An Economic Way of Thinking Section Summaries

1.2 What Is Economics All About? Economics is various things to various people. Economics has a lot to do with asking questions about—and then solving or explaining—everyday mysteries and enigmas.

1.2 What Is Economics All About? Economics is the study of how people, individually and in groups, choose to use their limited resources to satisfy their unlimited wants. All resources are scarce because they exist in finite amounts. All resources have alternative uses.

1.2 What Is Economics All About? Economics is the science of decision making, or of how people make choices. Positive economics describes how things are. Normative economics describes how things ought to be.

1.2 What Is Economics All About? Try to think of positive and normative this way: Academics use positive to describe what is, or the presence of something, whether good or bad. Think of a positive drug test. They use normative to refer to standards, or norms, that can be used to make judgments about what ought to be.

1.3 What Seven Principles Guide an Economic Way of Thinking? Scarcity-forces-tradeoffs principle: Limited resources force people to make choices and face tradeoffs when they choose. You use this principle when you decide between which TV show to watch.  The time that the shows are on is scarce so it forces you to make a tradeoff. You ask yourself: Which show should i watch now? Which should i record and watch later.

1.3 What Seven Principles Guide an Economic Way of Thinking? Cost-versus-benefits principle: People choose something when the benefits of doing so are greater than the costs. You apply this principle when you decide between studying for another hour or sleeping for another hour.  You weigh the benefits of sleeping for another hour like being less tired the next day and the costs like losing study time the next day.  You then decide which decision's benefits outweigh the costs.

1.3 What Seven Principles Guide an Economic Way of Thinking? Thinking-at-the-margin principle: Most decisions involve choices about a little more or a little less of something. You apply this economic principle when you decide what time to get up for school every morning.  You decide what margin or time is going to give you the most benefits.  When you set your alarm every day you are deciding which time is going to give you the most sleep possible and give you enough time to shower and ready in time for school.

1.3 What Seven Principles Guide an Economic Way of Thinking? Incentives-matter principle: People respond to incentives in generally predictable ways. Example: Incentives make people respond in different ways like how getting good grades is an incentive to do your homework every day.  The incentive of having an A in a class motivates you to do the homework that you wouldnt do if there wasnt that incentive.

1.3 What Seven Principles Guide an Economic Way of Thinking? Trade-makes-people-better-off principle: By focusing on what we do well and then trading with others, we will end up with more and better choices than by doing everything for ourselves. Example: the Iphone's huge sales is an example of the "Trade makes people better off" principle. When a person buys an Iphone it makes themselves and Apple better off.  The buyer gets a phone that they couldnt make on their own, while Apple and the customer's service provider get the customer's money, that way both parties benefit from the trade.

1.3 What Seven Principles Guide an Economic Way of Thinking? Markets-coordinate-trade principle: Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers. Example: Amazon is an example of a Market coordinating trade.  Amazon can coordinate trades between people that live hundreds or even thousands of miles away that wouldn't normally trade.  These markets like Amazon usually do better than anyone or anything else at coordinating these trades and it benefits everyone.

1.3 What Seven Principles Guide an Economic Way of Thinking? Future-consequences-count principle: Decisions made today have future (and often unintended) consequences. Example: Future Consequences count is when you get into a car crash.  The decision made today of trying to send a text message while your driving has future consequences.  The crash has the consequences in the future like possibly having a broken limb or making your insurance rates go up.

1.4 What Tools Do Economists Use? The scientific method involves posing a question, developing a hypothesis, conducting studies and collecting data, analyzing the data, and evaluating the hypothesis.

1.4 What Tools Do Economists Use? Graphs are two-dimensional representations of a three-dimensional world. They show relationships between two sets of data.

1.4 What Tools Do Economists Use? Economic models are simplified representations of reality that help economists focus on the effects of one change at a time