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Big question i · Micro

How do people and firms make choices?

Scarcity forces trade-offs: time, money and attention spent on one thing can't be spent on another. Economics starts by asking how people weigh those trade-offs, and whether they weigh them well.

Emerged 1871

In books published independently, William Stanley Jevons and Carl Menger explained value by the usefulness of one more unit of a good, which put individual choice at the centre of economics.

SourceEconLib, Concise Encyclopedia of Economics: William Stanley Jevons (opens in a new tab)

In the real world

Why do people pay for gym memberships they barely use? US gym members paid more per visit than a pay-as-you-go pass would have cost (DellaVigna and Malmendier, 2006).

What the schools say

4 rival answers, oldest first.

  • 1871Mainstream

    Neoclassical

    The grammar of modern economics. People and firms are modelled as making the best choice they can, and markets as finding a balance between supply and demand. It is precise and powerful. Critics say its assumptions about rationality and information often don't hold.

    Read the school
  • 1972Mainstream

    New classical

    What if people are smart and look ahead? Then predictable policy may achieve little, because people see it coming. This 1970s revolution changed how all macro models are built, even though most economists rejected its conclusion that recessions are efficient.

    Read the school
  • 1979Bridge

    Behavioural

    Real people aren't perfectly rational. They hate losses, procrastinate and stick with defaults. Behavioural economics tests these habits and uses them to design better policy, such as automatic pension enrolment. Some famous findings haven't survived replication, so read it critically.

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  • 1992Heterodox

    Feminist

    What happens if you count the work that isn't paid? Care, housework and bargaining inside households change the picture of the economy. Its biggest finding has gone mainstream: much of the gender pay gap opens up when women have children.

    Read the school

Where it is studied

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