1. What Seven Principles Guide an Economic Way of Thinking?
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2. What Seven Principles Guide an Economic Way of Thinking?
Money, taxes, banking, and trade are economics, but economics principles apply to much more
Economic way of thinking is thinking about the wider world  seeing ordinary events in a new way

3. Principle 1: Scarcity Forces Tradeoffs

4. Principle 1: Scarcity Forces Tradeoffs
Desire = unlimited
Resources = scarce
Scarcity causes us to make choices
Tradeoff—when you choose one thing over another

5. Principle 1: Scarcity Forces Tradeoffs
TINSTAAFL—even accepting a free lunch involves tradeoffs. Someone had to pay.

6. Principle 1: Scarcity Forces Tradeoffs
All decisions involve tradeoffs
Going to a party the night before your midterm leaves less time for studying
Having more money to buy stuff requires working longer hours, which leave less time for leisure
What should you do next summer? Work at the mall? (money, but boring) Internship? (low/no pay, but valuable experience) Volunteer? (no pay, but help others)
TIME IS SCARCE

7. Principle 1: Scarcity Forces Tradeoffs
Example:
Say this summer you plan a road trip w/ your bff to follow your favorite band
Buy a car
2 cars fit your budget
Option 1: Luxury sedan (15 mpg)
Option 2: Eco model (+30 mpg)

8. Principle 2: Cost Versus Benefits

9. Principle 2: Cost Versus Benefits
How do we decide which alternative to choose?
COST-BENEFIT ANALYSIS
Cost: money, time, effort, other sacrifices
Benefit: whatever you gain
People choose something when the benefits of doing so are greater than the costs

10. Principle 2: Cost Versus Benefits Ex) Sleep 1 hr later
Costs
No time for good bfast
No long morning shower
No study time for tests before school
Less time to get dressed
More likely to be late for class
Benefits
Pleasure of sleeping longer
Lower water bill
May do better on test w/ rest
Less time to worry what to wear
Less likely to fall asleep in class

11. Principle 2: Cost Versus Benefits
Ex) (Road Trip)
Where to sleep?
Tent at inexpensive campground?
Hotel?
Choice is personal
Do benefits of a shower and bed outweigh the higher cost?

12. Principle 3: Thinking at the Margin

13. Principle 3: Thinking at the Margin
Most choices involve thinking in terms of a littler more of this or a little less of that, rather than all or nothing
Ex) study one more hr, buy one more pair of shoes, eat one more slice of pizza, etc
When we add or subtract one more unit we are thinking at the margin

14. Principle 3: Thinking at the Margin
Marginal cost—what you give up to add one unit of an activity
Marginal benefit—what you gain by adding one more unit

15. Principle 3: Thinking at the Margin
Ex) You’ve spent 2 hrs studying for a test. Should you study another hour or go to bed?
Compare marginal cost and marginal benefit
Ex) (Road trip) Band announces that it is extending its tour to one more city. Is going worth the time and money?

16. Principle 4: Incentives Matter

17. Principle 4: Incentives Matter
Costs and benefits act as incentives Ns
“Incentives are the cornerstone of modern life and understanding them—or often, ferreting them out—is the key to solving just about any riddle, from violent crime to sports cheating to online dating.”
Steven D. Levitt and Stephen J. Dubner, Freakonomics

18. Principle 4: Incentives Matter
Ex) Why would people stand in line on a city sidewalk in the heat of summer for several hrs just to get a concert ticket?

19. Principle 4: Incentives Matter
Positive and Negative Incentives
Teachers use points/grades to encourage students to complete assignments
Honor societies/awards
Jail/fines to discourage breaking laws

20. Principle 4: Incentives Matter
Ex) (Road Trip)
You are pulled over for driving 65mph in a 50 mph zone. And it’s a construction zone.
Fine = $300
You decide not to speed from now on…

21. Principle 5: Trade Makes People Better Off

22. Principle 5: Trade Makes People Better Off
Why doesn’t your family make their own clothes?
Build all your own furniture?
Grow all its own food?
Produce your own medicine?

23. Principle 5: Trade Makes People Better Off
“It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor [tailor] does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor.”
Adam Smith, The Wealth of Nations, 1776

24. Principle 5: Trade Makes People Better Off
By focusing on what we do well and then trading w/ others, we will end up w/ more and better choices than trying to do everything for ourselves

25. Principle 5: Trade Makes People Better Off
Ex) (Road Trip)
You have car trouble, and neither you nor your friend is a mechanic. You push the car to the nearest gas station. The mechanic says you have a dead battery. You offer to trade your 2 tickets for that night’s concert for a new battery. The mechanic agrees. You are disappointed about missing the concert, but everyone involved agrees that trading the battery for the tickets make you all better off than you were that morning.

26. Principle 6: Markets Coordinate Trade

27. Principle 6: Markets Coordinate Trade
Market—any place buyers and sellers meet (could be an actual place or more intangible like the Internet)
Free Market—market w/ little or no govt interference. Buyers and sellers trade until satisfied
Result: an efficient market that serves everyone’s interest w/out guidance from a person or an institution

28. Principle 6: Markets Coordinate Trade
Markets usually do better than anyone/anything else at coordinating exchange between buyers and sellers.
Adam Smith used “invisible hand” metaphor
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29. Principle 6: Markets Coordinate Trade
Ex) (Road Trip)
You feel the invisible hand at work when you visit a supermarket—mangos from Mexico, bananas from Belize, Shrimp from Thailand, cheese from France, and salmon from Alaska
How does the grocery store manage to stock itself w/ so many fresh foods from around the world at prices you’re willing to pay?
Answer: markets coordinate trade w/ remarkable efficiency

30. Principle 7: Future Consequences Count

31. Principle 7: Future Consequences Count
In general, people are short-sighted  concerned w/ immediate costs/benefits
Decisions made today have consequences not only for today but also in the future

32. Principle 7: Future Consequences Count
“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences…The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.”
Henry Hazlitt, Economics in One Lesson

33. Principle 7: Future Consequences Count
Part of thinking like an economist = trying to imagine all the possible consequences of a decision

34. Principle 7: Future Consequences Count
Ex) 1968—Vermont passed a law that banned roadside billboards and other large signs in order to protect the state’s scenic beauty
Businesses instead built sculptures, including a giant squirrel in red suspenders and a 19-ft high genie

35. Principle 7: Future Consequences Count
The actions of people and governments always have effects that are not expected, or that are “unintended.”

36. Principle 7: Future Consequences Count
Ex) (Road Trip)
Some intended consequences, some unintended
Short term—found out what it was like to be on your own, away from family, learned about being independent, handling difficult situations, etc.
Long term—insurance went up from speeding ticket

37. Student Question
Create a table about the 7 principles of economic thinking
Draw a symbol for each of the seven economic principles
Principle
One-sentence summary
Scarcity forces tradeoffs