1. Chapter 1: An Economic Way of Thinking

2. Objectives
EPF.1 The student will demonstrate knowledge of basic economic concepts and structures by
a) describing how consumers, businesses, and government decision makers face scarcity of resources and must make trade-offs and incur opportunity costs;
b) explaining that choices often have long-term unintended consequences;
c) describing how effective decision making requires comparing the additional costs (marginal costs) and additional benefits (marginal benefits);
f) identifying Adam Smith and describing the characteristics of a market economy.
EPF.2 The student will demonstrate knowledge of the role of producers and consumers in a market economy by
a) describing how consumers, producers, workers, savers, investors, and citizens respond to incentives;

3. Essential Questions What is scarcity?
Why do choices result in opportunity costs?
How do consumers, businesses, and government decision-makers face scarcity of resources?
What is an unintended consequence?
What is marginal benefit?
What is marginal cost?
How can marginal benefit and marginal cost be used to improve decision-making?
What were some of Adam Smith’s economic theories?  
What are the characteristics of a market economy, and why is each important?
What is an incentive?
How do incentives influence behavior?

4. Adam Smith Father of economics
Wrote_________________________________– argued that competition and a free market is key to a healthy economy
Your age group is very powerful! Think about how your influence the companies and how they spend money and advertise.
(obviously did not invent economics, but developed a new way of thinking of economics)

5. What is Economics
Economics is the study of how people choose to use their _______ ____________ to satisfy their __________________.
It is ______________ just about money…
Economics deals with things of any ________, not just monetary value
Everyone has ___________ values and __________ wants
A resource Is anything used to produce a good or service. They are limited or scarce. EX-workers, trees,
Wants are unlimited. Might be satisfied at a moment, but still want more.
What I WANT….
What I have….

6. Comprehending Economics boils down to….
People make _______________
People’s choices ____________
People respond to ____________ in ___________ ways

7. Different Focuses
Microeconomics – economic decision making of _______________________________________________
Macroeconomics – the workings of the economy as a ___________
Positive Economics – focuses on _______ and cause and effect relationships; “____________”
Normative Economics – uses value judgments and _________; “_________________________”

8. Macro vs. Micro Positive vs. Normative
Which type of economics would be used for each scenario – hint: more than one can be used
Macro vs. Micro Positive vs. Normative
Should a tax return be used to fix up the house or to buy a new TV?
What could Broad Run do to reduce the sports fee required to play sports?
What are the costs to increase our the US workforce by 10,000 workers next year?
Should we impose an embargo on all Communist countries to force them to become free-market?

9. The Seven Principles of Economic Thinking.
Scarcity Forces Tradeoffs
_________________ force people to make choices and ________________ when they choose
Shortages are temporary, while _____________________
(Every decision comes with a cost. EX-Summer school, vacation or job; volunteering at a homeless shelter, go to college or get a job?)
(when RG3 joined the Redskins, there was a shortage on Superman Socks, a drought last year caused a shortage in crops for pigs, which is leading to a shortage in bacon)
Scarcity is the condition of not being able to have all the goods and services one wants. It exists because human wants for goods and services exceed the quantity of goods and services that can be produced from all available resources.

10. Principle 1 Practice (can be +/-)
What are the tradeoffs of driving to school vs. taking the bus to school?
What are some of the tradeoffs you make when you decide to do sports/clubs?
What are the tradeoff to learning a new language beside the one
speak usually?

11. Potential Graph
If we look at the chart, we see that the further away a person works from their home, the more money they make.
How much TIME would you be willing to tradeoff for money?

12. The Seven Principles of Economic Thinking.
2. Costs Versus Benefits
Costs – what you spend in money time, effort, or other sacrifices to get what you want
Benefits – what you gain from something in terms of money, time, experience, or other improvements
If I sleep another 30 minutes, what do I give up?
Costs
Benefits
Do a Costs v. Benefits of sleeping in on the board.

13. Costs and Benefits of Going to College
Was your score consistent with the decision you think you will make (or have already made) about attending college?
Why might college be a better decision for some people than for others?

14. The Seven Principles of Economic Thinking.
3. Thinking at the Margin
When we decide to add or subtract a ________ (or ______) what we ________
Marginal benefit is the change in total benefit resulting from an action
Marginal cost is the change in total cost resulting from an action
When the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it
When the marginal cost of an activity exceeds the marginal benefit, they are better off doing less of it
(The choices we make are usually not all or nothing. EX – If I sleep another 30 minutes, what do I give up? Government could choose to trade off some money for roads to spend more on education.)
For example, what is the marginal benefit of one more hour of exercise? Suppose the marginal cost is one more hour of study? To determine the best level of consumption of a product or whether to participate in an activity, people must compare the additional benefits with the additional costs of consuming or participating a little more or a little less.

15. The Seven Principles of Economic Thinking.
4. Incentives Matter
Something that __________ a person ________________
people respond to incentives, EX-standing in line for concert tickets, grades, fines and jail time)

16. The Seven Principles of Economic Thinking.
5. Trade Makes People Better Off
We should focus on what __________________, and then ____________with others for the _____________________

17. The Seven Principles of Economic Thinking.
6. Markets Coordinate Trade
Any arrangement that brings buyers and sellers together to do business with each other
Free markets are ones in which buyers and sellers trade until both are satisfied
(grocery stores, Amazon.com; markets are better at coordinating exchanges than individual buyers and sellers EX-fresh mangos from Mexico and fresh Salmon from Alaska, free markets are the most efficient)
Invisible Hand - a term used by Adam Smith to describe his belief that individuals seeking their economic self-interest actually benefit society more than they would if they tried to benefit society directly.

18. The Seven Principles of Economic Thinking.
7. Future Consequences Count
Decisions ______________________________not only for today, but also_______________________
Law of unintended consequences – actions of people and governments __________________that are not expected
For example, off the coast of Florida, old tires were used to build reefs to attract fish;
unfortunately, over time, the tires began to disintegrate, polluting the water and the tires had to be removed
People make decisions and governments make policies which sometimes have completely unexpected results, called unintended consequences. For example, off the coast of Florida, old tires were used to build reefs to attract fish;
unfortunately, over time, the tires began to disintegrate, polluting the water and the tires had to be removed

19. What Tools Do Economists Use?
Scientific Method – involves posing a question, researching the question, developing a hypothesis, conducting studies and collecting information, analyzing the information, and then evaluating the hypothesis
Graphs – show the relationship between two given sets of data
It is a simplification and does not represent all the variables
Economic Models – a simplified representation of reality that allows economists to focus on the effects of one change at a time
Can take the form of an equations, computer program or diagram
Useful for explaining and predicting how the economy works
Create questions to current
can’t really conduct experiments EX-raising the speed limit
consider people who make it as musicians or people like Bill Gates and Steve Jobs