1. Thinking
Like an
Economist
Federal Reserve Chair: Janet Yellen

2. Philosophy of Economics
One must do and see economics in order to understand it
Use examples, exercises, and applications
Encourage thinking critically when considering problems
Encourage discussing interesting insights with friends

3. Economic Naturalism
Using insights from economics to make sense of everyday observations

4. Economic Naturalism Examples:
Why did we switch from driving big cars to little cars in the 1970’s only to switch back again in the 1990’s?
Why do brides spend thousands on a wedding dress that will never be worn again, while grooms rent a tuxedo that could be worn again?

5. More Examples:
Why do drug stores offer senior citizen discounts only on certain days of the week?
Why does staying over a Saturday get you a cheaper air fare?
Why did I make more money driving my ice-cream truck in poorer neighborhoods than in more affluent neighborhoods?

6. Core Principles The Scarcity Principle - “No Free Lunch”
The Cost-Benefit Principle
The “Not-All-Costs-and-Benefits-Matter Equally” Principle
The Principle of Comparative Advantage
The Equilibrium Principle
The Principle of Increasing Opportunity Cost
The Efficiency Principle

7. Scarcity Scarcity-a fact of life Economics is the study of:
Never enough time, money, energy, chocolate...
Economics is the study of:
How people make choices under conditions of scarcity and of the results of those choices for society

8. 1. Scarcity Principle Because of scarcity Tradeoffs are widespread
Having more of one good usually means having less of another
Thus, the “No Free Lunch Principle”-somebody has got to pay!

9. Scarcity Leads to Opportunity Costs
The value of the next best alternative that you did NOT choose.
Example: Where to work?
Option 1: IBM; Salary = $70 k
Option 2: Surf Shop in California; Salary = $30k
If you select option 2, what is your opportunity cost?

10. Opportunity Cost The Opportunity Cost is $70,000!
The opportunity cost of selecting job Option 2 is giving up job Option 1.
The Opportunity Cost is $70,000!
(But what about what we get????)*
* Keep costs and benefits separate.

11. Opportunity Cost
Opportunity Cost: The value of the next-best alternative that must be forgone in order to undertake an activity
Decisions depend upon opportunity costs
It is not the combined value of all other forgone activities, just the next best one

12. Everyone Faces Scarcity
Should Bill Gates pick up a $100 he sees laying on the street?
His time is so valuable that picking up a $100 bill might not be worth his while
He has 24 hrs/day and limited energy
Time spent building his company does not allow time for doing other things
Should you spend an hour cutting coupons on Sunday or cut your neighbor’s yard for $25?

13. 2. Cost-Benefit Principle
Take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs

14. What is in it for you?
If the opportunity cost is $50 and the benefit is $80, should the trade-off be made?
Taking a sick friend’s shift at work for 5 hours after school you will earn $50 Net (before taxes). If you do not take the shift you could watch football with your friends and bet on the game (winner takes $30). Girls will get this question correct, but will the guys???