Chapter Summary

Microeconomics is the science of choice under scarcity. Scarcity is ever present, even when material resources are abundant. There are always important limitations on time, energy, and the other things we need to pursue our goals.

Much of the economist's task is to try to answer questions of the form "Should I do activity x?" The approach to answering them is disarmingly simple. It is to do x if and only if its costs are smaller than its benefits. Not incurring a cost is the same as getting a benefit.

We saw that the cost-benefit model sometimes fails to predict how people behave when confronted with everyday choices. The art of cost-benefit analysis lies in being able to specify and measure the relevant costs and benefits, a skill that many decision makers conspicuously lack. Some costs, like sunk costs, will often seem relevant but turn out not to be. Others, like implicit costs, are sometimes ignored, even though they are of central importance. Benefits too are often difficult to conceptualize and measure. Experience has taught that becoming aware of the most common pitfalls helps most people become better decision makers.

The principles of rational choice are by no means limited to formal markets for goods and services. Indeed, some form of implicit or explicit cost-benefit calculation lies behind almost every human action, object, and behaviour. Knowledge of the underlying principles casts our world in a sharp new light, not always flattering, but ever a source of stimulating insight.