Compare costs with benefits of alternatives

Need to include opportunity costs

Whatever you have to give up to obtain some item

Do the best they can to achieve their objectives given the available opportunities

Make decisions by evaluating costs and benefits of marginal changes

Something that induces a person to act

Because the incentives change the costs and/or benefits of their actions

And rational people make decisions by comparing the marginal costs and the marginal benefits

People can buy a greater variety of goods and services at lower cost

Allows countries to specialize in what they do best

Enjoy a greater variety of goods and services

A group of buyers and sellers

What goods and services to produce

How to produce these goods and services

How to allocate them to their final user

Determined by the interaction of buyers andsellers

Reflect the good’s value to buyers

Reflect the cost of producing the good

In the process prices guide households and firms to make decisions to maximize their benefit, it also helps to maximize society’s economic well-being

Enforce rules and maintain institutions that are key to a market economy

In the presence of externalities

In the presence of market power

Many public policies, such as the income tax and the welfare system, aim to achieve a more equal distribution of economic well-being.