People utilize the information they have to accomplish their objectives in the most efficient way. This principle does not mean that people always make the best decision because information is often imperfect. However, this principle assumes that people use rational thought over emotional impulse most of the time, using the best information available at the time.
When people respond to economic incentives, it sometimes explains seemingly irrational behavior, according to Hubbard. In his textbook "Economics," he explains why many banks do not put simple security measures in place to prevent bank robberies. The FBI suggested bullet-resistant glass and security guards would prevent most robberies. However, these measures would cost over $60,000 per year, whereas a robbery averaged a $1,200 loss. For the security measures to be cost-effective, the bank would have to be robbed at least 50 times per year.
Students examine the concepts of marginal analysis in depth in advanced economics courses. Marginal cost refers to the incremental cost in choosing one option over another. The marginal benefit is the reward for choosing the more expensive option. Hubbard and other economists hold that most people make marginal decisions every day without much thought to marginal analysis. For example, a mother at the grocery store considers whether to make a homemade meal for her family or buy a frozen lasagna. She calculates the cost difference and determines if the marginal benefit of the homemade meal is worth the marginal cost. Companies make these same decisions when making production and pricing decisions for their products.
Hubbard says these three principles go into solving the basic economic problem: every society faces trade-offs in order to distribute scarce resources. In other words, the basic economic concepts of supply and demand, opportunity costs, and the extent of government intervention answer the economic questions of what goods will be produced, how they will be produced and who will receive the goods produced.