Chapter Overview Economists approach problems differently from many other people. Underlying economics is the basic principle of rational behavior—that people make choices to achieve their goals in the most effective way possible. In this chapter we have introduced the basic concepts economists use, as well as four questions they ask to break down problems. Throughout this book, students will see these concepts and questions over and over again: 1. Scarcity: What are the wants and constraints of those involved? 2. Opportunity cost: What are the trade-offs? 3. Incentives: How will others respond? 4. Efficiency: Why isn’t everyone already doing it? In later chapters, as we progress to more complicated problems, students should use these four questions to break down problems into manageable pieces, ones they can understand using the fundamental concepts presented in this chapter. Learning Objectives LO 1.1: Explain the economic concept of scarcity. LO 1.2: Explain the economic concepts of opportunity cost and marginal decision making. LO 1.3: Explain the economic concept of incentives. LO 1.4: Explain the economic concept of efficiency. LO 1.5: Distinguish between correlation and causation. LO 1.6: List the characteristics of a good economic model. LO 1.7: Distinguish between positive and normative analysis. Chapter Outline OPENING STORY: MAKING AN IMPACT WITH SMALL LOANS The Basic Insights of Economics Scarcity (LO 1.1) Opportunity Cost and Marginal Decision Making (LO 1.2) BOX FEATURE: WHAT DO YOU THINK? – THE OPPORTUNITY COST OF A LIFE Incentives (LO 1.3) Efficiency (LO 1.4) An Economist’s Problem-Solving Toolbox