Personal Finance Lesson on What is the economic way of thinking?

Economic Vocabulary Opportunity Cost – the next-best alternative that is given up when a choice is made Opportunity Cost – the next-best alternative that is given up when a choice is made Incentive- a reason or reward that motivates people to behave in predictable ways Incentive- a reason or reward that motivates people to behave in predictable ways Consequence – the result or effect of a person’s behavior Consequence – the result or effect of a person’s behavior

The economic way of thinking provides a method for analyzing people’s behavior. The economic way of thinking provides a method for analyzing people’s behavior. Because time, space, and money are limited, and wants are unlimited, people can’t have everything they want. Because time, space, and money are limited, and wants are unlimited, people can’t have everything they want. People must make choices People must make choices Every choice has a cost Every choice has a cost People respond to incentives People respond to incentives Choices have consequences Choices have consequences

Answer these questions… Why should people use the economic way of thinking? Why should people use the economic way of thinking? Why do people have to make choices? Why do people have to make choices? Why do economists say “there’s no such thing as a free lunch”? Why do economists say “there’s no such thing as a free lunch”? How do incentives work? How do incentives work? What is a disincentive? What is a disincentive? What are consequences? What are consequences?

Why should people use the economic way of thinking? By examining the costs and benefits of decisions, people will be more likely to make good decisions By examining the costs and benefits of decisions, people will be more likely to make good decisions

Why do people have to make choices? Resources are limited, and wants are unlimited; people cannot have everything they want. That’s why they have to choose. Resources are limited, and wants are unlimited; people cannot have everything they want. That’s why they have to choose.

Why do economists say “there’s no such thing as a free lunch”? Nothing is free, because every choices involves an opportunity cost Nothing is free, because every choices involves an opportunity cost

How do incentives work? Incentives are rewards (both monetary and non-monetary) that motivate behavior. Because people tend to respond to incentives in predictable ways, sometimes people’s behavior can be changed by offering incentives. Incentives are rewards (both monetary and non-monetary) that motivate behavior. Because people tend to respond to incentives in predictable ways, sometimes people’s behavior can be changed by offering incentives.

What is a disincentive? Just the opposite of an incentive; it is not a reward but a penalty. Many drivers slow down when they see a police car because getting a $100 fine is a powerful disincentive Just the opposite of an incentive; it is not a reward but a penalty. Many drivers slow down when they see a police car because getting a $100 fine is a powerful disincentive

What are consequences? The results of behavior are consequences. Studying for a test usually results in a good grade; the good grade is a consequence The results of behavior are consequences. Studying for a test usually results in a good grade; the good grade is a consequence

Your turn… Determine what is the best incentive… #1 #1 Bookbag – $11.99 (buying one) Coupon % off Coupon 2 – Save $2.00 The better incentive is coupon # ______ The reason is….

#2 Snappy-Krunch Cereal - $2.59 per box (buy three boxes) Snappy-Krunch Cereal - $2.59 per box (buy three boxes) Coupon 1 – Buy 2 Get 1 free Coupon 1 – Buy 2 Get 1 free Coupon 2 – Save $1.00 per box Coupon 2 – Save $1.00 per box The better incentive is coupon# ________ The better incentive is coupon# ________ The reason is…. The reason is….

#3 Soccer shoes $69.95 a pair (buy 2 pairs) Soccer shoes $69.95 a pair (buy 2 pairs) Coupon 1 – Buy one pair –get another at ½ price Coupon 1 – Buy one pair –get another at ½ price Coupon 2 – 2 pairs $ Coupon 2 – 2 pairs $ The better incentive is coupon# ________ The better incentive is coupon# ________ The reason is…. The reason is….

4 Scary movie festival $8.00 each night for 6 nights (attend all 6 nights) Coupon nights at regular price, ½ price the next two nights Coupon 2 – 5 nights at regular price – 6 th night free The better incentive is coupon # ______ The reason is….

#5 Pizza $18.99 (buy 2 pizzas) Pizza $18.99 (buy 2 pizzas) Coupon 1 – Save $2.00 on each pizza Limit 2 Coupon 1 – Save $2.00 on each pizza Limit 2 Coupon 2 – Today only 2 pizzas $35. Coupon 2 – Today only 2 pizzas $35. The better incentive is coupon# ________ The better incentive is coupon# ________ The reason is…. The reason is….