Chapter 1: An Economic Way of Thinking

So What is Economics?? Economics is how people decide to use their limited resources for their unlimited wants Basically – getting the most with what you have It is NOT just about money Economics deals with things of any VALUE, not just monetary value Everyone has different values and different wants It is NOT full of mathematic equations It is more a conceptual study than mathematical There is some math involved but it is not the focus

Wrote The Wealth of Nations in 1776 The Start of Economics Started by Adam Smith Wrote The Wealth of Nations in 1776 Explained that companies were better off when they compete against one another Not competition by war, but by production/selling of goods Said people needed more than food, shelter, clothing The more of these “things” they have – the richer they are Led to studies of how to control/run an economy

What is an economy of a country? The Start of Economics What is an economy of a country? An economy deals with how a country or government uses or utilizes its limited resource to get the most out in production and consumption of these goods.

Section 3: What Seven Principles guide an economic way of thinking? Scarcity Forces Tradeoffs Cost v. Benefit Thinking in the Margin Incentives Matter Trade Makes People Better Markets Coordinate Trade Future Consequences Count

Principle 1: Scarcity Forces Tradeoffs Main Idea: Although our desire for things is unlimited, the resources needed to fulfill our desires are scarce. Scarcity – Tradeoff –

Principle 1: Scarcity Forces Tradeoffs Also known as the no free lunch principle “TINSTAAFL” remember the Seinfeld video? No Free Lunch

Potential Graph If we look at the chart, we see that the further away a person works from their home, the more money they make. How much TIME would you be willing to tradeoff for money??

Principle 2: Cost v. Benefit Main Idea: Individuals make choices based on the expected costs and benefits Cost– Benefit –

Cost-Benefit Analysis

Principle 2: Cost v. Benefit Cost-Benefit analysis of: Driving vs. flying for vacation New car vs. used car

Principle 3: Thinking at the Margin Main Idea: Most decisions we make involve choices about a little more or a little less of something rather than a whole change Margin- Marginal cost – Marginal benefit-

Principle 3: Thinking at the Margin You and your friend have organized a trip around all six cities where your favorite band is performing. But then the band announces that it is extending its tour to one more city. The added concert is not in your plans, but you would really hate to miss it. Here is a decision you must make at the margin. Is the marginal benefit of attending the seventh concert worth the added costs in time and money?

Principle 4: Incentives Matter Main Idea: People respond to incentives in a predictable way Incentive– Positive Incentives – Negative Incentives –

Principle 4: Incentives Matter What are examples of positive and negative incentives that you can think of? Positive Incentives: Negative Incentives:

Principle 5: Trade makes people better off Main Idea: 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 for ourselves.

Principle 5: Trade makes people better off It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor [tailor] does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. —Adam Smith, The Wealth of Nations, 1776

Principle 6: Markets coordinate trade Main Idea: the idea that markets are usually the best way to coordinate exchanges between buyers and sellers Market – Markets Examples:

Principle 7: Future Consequences Count Main Idea: Even though most people make decisions that will effect the immediate cost and benefit, this principle reinforces that decisions made have future implications

Principle 7: Future Consequences Count The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences . . . The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy. —Henry Hazlitt, Economics in One Lesson, 1979

Principle 7: Future Consequences Count Law of unintended consequences- Can you think of a local example?