Chapter 1: An Economic Way of Thinking

ObjectivesEPF.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 bya) describing how consumers, producers, workers, savers, investors, and citizens respond to incentives;

Essential Questions1. What is scarcity? 2. Why do choices result in opportunity costs? 3. How do consumers, businesses, and government decision-makers face scarcity of resources?4. What is an unintended consequence?5. What is marginal benefit? 6. What is marginal cost? 7. How can marginal benefit and marginal cost be used to improve decision-making?

8. What were some of Adam Smith’s economic theories?9. What are the characteristics of a market economy, and why is each important?10. What is an incentive?11. How do incentives influence behavior?

Adam Smith• Father of economics• Wrote Wealth of Nations –

argued that competition and a free market is key to a healthy economy

What is EconomicsEconomics is the study of how people choose to use their limited resources to satisfy their unlimited wants.It is NOT just about money…

• Economics deals with things of any VALUE, not just monetary value• Everyone has different values and different wants

http://www.youtube.com/watch?v=yoVc_S_gd_0&feature=c4-overview-vl&list=PLF2A3693D8481F442

Comprehending Economics boils down to….

• People make choices

• People’s choices involve cost

• People respond to incentives in predictable ways

Different FocusesMicroeconomics – economic decision making of individuals, households, and businessesMacroeconomics – the workings of the economy as a wholePositive Economics – focuses on facts and cause and effect relationships; “how things are”Normative Economics – uses value judgments and opinions; “how things ought to be”

http://www.youtube.com/watch?v=AV_p_QntywA&list=PLF2A3693D8481F442

Scenarios to Figure Out

Which type of economics would be used for each scenario – hint: more than one can be used1.Should a tax return be used to fix up the house or to buy a new TV?2.What could Broad Run do to reduce the sports fee required to play sports?3.What are the costs to increase our workforce by 5 workers next year?4.Should we impose an embargo on all Communist countries to force them to become free-market?

The Seven Principles of Economic Thinking.1. Scarcity Forces Tradeoffs

a. Limited resources force people to make choices and face tradeoffs when they choose

b. Shortages are temporary, while scarcity is forever

http://www.yadayadayadaecon.com/clip/47/

Principle 1 Practice

1. What are the tradeoffs of working as a high-powered lawyer in DC?2. What are some of the tradeoffs you make when you decide to do

sports/clubs?3. What resource(s) is/are most scarce to people working in DC but

living West Virginia?

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Commute v. Salary• 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?

Potential Graph

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

Costs and Benefits of Going to College

1. Was your score consistent with the decision you think you will make (or have already made) about attending college?

2. Why might college be a better decision for some people than for others?

The Seven Principles of Economic Thinking.3. Thinking at the Margin

• When we decide to add or subtract a little to (or from) what we already have

• Marginal benefit is the change in total benefit resulting from an action

• Marginal cost is the change in total cost resulting from an action

• As long as the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it

• When the marginal cost exceeds the marginal benefit, they are better off doing less of it

https://www.youtube.com/watch?v=0BAMv6lV2t4&list=PL1oDmcs0xTD9Aig5cP8_R1gzq-mQHgcAH&index=9

The Seven Principles of Economic Thinking.4. Incentives Matter

• Something that motivates a person to do something

http://www.yadayadayadaecon.com/clip/81/

The Seven Principles of Economic Thinking.5. Trade Makes People Better Off

• We should focus on what we do well, and then trade with others for the other stuff we need/want

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

https://www.youtube.com/watch?v=ulyVXa-u4wE

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.

The Seven Principles of Economic Thinking.7. Future Consequences Count

• Decisions made today have consequences not only for today, but also for the future

• Law of unintended consequences – actions of people and governments always have effects 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

What Tools Do Economists Use?1. 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

2. Graphs – show the relationship between two given sets of data• It is a simplification and does not represent all the variables

3. 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