Economic Way of Thinking By: Mr. Hinsvark Information from: AP Economics Teacher Resource Manual NCEE

Economic Way of Thinking Economics “principles” Economics “principles” Most economics agree with them Most economics agree with them Are useful in explaining economic principles in a mixed-market economic system Are useful in explaining economic principles in a mixed-market economic system

Everything has a cost Every action costs someone; time, effort or lost opportunities to do something else. Every action costs someone; time, effort or lost opportunities to do something else. Opportunity Cost -The next best alternative that is foregone when a choice is made. Opportunity Cost -The next best alternative that is foregone when a choice is made. People incur costs even if there is not a monetary cost. People incur costs even if there is not a monetary cost.

People choose for good reasons. People should make a choice that gives them the most advantageous combination of costs and benefits. People should make a choice that gives them the most advantageous combination of costs and benefits. Different values amongst people will lead to different choices. Different values amongst people will lead to different choices. Even when government and businesses makes choices these choices are made by people. Even when government and businesses makes choices these choices are made by people.

Incentives matter Economics is incentives. Economics is incentives. When incentives change, people’s behavior changes in predictable ways. When incentives change, people’s behavior changes in predictable ways.

People create economic systems to influence choices and incentives Cooperation among people is governed by rules, which make the core of an economic system. Cooperation among people is governed by rules, which make the core of an economic system. As rules change incentives, and then behavior changes. As rules change incentives, and then behavior changes.

People gain from voluntary trade People will trade if they believe it benefits them. People will trade if they believe it benefits them. Specialization is key, make one thing and make it well. Trade for the rest. Specialization is key, make one thing and make it well. Trade for the rest.

Economic thinking is marginal thinking Marginal choices involve the additions and subtractions from current conditions. Marginal choices involve the additions and subtractions from current conditions. Is it worth it to make one more? Is it worth it to make one more? Is it worth it to buy one more? Is it worth it to buy one more?

The value of a good or service is affected by people’s choices The price of a good is set by supply and demand. The price of a good is set by supply and demand. Value is determined by the preferences of buyers and sellers. Value is determined by the preferences of buyers and sellers.

Economic actions create secondary effects. Good economics looks at secondary effects. Good economics looks at secondary effects. Increase in government spending causes the crowding out effect. Increase in government spending causes the crowding out effect. Minimum wage can lead to a surplus of labor, unemployment. Minimum wage can lead to a surplus of labor, unemployment. Good economists admit secondary effects and study their impact. Good economists admit secondary effects and study their impact.

The test of a theory is its ability to predict correctly. If a theory correctly predicts the consequences of actions it is a good theory. If a theory correctly predicts the consequences of actions it is a good theory. The idea that something is “good in theory, but bad in practice.” is wrong. The idea that something is “good in theory, but bad in practice.” is wrong.