better business brunch: know your numbers-the economic way of thinking (part 1)

Take advantage of these interesting times.

Know Your Numbers

Dr. Alvin AngPresident | Philippine Economic Society

A lot of issues that affect us require a certain level of economic sense to comprehend and properly evaluate.

Examples:

•Rising prices of oil and basic necessities

•K to 12

•Global financial meltdown

•Or as simple as buying a product, getting a loan, voting a candidate

Economics Matters So Literacy Matters

•Surveys have shown that what people know about basic economics affects what they think about an economic issue

•Similarly, people with no basic knowledge of economics are almost always willing to state an opinion.

@newleafph What people know about

basic economics

affects what they think about en

economic issue #betterbusines

s

@newleafph

Tweet Sheet

Economics Matters So Literacy Matters

•People’s incentives and choices, and what happens to coordinate their decisions and activities

•Organization and information are crucial aspects

•Economic failures are mostly failures of coordination

•Social Institutions are involved

Economics is...

@newleafph Economics is

about people’s incentives and

choices #betterbusines

s

@newleafph

Tweet Sheet

• OPPORTUNITY COST – You cannot be in two places at the same time!

• Watching a movie does not cost you the price of the ticket alone but the time spent watching

Principle I

• We all make trade-offs when making a decision

• The choice of one, lets go of another

• Being here – means no lunch date

Principle 2

@newleafph The choice of one, affects

others #betterbusines

s

@newleafph

Tweet Sheet

• People are rational – systematic and purposeful in decision making

• When making choices, people order possibilities consistently – if you prefer Apple over Sony, and Sony over Samsung, then you prefer Apple over Samsung

Principle 3

@newleafph People are rational-

systematic and purposeful in

decision-making

#betterbusiness

@newleafph

Tweet Sheet

• Rational people decide on the marginal cost. (Cheaper by the Dozen)

• Why do people take graduate studies? What do managers think of when they increase production? Why can airlines offer piso fares?

Principle 4

@newleafph Rational people decide on the marginal cost

#betterbusiness

@newleafph

Tweet Sheet

• Rational people respond to incentives

• Why not a license discount if there are no traffic violations?

• Incentive structure requires strict implementation of rules

Principle 5

@newleafph Rational people

respond to incentives

#betterbusiness

@newleafph

Tweet Sheet

• We are all made better off by trading

• Why is it better to eat out or take out food?

• You cannot cut your own hair!

Principle 6

@newleafph Rational people

respond to incentives

#betterbusiness

@newleafph

Tweet Sheet

• A channel to improve people’s standards of living within the limit of available resources

• Solve the problems of society

1.Unemployment

2.Inflation

3.Inequitable income distribution

Goals of Economic Activity

Coffee BreakPREMIUM

Some seemingly crazy ideas...

• We are all made better off by trading

• Why is it better to eat out or take out food?

• You cannot cut your own hair!

Principle 6

@newleafph Rational people

respond to incentives

#betterbusiness

@newleafph

Tweet Sheet

•People who are addicted to anything are not necessarily unaware that they are making an irrational choice.

•Demand for addictive goods are insensitive to price, but if there is an announced price increase, demand will fall.

Rational Addicts

@newleafph Demand for

addictive goods are insensitive to price, but if

there is an announced

price increase, demand will fall #betterbusines

s

@newleafph

Tweet Sheet

•People are motivated by things apart from material well-being, e.g. leisure, love or altruism

Motivation

• If real disposable income is falling due to inflation, do you prefer to have an increase in salary and a higher increase in expense vs constant salary but a smaller increase in expense?

People Think In Nominal Terms

•Why do we continue to hear of scams?

•People think in rule of thumb: inductive rather than deductive manner

•Hence, people crowd together creating bubbles – a cheap and practical alternative

Decisions Based On Recent Data

@newleafph People make

decisions based on recent data #betterbusines

s

@newleafph

Tweet Sheet

•Why do people without health insurances bet on lotto – which on the average is priced the same?

•The greater one’s future well-being is, the more one will invest in thinking about the future (hence, rich invest more than the poor)

Why?

@newleafph People make

decisions based on recent data #betterbusines

s

@newleafph

Tweet Sheet

• People who will go to heaven care about the future as much as the present.

• People who will go to hell seek maximum pleasure today!

Why?

•Shoot the messenger – confusing consequences and causes

•Allergy to change – People object to competition.

Issues in Economic Analysis

•One-sided Coin

•What is the better exchange rate? USD 1 = PhP 43 or USD 1 = PhP 50

•What is the better interest rate?

10% or 5%

Abuse of Economic Analysis

• Availability of Numbers

• Interpretation of Numbers

• …as they affect our way of life

Our ability to make rational choices depends on:

Decision Making

Thank You!

@newleafph

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