Adam smith 18th Century political economist and philosopher 1776 – Wrote The Wealth of Nations “competition is the key to a healthy economy” “Invisible Hand” – i.e. markets control economic decisions Governments should not intervene

What is Economics All About? Asking questions and then solving or explaining everyday mysteries and enigmas = puzzles or riddles that might be explained through an economic analysis How people – individuals and groups – choose to use limited resources to satisfy unlimited wants Resource = anything used to produce an economic good or a service All resources are scarce All resources have alternative uses Economic enigmas are puzzles or mysteries that can be explained through economic analysis Big questions: Why does an economy grow for a long time and then start to shrink??? Smaller questions: Why does popcorn sold at the movies cost so much??? theatres owners make money by selling either tickets or food – by overcharging for popcorn they can keep ticket prices low and draw in more customers Why do some things cost &2.99 and others cost $3.00??? one theory links this to the invention of the cash register; pricing goods at 99 cents instead of $1.00 made it hard for clerks to pocket the dollar bill rather than ring it up… How people use limited resources to meet unlimited wants goes back to ancient Greece – author Xenophon wrote book called Oeconomicus described how a household should manage its resources.

2 Main branches of economics Looks at economic decision making by individuals, households, and businesses Supply and Demand, prices Focuses on the workings of an economy as a whole Microeconomics Macroeconomics

The Science of decision making – What is and what should be Positive Economics – describes how things are Normative Economics – focuses how things ought to be (analysis/advice/opinion) Types of questions economist are asked: What impact will increased enrollment, salary increases, and rising maintenance costs have on next years school budget? What actions should we take now to reduce expenses in order to balance next years budget? Positive economics – gather data to describe how things are Normative – analyzing future impact of data gathered and making choices among options

Seven Principles of Economic Thinking Scarcity forces tradeoffs: Limited resources force people to make choices People face trade-offs when they choose This is known as the “no-free-lunch-principle” Costs vs. Benefits: People choose something when the benefits of doing so are greater than the costs Cost-benefit analysis, which “outweighs” the other? How might scarcity forces tradeoff principle come in to play if you were to buy a used car for your trip? 2 cars fit your budget – luxury sedan that gets 15 miles to a gallon/economy car that gets 30 miles you can’t buy both… your tradeoff is roominess for gas mileage or the other way around How does cost versus benefits come in to play? do you pitch a tent in an inexpensive campground or pay more for a hotel w/ soft bed and shower? Do the benefits of renting a hotel outweigh the higher cost? The choice is personal.

Seven Principles of Economic Thinking Thinking at the Margin: Most decisions involve choices about a little more or a little less of something Decisions involve comparing marginal cost = what you give up to add one more unit, versus marginal benefit = what you gain by adding one more unit Incentives Matter: Incentive = something that motivates a person People respond to incentives in predictable ways Thinking at the margin: You and your friends have organized your trip to six cities to see your favorite band. The band adds another show in a 7th city. This was not in your original plan. You must make a decision at the margin… Is the marginal benefit of seeing the 7th show worth the extra costs in time and money? Incentives matter: Incentives are positive and negative (extra credit is positive/governments use negative – fines and jail time) One morning on your road trip you hit a speed trap. Your were going 65 in a 50 mph zone. Worse yet it was a construction zone where fines are doubled! It ends up costing you $150. Is this incentive to follow the speed limit?

Seven principles of economic thinking Trade Makes People Better Off: Focusing on what we do well and trading with others gives us better choices Markets Coordinate Trade: Markets bring buyers and sellers together do better than individuals at coordinating exchange between buyers and sellers Are efficient because trade until both satisfied Future Consequences Count: Today’s decisions have future (often unintended) consequences Trade makes people better off: One morning on your road trip you turn the key in the engine and nothing happened. A mechanic tells you your battery is dead. You offer two concert tickets in exchange for a new battery. You are happy your car is running again and the mechanic is glad to see the concert. Markets: On your road trip you feel markets at work by visiting a grocery store. You find fruit from South America, Cheese from France, and Seafood from Thailand. How did this get here? Markets coordinate trade. Future consequences: Your road trip had a variety of consequences In short term you find out what it’s like to be on your own away from your family. You solved problems and navigated difficult situations. You also have a higher insurance bill because of your speeding ticket. Consequences are both good and bad.