In the book, Common Sense Economics, the author describes the ten key elements of economics. The key that I consider is the most important is “No Such Thing as a Free Lunch”. This element states that it is impossible to get something for nothing. Whatever goods and services are provided must constantly be funded for by someone. In other words, not every price is a monetary price. For example, a city council chooses to build a new school. By doing so, the cost of the new school necessitates sacrificing building other things such as a mall or water park. Essentially, you must give up the next best alternative to do something else.
The next key element I believe is important is, “Incentives Matter”. An incentive is a cost or benefit that motivates the choice of a person. Incentives are the core reason we do things. If incentives are altered, behavior is altered. When prices of goods are higher consumers have the incentive to purchase less of it and sellers have the incentive to sell more of it. Prices are very powerful incentives.
For example, when gas prices rise, consumers buy a reduced amount of gasoline. They do not stop buying gasoline, but instead find ways to use less. A way they do this is by buying more fuel efficient cars. Then when you have a more fuel efficient car you drive more which in return causes you to buy more gas than before. This element relates to “No Such Thing as a Free Lunch” in the way of how you can believe you are saving money when in reality you are costing more.
Another vital element is, “People Earn Income by Helping Others”. Due to having different interests, we all branch of into diverse careers. These dissimilarities influence income because they influence the value of the different goods and services individuals are able or willing to provide to others. A doctor’s job is to help a person maintain their overall wellbeing. While performing a service to help to heal someone they are also making money off of the person because of the doctor bills. No Such Thing as a Free Lunch comes into relation because in order to be healthy we must give up a large sum of money. In other words, if you want to have a significantly large income, figure out how to help others.
Lastly, “Decisions Are Made at the Margin” is the fourth most important element in my eyes. Very few decisions are considered all-or-nothing. A marginal decision is another word for an additional decision. In order to get the most out of resources, we should only take an action if the additional benefits are greater than the additional costs. For instance, if you are offered another job you should only accept it if the pay is more and if the pay is less then you should not accept the job. This compares to “No Such Thing as a Free Lunch” because when making marginal decisions you refuse something else and make a trade-off.
In Common Sense Economics, ten key elements of economics are explained. All of them are important to the economics world, but I chose the four most important in my opinion to write about. These four were: “Incentives Matter”, “No Such Thing as a Free Lunch”, “People Earn Income by Helping Others”, and “Decisions are Made at the Margin”. Incentives matter is the principal that people care about personal costs and benefits. There is no such thing as a free lunch states that everything has a cost whether it’s direct or underlying. People earn income by helping others says it all for itself. Decisions are made at the margin which is the cost and benefit of additional costs. To understand these important elements is to understand a vast base of economics.