2Warm Up: Think Like an Economist If you could choose between two nearly identical products–one that is free and one that you have to pay for–which would you choose? Why?If you were opening a new business, would you select a location closer to or farther away from a business that sold similar or even identical product? Why?If you could make a small change in your daily routine that would save you time and money, would you make the change? Why or why not?
3IntroductionEconomics IS more than just money, taxes, banking, and tradeEconomists have developed principles that represent a specific way of thinkingThe number of principles may change depending on the economist, but the overall message is the same
4Principle #1: Scarcity Forces Tradeoffs Remember the definition of “Economics”Four Words: What are they? (L R, U W)Scarcitythe condition that results because people have limited resources but unlimited wantsMust make choicesEvery choice involves tradeoffsNo such thing as a free lunchWhat choices and tradeoffs do you think about or make?tradeoff: the exchange of one benefit or advantage for another that is thought to be betterscarcity-forces-tradeoffs principle: the idea that limited resources force people to make choices and face tradeoffs when they chooseno-free-lunch principle: the idea that every choice involves tradeoffs; a restatement of the scarcity-forces-tradeoffs principle
5Principle #2: Costs vs. Benefits Principle #1 makes us choose, but how do we decide?Economists assume that people make choices based on estimated costs and benefitsCost v. Benefit analysisListsWeighted calculationsWhat are the costs v. benefits of sleeping one hour later each day?cost: what is spent in money, effort, or other sacrifices to get somethingbenefit: what is gained from something in terms of money, time, experience, or other improvementscosts-versus-benefits principle: the idea that people choose something when the benefits of doing so outweigh the costscost-benefit analysis: a way to compare the costs of an action with the benefits of that action; if benefits exceed costs, then the action is worth taking
6Principle #3: Thinking at the Margin Margin is the border or outer edge“A little more” or “a little less” rather than all or nothingUsually decisions are not a wholesale changeMarginal cost: What you give up to add “one unit” to an activityMarginal benefit: What you gain by adding one more unitExample: Studying. Should you study 2 hours for Econ, or 3?margin: the border or outer edge of somethingthinking-at-the-margin principle: the idea that many decisions involve choices about using or doing a little more or a little less of something rather than making a wholesale changemarginal cost: what is given up by adding one more unit to an activitymarginal benefit: what is gained by adding one more unit to an activity
7Principle #4: Incentives Matter Costs and benefits influence our behaviorThey are INCENTIVESPeople respond to themCan be positive or negativeWhat are some examples you can think of?incentive: something that motivates a person to take a particular course of actionincentives-matter principle: the idea that people respond to incentives in generally predictable ways
8Principle #5: Trade Makes People Better Off Why don’t we all make our own clothes, or grow our own food?Adam Smith: none of us is equally skilled at everythingConcentrate on what we do best, and trade for the rest!Examples?trade-makes-people-better-off principle: the idea that people benefit by focusing on what they do well and then trading with others, rather than trying to do everything for themselves
9Principle #6: Markets Direct Trade What is a market to you?Economists take a larger viewA market is any arrangement that brings buyers and sellers together to do businessCan exist anywhereWhen markets operate freely, both sides will trade until each is satisfied (theory)Result is efficient marketAdam Smith: Invisible Handmarket: an arrangement that brings buyers and sellers together to do business with each othermarkets-coordinate-trade principle: the idea that markets are usually the best way to coordinate exchanges between buyers and sellersinvisible hand: Adam Smith’s metaphor to explain how an individual’s pursuit of economic self-interest can promote the well-being of society as a whole
10Principle #7: Future Consequences Count Do people think long term or short term?Generally shortsighted; they look for immediate benefits and costsDecisions always have long term consequences, thoughExample: VT law banned road side billboards; result---people built large sculptures and statues to get attention (19 ft Genie, giant squirrel)Unintended Consequencesfuture-consequences-count principle: the idea that decisions made today have effects in the futurelaw of unintended consequences: the general observation that the actions of people and governments always have effects that are not expected or intended
11ConclusionNow you know the principles, it is time to put them into action by analyzing some data on real world situations.But first…
12Conclusion You will now take on the role of economists you will practice analyzing enigmas and applying the principles of economic thinking to explain each enigma in groups.3 enigmas around the room.Use the handouts provided to complete your group work.EACH STUDENT MUST TURN IN THEIR OWN HANDOUT!