By the end of this chapter, you are supposed to understand:

That economics is about the allocation of scarce resources;  that individuals face trade-offs; the meaning of opportunity cost; how to use marginal reasoning when making decisions; how incentives affect people’s behavior; why trade among people or nations can be good for everyone; why markets are a good, but not perfect, way to allocate resources; what determines some trends in the overall economy.

Key Points:

1 The fundamental lessons about individual decisionmaking are that people face trade-offs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face.

2  The fundamental lessons about interactions among people are that trade and interdependence can be mutually beneficial, that markets are usually a good way of coordinating economic activity among people, and that the government can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality.

3  The fundamental lessons about the economy as a whole are that productivity is the ultimate source of improving living standards, that growth in the quantity of money is the ultimate source of inflation, and that society faces a short-run trade-off between inflation and unemployment.