1. Thinking Like an Economist

2. Thinking Like an Economist
Every field of study has its own terminology
Mathematics
integrals  axioms  vector spaces
Psychology
ego  id  cognitive dissonance
History
Bias  point of view  cause and effect
Law
Precedent  torts  codification
Economics
supply  opportunity cost  elasticity  consumer surplus  demand  comparative advantage  deadweight loss

3. Thinking Like an Economist
Economics trains you to
Think in terms of alternatives.
Evaluate the cost of individual and social choices.
Examine and understand how certain events and issues are related. 2

4. The economist as a scientist
The economic way of thinking . . .
Involves thinking analytically and objectively.
Makes use of the scientific method. 3

5. The Role of Assumptions
Economists make assumptions in order to make the world easier to understand.
The art in scientific thinking is deciding which assumptions to make.
Economists use different assumptions to answer different questions.

6. The Basic Economic Problem: Scarcity
Scarcity occurs when people’s wants and needs are unlimited while the resources needed to produce goods and services are limited
Unlimited wants and needs is the human characteristic of never having all wants and needs satisfied
Limited resources means that there are never enough resources to fulfill all wants and needs
Limited resources available to satisfy unlimited wants and needs creates scarcity

7. Scarcity  Allocation
Allocation is the process of choosing which needs will be satisfied and how much of our resources we will use to satisfy them
Making trade-offs (choosing among alternatives)
When you allocate, you make trade-offs in deciding how to use your resources
Economics: the science that deals with how society allocates its scarce resources among its unlimited wants and needs

8. Costs & Benefits
Teresa and Maria work at The Sports Machine, a sporting goods store near their school. Teresa spends most of what she earns on clothes and jewelry. The rest she uses for going out on the weekends. When she asks Maria why she never goes out on the weekends, Maria tells her that she’s saving for a used car so she can drive to school and work. Teresa says she’ll just keep riding the bus.

9. Costs & Benefits
Economics consider the opportunity costs and opportunity benefits of each choice
Opportunity cost: the value of the opportunity lost by making a decision
Example:

10. Opportunity Cost: Case Study
Assume you have a weekly income of $30 and that you spend that income on only 2 different goods: movies and paperback books.
Assume you have only 2 choices: Alternative A or Alternative B
Alternative A:
4 $5 = $20
1 $10 = $10
Total = $30
Alternative B:
2 $5 = $10
2 $10 = $20

11. Best way to make a choice between choosing Alternative A or B is to look at the opportunity cost
With A, what do you have to give up to move to option B?
The opportunity cost of one movie is two books.
Make your decision based on how much you like movies compared with how much you like books
Do you like one movie enough to give up two books?
Or do you like two books enough to give up one movie?

12. Opportunity Benefit
Opportunity benefit is what is gained by making a particular choice
If, in the previous case, the opportunity cost of moving from Combo A to Combo B is 2 books, then the opportunity benefit is one movie.
In the case of choosing to study rather than to ski, the opportunity benefit is receiving a better grade on your test
Every economic choice has an opportunity benefit and an opportunity cost

13. What do you think?
Do you think Maria and Teresa considered the opportunity costs of their choices before they reached their decisions?
Why do you think Teresa and Maria made different decisions?
What would you have decided? Why?

14. Economic branches and choices
Microeconomics: the branch of economics that examines the choices of individuals concerning one product, one firm, or one industry
Concerned with the individual
The unit of analysis is one person, one product, one industry, etc.
Individual consumers must decide whether they wish to buy more, less, or the same amount of a product

15. Economic branches and choices
Macroeconomics: the branch of economics that examines the behavior of the whole economy at once (government)
Macroeconomic choice: how the government of a country deals with inflation
Could cut back its spending
Make credit more difficult for consumers to get
Raise taxes to encourage consumers to cut spending