceptions of the expected costs, benefits, & the alternatives they face

3. The key to understanding human behavior lies in identifying incentives Incentives are rewards or punishments that influence people’s actions When incentives change, people’s behavior changes The 1 st thing we must recognize is that people face trade-offs (alternative choices) w/ every economic decision

4. Opportunity Cost We live in a world of relative scarcity Scarcity forces people to choose between alternatives Individuals’ evaluation of alternatives is subjective The distinction between needs and wants is individual

5. Societies have adopted different ways to deal with scarcity In economics, cost is related to opportunity cost- cost of the next best alternative use of money, time, or resources when one choice is made over another The opportunity cost of choosing one alternative is the value given up by not taking advantage of the next best alternative To choose is to refuse! The decision to take the benefits of one alternative means refusing the benefits of the next best opportunity

6. You spend $5,000 on a used car The OC = the value of the stereo, apt, vacation you could have purchased Even time has OC, the time you spend on one thing could be spent on another

7. We seldom make all or nothing decisions Life is an exercise in marginal decision making Decisions to continue or discontinue an activity are made by weighing the expected benefits against the expected costs

8. SCARCITY, SCARCITY, SCARCITY!!! Societies must make consumption choices At the core of a society’s consumption choices is its choice about production