Productive resources are limited. Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Different methods can be used to allocate goods and services. People acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services. People respond predictably to positive and negative incentives.
Voluntary exchange occurs only when all participating parties expect to gain.
This is true for trade among individuals or organizations within a nation, and usually among individuals or organizations in different nations. When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase. Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services. Prices send signals and provide incentives to buyers and sellers.