Guiding principles for thinking like an economist for high school senior economics class (2021 edit).

1. I N T R O D U C T I O N T O E C O N O M I C S
The Economic Way of Thinking

2. What Is Economics?
 If economics is allegedly about money why is it
taught as a social science?
 The study of how people make decisions

3. What Is Economics?
Define “Needs”
 Something necessary for survival
 Examples: Food, Water, Shelter
Define “Wants”
 A way of expressing a need

4. What Is Economics?
Food

5. What Is Economics?
What are “Trade-Offs”?
 All of the options to choose from when deciding how
to fulfill a Need
 When deciding which food to eat, all the different
options are your trade-offs.

6.  What is Scarcity?
 Something is Scarce if it is limited and people desire it
 What are Trade-Offs?
 The choices (options) we choose from
 What are Opportunity Costs?
 The value of the next best option we did not choose
Life is about choices and the choices we make
impact us now and in the future.
It’s All About the Choices

7.  “Knowledge is Power”
 The more information you have about your trade-offs
(choices), the better decisions you can make.
Basic Principles of Economic Reasoning

8. 1. People Choose (Everything has a cost)
 TINSTAAFL “There is not such thing as a free
lunch.”
 Every action costs someone time, effort, or lost
opportunity to do something else.
 Opportunity Cost is the value of the next best
choice you did not make.
 Not all costs are in dollars and cents.
 See video: Economics Made Memorable,
Opportunity Costs, part 1

9. 2. People choose for good reasons.
 People make decisions based on what they believe is
most important to them
 While this may vary from person to person, it is
usually the same for most people for any given
choice
 Rational Choices involve weighing the benefits
against the costs – “cost benefit analysis”
 See video: Economics Made Memorable,
Opportunity Costs, part 2

10. 2. People choose for good reasons.
 Production Possibilities Curves

11. 3. Incentives matter.
 When people make their Rational Choices and
weighing the benefits against the costs, they are
comparing the incentives involved in making the
decision
 When incentive change, people’s behavior changes in
predictable ways
 Incentives can be positives, such as a reward or
added benefit, or a punishment or additional cost
 See also: Freakonomics: Incentives of a Real Estate
Agent

12. 4. People create economic systems to influence
choices and incentives.
 Economic Systems are a means of a society
answering the three basic economic questions:
1. What to produce?
2. How to produce them?
3. For whom will they be produced?

13. 4. People create economic systems to influence
choices and incentives.
 Coordinating the needs of the people in a society
takes the cooperation of many people involved
 There are rules, written and unwritten that guide
people’s behavior by adding incentives to trade in
certain ways
 See videos:
 Return to Mocha, part 1
 Return to Mocha, part 2
 Return to Mocha, part 3

14. 5. People gain from trade voluntarily.
 People will trade when they believe the trade will
make them better off
 Like any Rational Choice, trade is another decision
people will have to decide upon weighing benefits
against the cost
 Economic Systems are about trade, and therefore
about making Rational Choices

15. 6. People’s Choices Have Consequences for the
Future.
 Every decision has side effects both direct and
indirect (these are called Externalities or Spill-Overs)
 These secondary effects, where predictable, are part
of the cost-benefit analysis
 When these secondary effects are not predicted the
will result in additional cost or benefits that are not
reflected in the initial decision

16. 6. People’s Choices Have Consequences for the
Future.
 In an Market economy, whenever any information is
unknown or unavailable in the decision making
process, it is considered a “market failure.”
 A Market Failure occurs whenever any of the
requirements for a competitive market (such as,
adequate competition, knowledge of prices and
opportunities) are lacking.

17. 6. People’s Choices Have Consequences for the
Future.
 Examples of Secondary Effects
1. Aspirin
 Aspirin is a very inexpensive pain reliever and fever
reducer. When invented, it was considered a “miracle drug”
for these reasons.
 Initially unknown, aspirin also thins the blood making it
less likely to clot and has become an important treatment
for people with heart conditions
 People who take aspirin are receiving this extra benefit at
no extra cost – A Positive Externality or Spill Over Benefit

18. 6. People’s Choices Have Consequences for the
Future.
 Examples of Secondary Effects
2. Independence from Foreign Oil
 As the world becomes more industrialized, more nations
demand fossil fuels causing prices to rise.
 A big push in the United States is find and utilize more
sources of fossil fuels domestically, for example, by
increasing drilling.
 While increasing the domestic supply of oil may lower
prices of gasoline, a secondary effect would include
pollution and environmental disasters such as oil spills out
at sea – A Negative Externality or Spill-Over Cost

19. 6. People’s Choices Have Consequences for the
Future.
 Because people behave in (mostly) predictable ways,
the institutions such as government and businesses
will make choices expecting secondary effects that
will impact the decisions people and consumers will
make.
 In this way, creating these secondary effects amounts
to changing the incentive as per rule #3

20. 6. People’s Choices Have Consequences for the
Future.
 Name some decisions you might make now that will
impact you in the future?

21. 7. Economic thinking is marginal thinking.
 “Marginal” is the economists term for “one more”
 In economics, decisions are made “on the margin” –
“How much benefit will I gain from one more
______ ?”
 Remember, as long as MB ≥ MC, we continue
to make that choice
 See the example of Park Hopper passes to Disney
World

22. 7. Economic thinking is marginal thinking.
Days
Total
Price
Total Price /
Day
Marginal
Price
1 $120 $120.00 $120
2 223 111.50 103
3 287 95.67 64
4 298 74.50 11
5 306 61.20 8
6 314 52.33 8
7 322 46.00 8
Rates for Park Hopper tickets to Walt Disney World, Florida
• Normally we think of the average, “How much will a
trip cost per day?”
• In economics we think on the margin, “How much
will one more day cost?” • It is clear that the
cost of buying an
additional day
decreases rapidly:
• Day 1: $120
• Day 2: $103
• Day 3: $64
• Day 4: $11
• Day 5-7: $8 each

23. 8. The value of a good or service is affected by
people’s choices.
 Value is personal; it is determined by the preferences
of the buyers and sellers
 Keeping in mind rule #2, people seek to maximize
their benefit while incurring the least cost
 Therefore, the value of any given trade-off is based
on any individual person’s evaluation of the cost-
benefit analysis
 This includes the decision to buy AND the decision
to sell

24. 9. The test of a theory is its ability to predict.
 Theories differ from laws in that theories have not
been tested on every single possibility
 In economics, most of what is dealt with is theory
since only MOST people behave in predictable ways
 Theories and models are the basis for economic
prediction and is what makes economics useful as a
study