5 Powers of Economic Thinking

Five Powers of Economic Thinking 1. Resources cost more than you think. Accounting costs (Monetary) --$ cost Opportunity cost (Non-monetary) -- The next highest-valued alternative. All decisions are rational. People make a decision after thinking through costs and benefits. Ask the students if it costs them anything to be in school today. Many of them will say that it cost them nothing. Ask the students who drove to school to raise their hands. Choose one of them. Ask the students who took the bus to raise their hands. Choose one of them. Start with the student who drove to school and ask how far they live from school. Figure out how many miles the car gets to the gallon and get a rough guess on how much money was used for gas to come to school today. Do a rough guess on the depreciation (wear and tear) on the automobile. Did the student or the parents pay for insurance? Write an answer on the board. Do their parents pay property taxes for public education? How much roughly? Now the student who took the public bus, did it cost this student any money? Maybe $1. How about the student who took the school bus? Did it cost them any money? Next, ask the student who drove to school today if he or she had a choice of doing three things today, what would they be? List them on the board—these are the trade offs this person has. Ask the student who took the bus the same question. List them on the board—these are the tradeoffs. Now ask each student to pick just one of those trade offs of what they would like to be doing right at this moment. THAT IS THE OPPORTUNITY COST! It is the next-highest valued alternative. It is what he or she would have been doing if they gave up economics for the day. 2. All decisions are rational (go to next slide)

Is this person’s decision rational? Most of the students will say that this person is NOT rational. Go to the next slide. http://www.humoroftheday.com/gallery/images/Pierced1.jpg

Margin—the weighing of additional costs and additional benefits of a 3. All Decisions are Made at the Margin. Margin—the weighing of additional costs and additional benefits of a specific change in the current situation. 3. Decisions are made at the margin. Margin--the weighing of the additional benefits and the additional costs of a specific change in the current situation. (give the students time to write this definition down) Let's work this definition backwards--THE CURRENT SITUATION is you are walking along the sidewalk. There is A SPECIFIC CHANGE IN THE SITUATION; you see a penny lying on the ground. A decision has to be made. Do you pick up the penny or keep on walking? First off, how many of you in the classroom would pick up the penny? (A couple to a few hands will be raised--point out one of them) How many of you would only pick up the penny if it were heads up? (One or two students will probably raise their hands--poiint out one of them) How many of you would never pick up a penny? (A couple to a few will raise their hands--point out one of them) Ask the students if there are any costs in picking up a penny. Wait for some answers and then demonstrate--first you have to stop and everyone knows that time is money, then you have to stoop, then you have to scrap your fingers on the ground, then you have to get back up. Ask the person who 9 out of 10 times picks up a penny, why he or she would stop, stoop, scrap, and get back up all for just one penny? (The student's answers might be "a penny saved is a penny earned," or "if I pick up 100 of them then I will have a $1." Whatever the answer, did this person feel that the additional costs of picking up the penny were at least equal to the penny itself. YES. Marginal Costs = Marginal Benefits. Student #2 (heads up)--Let's say that it took you the same time and energy to stop, stoop, scrap, and get back up. You have all of these costs and you get a penny in return. Is there anything else you get if the penny is heads up? (The student will answer--good luck). Does this person believe at least that his or her MARGINAL COSTS are AT LEAST = his or her MARGINAL BENEFITS? YES. Student #3 (Never picks up a penny) Ask why not? (The student will answer it is not worth it) Ask what he or she means? (Go to the next slide) http://www.new2usa.com/nova/english/00000226/penny.jpg

If there is a pile full of pennies, will you pick any of these up? Whatever the answer is, is he or she being RATIONAL? Yes. Are all three of these students RATIONAL human beings who make DECISIONS AT THE MARGIN? Yes. (Go to next slide) http://seattlepi.nwsource.com/dayart/20010824/226Ground24Q.jpg

Who in here would NOT pick this $100 bill up Why would you pick this up if it were lying on the ground? The MB are AT LEAST = MC. I am willing to bet the the MB are GREATER than the MC of picking this bill up. If you saw someone drop this out of their back pocket, how many of you would yell to the person that they dropped $100 bill so that you could return it to that person? Here is where you as a teacher can determine what value students place on honesty. Ask the students who would return the bill? What if it were a $20 bill? A $10? A $5? A $1? At whatever denomination they stop at, that is the value the student places on honesty. Who in here would NOT pick this $100 bill up if you saw it lying on the ground? Why would you pick it up? MB are at least = MC

IT DEPENDS!! 4. The answer to most questions is found in this simple statement: IT DEPENDS!! 4. Prices are signals to producers and consumers. Tell the students you are going to ask this question twice and after the second time of asking the question, you want them to shout out an answer. (Most students will say FEWER). Give them the example about skateboards and then tell them you are going to ask them the same questions twice again. You want them to shout out the answer. Give them the example about bubble gum. Now you should have them completely confused. Tell them you are going to ask them this question again, twice, and you want the RIGHT answer this time. (One or a couple of the students will yell out the right answer--IT DEPENDS. Tell those students you love them) If students of economics can say these two beautiful words--IT DEPENDS--to 98.32 percent of the question in the world, they will be right.

