The Economic Way of Thinking

What is Economics? The science of scarcity - unlimited wants, limited resources Scarcity forces us to make choices Economists study how individuals and societies deal with scarcity

Trade-Offs ALL decisions involve trade-offs: the alternatives we give up whenever we choose one course of action over others (There is no such thing as a free lunch!) Opportunity cost: the most desirable alternative given up Volunteer needed – must be dating someone.

Create a Pitch! Convince your classmates to pick your item. Good luck!

Check Your Understanding Which is more important to survival – diamonds or water? Which is more expensive and why? Explain in terms of scarcity.

Check Your Understanding How much does a ticket cost for a regular season Phillies game? What about in 2008 when the Phillies made it to the World Series? In terms of scarcity, explain why the price increased.

Micro vs. Macro MICROeconomics – study of small economic units such as ind’ls, firms, industries MACROeconomics – Study of the LARGE economy as a whole or in its basic subdivisions (national economic growth, unemployment, etc.)

Marginal Analysis In economics, marginal = additional “Thinking on the margin” or marginal analysis involves making decisions based on the additional benefit (marginal benefit) vs. the additional cost (marginal cost) For example, would you watch the movie three times?

Ceteris Paribus All other things held constant

List 3 things you don’t like to eat…

What if the alternative were dog poop?

Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant – ceteris paribus): You want to visit your friend for a week. You work every weekday earning $100 per day You have three flights to choose from: Thursday Night Flight: $275 Friday Early Morning Flight: $300 Friday Night Flight: $325 Which flight do you choose and why?

Centerpiece Activity Each person needs one notecard in addition to one notecard placed in the center of your group. Label the first notecard with “Cartoon Characters” 30 second “think time” – no writing or discussion! Generate one idea at a time then trade your notecard with the one in the center. Continue brainstorming items, each time trading your note card with the centerpiece.

Centerpiece Topic #2: BEST Class Ever! Brainstorm features of the best class you’ve ever experienced. What did the teacher do? What did you and your fellow classmates do?

Centerpiece Topic #3: WORST Class Ever!  Brainstorm features of the worst class you’ve ever experienced. What did the teacher do? What did you and your fellow classmates do?

How is economics used? Theoretical Economics – scientific method used to make generalizations & abstractions to develop theories Policy Economics – theories applied to fix problems or meet economic goals Positive vs. Normative: Positive Statements – based on facts. Avoids value judgements (what is) Normative Statements – includes value judgements (what ought to be)

Positive or Normative Statement? The minimum wage creates unemployment among young and unskilled workers The minimum wage ought to be abolished If the price of a product in a market decreases, then, other things equal, quantity demanded will increase A little bit of inflation is worse for society than a little bit of unemployment There is a trade-off between inflation and unemployment in the short run

In Summary: Five Key Economic Assumptions Society’s wants are unlimited, but ALL resources are limited (scarcity). Due to scarcity, choices must be made. Every choice has a cost (a trade-off). Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.” Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice Real-life situations can be explained and analyzed through simplified models and graphs.