An economic system is a system for the production and distribution of goods and services. But what is crucial for understanding the way it functions is that it is a system for rationing goods and services that are inadequate to supply all that people want. Economic institutions exist to introduce elements of rationality or efficiency into the use of inputs and outputs. An economic system must determine how much of each resource shall go to each of its various uses, under the inherent constraint that all of the desires for all of the users cannot possibly be satisfied simultaneously.
Because economic systems are essentially systems of rationing, any successfully functioning economic system would have "unmet needs" everywhere. A nation is wealthier, its standard of living is higher, when it has more of real things, not when bigger numbers are printed on its currency. Man neither creates nor destroys matter, but only transforms it--and the knowledge of how to make these transformations is a key economic factor. In an economy, it is not the superficial possession of knowledge in the abstract that counts, but the effective application of it. We are all in the business of selling and buying knowledge form one another, because we are each so profoundly ignorant of what it takes to complete the whole process of which we are a part.
The notion of marginal rate of substitution (MRS) means that there is no categorical preferences. People's values are subjective, changing according to the time, their current situation, etc.
The cost of any good is the cost of its ingredients, and their cost, in turn, is whatever alternative good had to be foregone in order to use then where they are used. The notion of opportunity cost. Denunciations of "inefficiency" and "waste" are often nothing more than statements of a different set of preferences. Schemes to turn particular decisions or processes over to "experts" who will promote scientifically neutral "efficiency" are often simply ways of allowing one group of people to impose their subjective preferences on others.
The assumption that larger numbers of people meant additional outputs without an offsetting loss us only approximately true for small numbers of people. Crowding, distraction, and monitoring costs offset the gains made possible by cooperative organizational work. The law of diminishing returns.
Other things being equal, the present is always preferred to the future, if only because life itself is uncertain and the future may never come.
The process of transforming current assets into future assets is known as investment and disinvestment is the opposite.
Speculators reduce the risk.
The same things have different values to different people at a given time. Middlemen reallocated the resources, giving them to who value them most.
Although we cannot reduce all the different sets of individual preferences to one set, we can conceive of an optimal performance by an economy as representing the satisfaction of the diverse sets of preferences to such an extent that no one could be made any better off (by his own standards) without making someone else worse off (by his own different standards). This is called "Pareto optimality".
Government edicts without a threat of violence are mere suggestions, and suggestions have a notorious record of ineffecitiveness in the economy.
The knowledge of market is transmitted through prices. Price changes convey the changing relative scarcities of different resources.
Perhaps the most widespread misunderstanding of economics is that it applies solely to financial transactions. Frequently this leads to the statements that there are noneconomic values. IN fact, there is only economic values because economics is not a value itself but rather a method of trading off one value against another.
Things cost because other things could have been produced with the same time, effort and energy.
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