ECONOMICS The Seven Principles of Economics

Introduction  Economics IS more than just money, taxes, banking, and trade  Economists have developed principles that represent a specific way of thinking  The number of principles may change depending on the economist, but the overall message is the same

Principle #1: Scarcity Forces Tradeoffs  Remember the definition of “Economics”  Four Words: What are they? (L R, U W)  Scarcity  Must make choices  Every choice involves tradeoffs  No such thing as a free lunch  What choices and tradeoffs do you think about or make?

Principle #2: Costs vs. Benefits  Principle #1 makes us choose, but how do we decide?  Economists assume that people make choices based on estimated costs and benefits  Cost v. Benefit analysis  Lists  Weighted calculations  What are the costs v. benefits of sleeping one hour later each day?

Principle #3: Thinking at the Margin  Margin is the border or outer edge  “A little more” or “a little less” rather than all or nothing  Usually decisions are not a wholesale change  Marginal cost: What you give up to add “one unit” to an activity  Marginal benefit: What you gain by adding one more unit  Example: Studying. Should you study 2 hours for Econ, or 3?

Principle #4: Incentives Matter  Costs and benefits influence our behavior  They are INCENTIVES  People respond to them  Can be positive or negative  What are some examples you can think of?

Principle #5: Trade Makes People Better Off  Why don’t we all make our own clothes, or grow our own food?  Adam Smith: none of us is equally skilled at everything  Concentrate on what we do best, and trade for the rest!  Examples?

Principle #6: Markets Direct Trade  What is a market to you?  Economists take a larger view  A market is any arrangement that brings buyers and sellers together to do business  Can exist anywhere  When markets operate freely, both sides will trade until each is satisfied (theory)  Result is efficient market  Adam Smith: Invisible Hand

Principle #7: Future Consequences Count  Do people think long term or short term?  Generally shortsighted; they look for immediate benefits and costs  Decisions always have long term consequences, though  Example: 1968 VT law banned road side billboards; result---people built large sculptures and statues to get attention (19 ft Genie, giant squirrel)  Unintended Consequences

Conclusion  Now you know the principles, it is time to put them into action by analyzing some data on real world situations.  But first… 