Keys to Economic Thinking

1. People economize. People choose the best alternative to them because it involves the least cost and the greatest benefit.
2. All choices involve cost. Cost is the second best choice. It is what people give up when they make their choice.
3. People respond to incentives. Incentives are actions or rewards that encourage people to act. When incentives change, people's behaviors change in predictable ways.
4. Economics systems influence individual choices and incentives. How people cooperate is governed by written and unwritten rules. As rules change, incentives change and behavior changes.
5. Voluntary trade creates wealth. People can produce more in less time by specializing in what they do best. The surplus goods or services they produce can be traded to obtain other valuable goods or services.
6. The consequences of a choice lie in the future. The important costs and benefits in economic decision making are those which will appear in the future. Economics stresses making decisions about the future because it is only the future that we can influence. We cannot influence things that have already happened.
   

A long time ago, Tanstaafl was made a king of all the lands. His first act was to call all his economic advisers and tell them to write up all the economic knowledge the society possessed. After years of work, they presented their monumental effort: 25 volumes, each about 400 pages long. But in the interim, king Tanstaafl had become a very busy man, with running a kingdom of all the lands and everything. Looking at the lengthy volumes, he told his advisers to summarize their findings in one volume.

Despondently, the economists returned to their desks, wondering how they could summarize what they'd been so careful to spell out. After many more years of rewriting, they were finally satisfied with their one-volume effort, and tried to make an appointment to see the king. Unfortunately, affairs of state had become even more pressing than before, and the king could not take the time to see them. Instead he sent word to them that he couldn't be bothered with the whole volume, and ordered them, under the threat of death (for he had become a tyrant), to reduce the work to only one sentence.

The economists returned to their desks, shivering in their sandals and pondering the impossible task. Thinking about their fate if they were not successful, they decided to send out for the last meal. Unfortunately, when they were collecting money to pay for the meal, they discovered they were broke. The disgusted delivery man took the meal back to the cook, and on the way, the delivery man's parting words echoed in their ears. They looked at each other and suddenly they realized the truth. " We're saved! " they screamed. " That's it! That's economic knowledge in one sentence!" They wrote the sentence down and presented it to the king, who thereafter fully understood all economics problems. (He also gave them a good meal.) The sentence?

There Ain't No Such Thing As A Free Lunch - TANSTAAFL