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Chapter 1 clarifies the relationship between the theory of the market and other branches of economics.

Society consists of individuals seeking to act to improve their positions. A market exists where the individuals are in close enough contact with one another to be aware of mutually profitable opportunities for exchange. A market system exists where the individuals in a society conduct their economic activities predominantly through the market.

Economic analysis reveals chains of cause and effect linking together and coordinating the mass of transactions taking place in the market. Market theory investigates these chains of cause and effect. Market theory is made possible by the unique properties of human actions. These properties are embodied in the act of choice among alternatives, an act that the observing mind of the economist can “understand.” Complex market phenomena may then be “understood” by relating them to individual acts of choice.

Economic theory is abstract, selecting only the key features of an economic situation for use in subsequent reasoning. Economic theory is general; its conclusions have validity for a wide range of possible real situations. Market theory provides the general framework for the analysis of a market system. Within this broad framework the various specialized branches of economic theory deal with more complex special cases. The theory in this book thus proceeds by drastic simplification.