We all want more than less. We want everything! 5. People are maximizers We all want more than less. We want everything! You have $35,000 in your pocket and you are going to purchase a car. You have narrowed your search to two choices: YUGO BMW The students have $35,000 in their pockets and they have two choices. Only one of their choices costs the entire $35,000. The other is less. There choices are the BMW or the YUGO. Ask the students how many of them would use the entire $35,000 and buy the BMW. (Many of the students will want to buy this car) Ask the students how many of them would buy the YUGO. (A couple to a few students will want to buy this car) Are the students who used the entire $35,000 to purchase the BMW maximizers? YES. Are the students who bought the YUGO for $3.95 maximizers? YES. They could use the rest of their money for something else. We are all maxmizers--we always want more than less. Review with the students the Five Powers of Economic Thinking: 1. Resources cost more than you think 2. All behavior is rational 3. Decisions are made at the margin 4. Prices are signals to producers and consumers 5. People are maximizers

Mini Project On one half-sheet of colored paper place a photo, title and statement explaining one of your daily choices. Your title should be one of the five powers of economic thinking. Your statement should explain that concept in the context of one of your decisions. Your picture should relate to your example. bbbb

Who Majored in Economics Famous Individuals Who Majored in Economics

George H.W. Bush and George W. Bush http://coat.ncf.ca/our_magazine/links/53/bush_sr_jr.JPG

Ronald Reagan http://www.brocktoon.net/img/ronald_reagan.jpg

Gerald Ford http://img132.imageshack.us/img132/5518/fordsnapshot2sv.jpg

http://upload. wikimedia. org/wikipedia/en/thumb/5/5c/O'Connor,_Sandra http://upload.wikimedia.org/wikipedia/en/thumb/5/5c/O'Connor,_Sandra.jpg/200px-O'Connor,_Sandra.jpg Sandra Day O’ Connor http://www.dallasnews.com/sharedcontent/dws/img/v3/07-02-2005.N1A_02OCONNORlede.GDN1KNVL2.1.jpg

Arnold Schwarzenegger http://media.schwarzenegger.ca/arnold/Schwarzenegger.jpg http://www.petrukhine.ru/gallery/albums/schwarzenegger_arnold/schwarzenegger_arnold_009.jpg

Sadie Tanner Mossell Alexander receiving Ph.D. at the University of Pennsylvania http://content.answers.com/main/content/wp/en/thumb/a/a6/180px-Mossell_02.jpg

Cate Blanchett http://www.cate-blanchett.org/pictures/cate-blanchett-3.jpg

Danny Glover http://www.pubdef.net/uploaded_images/danny-glover-791316.jpg

Paul Newman http://www.my-wc.com/celebs/paul_newman/top.jpg

http://www. bobgruen. com/files/rollingstones/files/R http://www.bobgruen.com/files/rollingstones/files/R.203%20ROLLING%20STONES%20PARTY.jpg http://www.jeffpidgeon.com/uploaded_images/mick.jagger-759852.jpg http://www.sportsevents.net/events/images/rolling_stones.jpg Mick Jagger

Janet L. Yellen took office as President and Chief Executive Officer of the Federal Reserve Bank of San Francisco on June 14, 2004 http://www.reformation.org/wash-fed-reserve-bank.jpg http://www.frbsf.org/federalreserve/people/officers/yellen.jpg

Tiger Woods http://www.golftodaymagazine.com/0603/images/s2%20Tiger%20Woods,%20AP%20photo.jpg

James Blake http://pub.tv2.no/multimedia/na/archive/00206/james_blake__us_ope_206390c.jpg

Robert Edward Turner the III, Founder of CNN http://cache.gawker.com/news/ted.turner.jpg

http://www. bloggingneworleans http://www.bloggingneworleans.com/media/2006/05/lionel-richie-coming-home.jpg

Carlos Salinas de Gortari President of Mexico from 1988 to 1994 http://chronicle.uchicago.edu/041202/salinas.jpg

Donald Trump http://www.hollandsentinel.com/images/100899/trump.jpg

Alan Greenspan http://www.theage.com.au/ffximage/2004/10/17/alan_greenspan_narrowweb__200x234.jpg

Important Terms in Economics

Post Hoc Fallacy-- A false cause and effect relationship. A occurs before B; therefore, A is the cause of B. You load software onto you computer. The next day you turn on your computer and it doesn’t turn on. Without checking things out, you are sure it was the software that caused the problem. The picture on your old television goes out. You get up and smack the side of the TV. This fixes the TV. You are sure the next time your picture on your TV goes out, you can just smack the side and it will be fixed.

Post Hoc Fallacy-- A false cause and effect relationship. A occurs before B; therefore, A is the cause of B. Superstitions are post hoc fallacies.

Fallacy of Composition-- What is true of a part is true of the whole. "A car makes less pollution than a bus. Therefore, cars are less of a pollution problem than buses." "Atoms are colorless. Cats are made of atoms, so cats are colorless." “All businessmen are crooks.”