Fundamentals of Economic Decision-Making

Economics starts with scarcity — even large amounts are limited relative to wants.

Scarcity forces tradeoffs, and the real cost of any choice is its opportunity

cost: the best alternative you give up. This includes what you don’t see — the counterfactual

— which is why breaking a window doesn’t “boost the economy”; it just redirects resources.

People respond to incentives, not intentions. Good incentives align behavior with

goals; bad ones create unintended consequences. Decisions happen at the margin —

we think in small increments, not totals — and sunk costs don’t matter,

only future costs and benefits. Demand slopes down because higher prices push people to substitute,