-
Because of Scarcity, People Choose: Economists emphasize that we live in a world of scarcity. By this, they mean that there are never enough productive resources to provide all the goods and services that people want. The result is that people must constantly choose among competing alternatives. (This concept is the basis for the oft-repeated phrase, “There's no such thing as a free lunch!” The idea is that no scarce good or service is ever really free — someone has to give up something to get it.)
• People must decide whether to spend or save their scarce income.
• Savers must choose between various saving and investing opportunities.
-
All Choices Have an Opportunity Cost: Every time an investor, saver, consumer, or producer makes a decision, there is an alternative course of action that could be taken. Economists refer to the best forgone alternative as the opportunity cost of a decision. It is very important that students recognize the importance of considering the opportunity cost when making a decision.
• People decide whether to spend or save their after-tax income. A person who chooses to save $100 gives up goods and services now as the opportunity cost of the decision to save.
• The opportunity cost of choosing to put money into a bank savings account instead of purchasing a long-term government bond is accepting less interest income. (But there is less risk.)
-
People Respond to Incentives in Predictable Ways: An incentive is something — either positive or negative — that influences the choices that a person makes. When incentives change, people's actions also change — usually in very predictable ways.
• When real interest rates rise, there is an incentive to save more and consume less. (In other words, the opportunity cost of spending increases.)
• If other things do not change, when the prices of stocks or bonds fall, people will buy more; when the prices rise, people will buy less.
-
Market Forces and Economic Systems Influence Choices: People make financial decisions in the context of an economic system. The type of economic system (market, command, traditional, or some combination) will have a significant impact on the decisions people make. For example, in a market system, changing prices help guide decisions, such as where people invest their savings or what type of insurance they purchase.
• The different wages and salaries of certain occupations (e.g. doctor, teacher, store clerk), which are influenced to a significant degree by supply and demand in the market for human resources, will have an effect on whether or not a person decides to enter a certain field.
• In a strict command economy, where most property is owned and controlled by the government (e.g. North Korea), most people do not have the choice to invest in a stock market.
-
People’s Choices Have Intended and Unintended Consequences Which Lie in the Future. Economists believe that the costs and benefits of decisions appear in the future since it is only the future that we can influence. However, sometimes people’s choices can have unintended consequences!
• A person’s choice to become a doctor will have intended consequences – many years of advanced school and training, hard work, but probably a higher income.
• A government may try to help consumers by putting a cap on gasoline prices; however, this will probably lead to the unintended consequences of long lines at the pump, black markets, and lots of irritation!
-
People Gain When They Trade Voluntarily. People do not produce all the goods and services they consume. Instead, they produce a narrower range of goods and services and then trade (exchange) with others to help satisfy their economic wants. Both parties expect to benefit from a voluntary trade; there are no “winners” and “losers.” This is why both buyers and sellers often say “Thank you!” after a purchase!
• When a person agrees to work for a company, the company benefits from the work the person provides and the person then benefits from the wage or salary received.
• When a person purchases a shirt, both the shirt producer and the person making the purchase benefit from this exchange.
