The characteristics of an incentive affect the characteristics of people's behavior. Incentives can be used to understand the reasons behind people's actions. For example, buying and selling is completely based on incentives, that is, products and money.
This element describes the fact that resources are limited, while people's desires are unlimited. Hence, although organizations like to use the word "free" to entice people, the limitation or resources means that no product is truly free.
People weigh the costs and benefits of certain actions before acting. This element describes that people make almost all of their decisions by performing this cost-benefit analysis. The word "marginal" refers to the changes in the actions, for example, producing one more unit or paying an additional dollar. These changes affect our decisions.
Economists believe that trade is an overall gain for both parties involved. The three reasons for this are: trade allows goods to move from those who value them less to those who value them more; trade increases consumption and production levels; and trade allows for mass-production methods.
Trade itself is costly. Adding a transaction cost reduces a person's willingness to trade.
This element discusses the idea that if a business were creating a product that customers valued less than the costs involved in production, then the business would not be profitable. Therefore, for a business to continue its existence, it must produce goods of value greater than the cost of the original material and labor involved.
Income comes from providing goods or services. If people did not provide such things, no consumers would spend money, leading to the absence of income.
Economic progress arises from three main sources: investments, technological improvements and economic institutions. Investments create progress as they boost the production of goods and services. Technological improvements also increase this production. Finally, the reliable organization of economic institutions encourages good ideas to arise while squashing unproductive ones.
The so-called "Invisible Hand" of market prices influence producers and consumers in a way that benefits the general welfare of all. This element states that the market prices of goods give both the buyer and the seller the information to allow them to coordinate their actions. These market prices arise from the preferences of masses of people. One important thing to know about this process is that it is entirely automatic.
Economic decisions focused on short-term gain often yield long-term consequences. However, there is a tendency for people and organizations to seek short-term benefits without considering these long-term consequences. Hence, people tend to overstate benefits and play down costs.