An Economic Way of Thinking Chapter 1 Essential Question: How can you think like an economist?

Intro Why are some nations rich and others poor? (good question) Economics = study of how people choose to use limited resources to satisfy unlimited wants 1776 – Adam Smith wrote The Wealth of Nations He is the father of modern economics Said nations prosper when they’re free to do their business Said people will satisfy basic needs (food, shelter) but also comforts (nice house, etc.) More on Adam Smith as we go thru the course

Essence of economics Econ is not just money or graphs It’s about what’s underneath the graphs; it’s about the why? Freakonomics calls it “the hidden side of everything” Our book talks about “economic enigmas” An enigma is a thing that cannot be explained (or is tough) An economic enigma might be… …why a nation gets richer for years then slides into depression …why popcorn is so expensive at the movies …why many things cost $2.99 but few cost $3.00

Economics Def. = study of how people choose to use limited resources to satisfy unlimited wants Resources – anything used to produce a good or service They are scarce – there is a limited amount (think gold) Wants are unlimited (we want lots of it!) Econ is about decision-making. It’s about deciding how to use our resources to get what we want. Bottom line…we must make choices and economics tries to systematize this study.

7 principles of economic thinking Scarcity forces tradeoffs Wants are unlimited, resources are scarce (or limited). So… …we must make tradeoffs or choices. AKA “no free-lunch principle”—even if it’s free to you, someone paid 2. Costs vs. benefits Costs can be money, time, effort, etc. Benefits are what’s gained

7 principles (cont.) 3. Thinking at the margin The margin refers to one more unit Question…is adding one more worth it? Think one more slice of pizza…is it worthwhile? Again? Again? Again? 4. Incentives matter Incentives – anything that motivates a person to action Think of the person camped out for a Black Friday sale, why do that? 5. Trade makes people better off We do best when we specialize in what we’re good at… …then buy/trade for other stuff. Think of a blacksmith in an old-time village.

7 principles (cont.) 6. Markets coordinate trade Market – anything that brings buyers & sellers together. Can be real-life, like a flea or farmers’ market, can be online, like ebay. When a sale is made, both buyer & seller are happy. 7. Future consequences count We tend to make decisions based on right now. But, decisions now can impact the future. “Law of unintended consequences” – you may get surprising effects. Ex.: the rat tails turned in for rewards mentioned in the video