Absent irrational behavior, everything we do, and everything businesses and workers and investors and consumers do ….. is the result of a choice. There were alternatives.

For everyone time is scarce and money is scarce. For producers, they have limited capital, and must pay workers for their scarce time, and they must also pay something for the materials and other resources they must have. Why must they pay? Well, these resources have costs to get them out of the ground, and to market, or to be manufactured in some way. The fact is, everything we might value or want, is scarce. This is the reality we face in the economy. Everything has competing uses, because everything is scarce, relative to need.

Prices for everything resolve this massive problem for our society that have more wants than the resources. In the world, some people have labor to sell, and other people want to buy some labor to produce something. Some persons also have grain, which other people want to buy. Some make clothes, and others want to buy clothes. So, everywhere we look, we can persons who have things to sell (if they could get a good price for them) and other people who want to buy these things because they dont have any. This is the natural order, where some individuals have things they might be willing to sell, and other individuals have a desire to obtain things they dont have. The strength of DEMAND and the relative SCARCITY of the item determines the level of the price that will ultimately be set by these “markets” which are composed of buyers and sellers.

Prices are the way that buyers and sellers in markets resolve who gets the scarce things (the labor, the oil, the hamburger, etc.). The choice to buy something at a price, or sell something at a price was made because the net benefits exceeded the net benefits of the next best alternative (eg what we call the “opportunity cost”). Net benefits facing different people or firms are often different. To choose differently is NOT wrong or irrational, it is due to the fact that different decision-makers make different assessments of the scarcity (value) of the resource constraints facing them. The make different choices because of things like (1) they value time differently, (2) they value money differently, (3) they value time with friends differently, (4) they value the present vs the future differently, etc etc.Everything is about making a choice. The reason some people choose to go to school long is a conscious choice, just like it is for those who dont go on to school—- it is not that some people made the wrong choice or that the’re ignorant, its likely that they valued present consumption more than future consumption.

Can choice patterns be influenced— ALWAYS!! Economic reasoning says that we can always alter people’s behavior at work by changing the marginal incentives. Sticks and carrots. Economics argues that you can also change social behavior by the same incentive mechanisms. If they are making choices because of incentives, then they choices can always be altered by impacting the benefits and costs of the options. Economic thinking is actually not “dismal” as Thomas Malthus had reasoned, it doesnt encourage wringing our hands and knashing our teeth over why others are WRONG, or INCORRIGIBLE, or ignorant in the choices they have made. It is more optimistic in seeing potential for changing things. Everybody did what they did because of a choice— and those choices would’ve been different had the net benefits of the options been different. How can we alter them so behavior is preferred?

When firms have sales, or lower the prices, they are basically encouraging consumers to change their choice and buy more (and at the same time to buy less of something else)—altering the purchasing pattern because the net benefits of alternatives have been changed.

The first principle in economic analysis is that ANY observed behavior ALWAYS involves a CHOICE. Clarifying what that choice was, and the underlying economic factors that may be driving it, may provide useful insight.

Why must there always be a choice? Very few things we do can be described by “I didn’t have a choice”. Lets begin with a personal example to illustrate. I hopped in my car to get some food—I had to, there was nothing else I could have done. That is simplistic reasoning. I could’ve walked, I could’ve called a taxi, I could have paid a delivery service to bring me take out food, I could have done without until tomorrow. Yes, I had choices.

The other way of expressing this, is that there is always some alternative I could have pursued.

I choose based on my preferences and the resource constraints that I face. If I have a car (I already paid for it and it is the fastest way to get there) I may choose this mode of transport to get my pizza tonight because of the relative value (scarcity) of my time and the value (relative scarcity) of the money it will take in gas to drive there. If it had been Saturday, maybe I would’ve decided to walk because I have more time than I will have tonight. A poor person (income is scarce) will often prefer to walk in the same circumstances (cause time is more abundant than money).

Other problems of choice are simpler, and not involve multiple constraints (time and money). Why did I take this faculty job ? Because it had some benefits, and they exceeded the benefits of my next best alternative (to stay where I was and not take the job).

Why did I choose to go to Stop n Shop to buy my groceries? Why did I turn down a job offer? Why do high income people drive their own cars to work? Why do demand curves slope down (why do people buy less at higher prices)? Why do supply curve slope up (why do suppliers supply more only at higher prices)? All of these behaviors involve a choice. That choice is about “what we get” vs “what we give up”. That is, the opportunity cost.