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ECONOMIC WAY OF THINKING Unit 1 – Principles of Economics

Studying Economics will help us in our daily lives.

So, what is Economics? The dictionary definition of Economics is that Economics is the study of the production, distribution, and consumption of goods and services. But Economics is much more than that.

Here’s a clue: No matter how much money we have, we always want more. Yes, we always want more.

Why do we always want more? Economists believe in a concept called scarcity. Scarcity is the idea that our resources are limited but our wants and desires are unlimited. Think about it. Twenty dollars can buy many different goods. Is there only one item you want? Or would you like more?

We have so many options but we must choose. We cannot have everything. E. Napp

Scarcity To think like an Economist, you must always remember that scarcity exists. You may only have ten dollars in your pocket but you can certainly think of a hundred different ways to spend it.

So, how do we choose?

Economics Can Help As we study Economics, we begin to understand that we must make choices. We begin to understand that we cannot have everything we need or want. We begin to understand that with every choice, there is a cost.

If we choose to live near the ocean, we are more likely to experience flooding. E. Napp

If we surf the waves, we may break our legs. Even fun activities have their costs.

It’s all about making choices and knowing the costs of those choices. E. Napp

Every Choice Has Its Cost Economists also teach us that every choice we make has its cost. In other words, every time we get something, we give something else up. There is no such thing as a free lunch.

Questions for Reflection Define Economics. Why must people make choices? Define scarcity. Why do our choices cost us? Define cost. Why is Economics a required course for graduation?

1. Scarcity forces trade offs Limited resources force people to make choices and face trade offs when they choose. Opportunity cost – next best option that you give up

2. Cost vs. benefits People choose something when the benefits of doing are greater than the costs

“There is no such thing as a free lunch”

3. Thinking at the margin Most of the decisions made each day involve choices about a little more or a little less of something. What is the extra that you will get? What is the extra that you could lose?

4. Incentives matter. Incentives encourage (motivate) people to act in certain ways When incentives change, people’s behavior changes too Economics wants to know the why and how

“You can lead a horse to water but you can’t make it drink”

5. Trade makes people better off By focusing on what we do well and then trading with others, we will end up with more and better choices than by trying to do everything ourselves.

6. Markets coordinate trade Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers. If consumers demand it, suppliers will make it!

7. Future consequences count. Decisions made today have future and often unintended consequences Ex. Broken window or Minimum wage

Critical Thinking Based on what we have learned, how would you now define Economics?

Answer The science that studies the choices of people trying to satisfy their wants in a world of scarcity. A.k.a. – the study of how people use their limited resources to satisfy their unlimited wants.

So, why study Economics? http://www.youtube.com/watch?v=XGhcJjIfwhY