In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve. We then consider how different types of economies determine which goods and services to produce, how to produce them, and to whom to distribute them. This unit also covers why and how specialization and exchange increase the total output of goods and services, with a discussion of absolute and comparative advantage. Finally, we touch on the importance of property rights, the role of incentives in the functioning of free markets, and the principle of marginal analysis.