This presentation provides introductory information about the Economic Way of Thinking in Economics, including the 8 Guideposts to Economic Thinking.

1. ECONOMIC WAY OF
THINKING
R. David Johnson MBA
Shawnee State University
ECON2202 51

2. ECONOMIC WAY OF THINKING
“It (economics) is a method rather than a doctrine, apparatus of the mind, a
technique of thinking which helps its possessor to draw correct conclusions.”
J.m. Keynes, 1923

3. ECONOMIC WAY OF THINKING
• The study of economics is relevant for many different
professions since “the economic way of thinking” is a
helpful tool in decision making.
• An understanding of economic events and policy alternatives
is an asset to everyone living in this ever changing world of
ours.
• Basic economic principles indicate that certain conditions are
vitally important for economic progress.

4. ECONOMIC WAY OF THINKING
• Would you like some:
• New Clothes?
• A New Car?
• A larger Apartment?
• Better Grades?
• More Time to Watch Television?
• Travel Abroad?
• All of these wants are considered
goods.
• A Good can be defined as:
anything that people find desirable
and therefore would like to have
or consume.
• Human desire for goods is
unlimited.
• However, we cannot have more of
everything.
• Both individually and collectively,
we have a constraint.
• This constraint is called scarcity.

5. ECONOMIC WAY OF THINKING
• Scarcity is the fundamental concept
of economics which indicates that
less of a good is freely available than
consumers would like.
• It is the most basic concept of
economics.
• Used by economists to indicate that
people’s desires for things is greater
than that would be freely available
from nature.
• Since scarcity prevents us from having
as much as we would like, we are
forced to choose among a restricted
set of potential alternatives.

6. ECONOMIC WAY OF THINKING
• Choice, therefore, is a logical
consequence of scarcity.
• Choice can be defined as: the
act of selecting among
alternatives.

7. ECONOMIC WAY OF THINKING
RESOURCES

8. ECONOMIC WAY OF THINKING: RESOURCES
• Resources are inputs that we
use to produce goods.
• As defined, a Resource is: an
input used to produce economic
goods.
• Land, labor, skills, natural
resources, and capital are
examples.
• Additionally, resources are tools
that we can use to battle
scarcity.

9. ECONOMIC WAY OF THINKING
Categories of Resources

10. ECONOMIC WAY OF THINKING: RESOURCES
• Human Resources: the
knowledge, skill, and strength
of human beings.
• Education, training, and
experience can increase the
future ability of human
resources.

11. ECONOMIC WAY OF THINKING: RESOURCES
• Physical Resources: things
such as tools, machines, and
buildings that enhance our
ability to produce goods.
• Economists use the term
capital when referring to
physical resources.

12. ECONOMIC WAY OF THINKING: RESOURCES
• Natural Resources: things
such as land, mineral deposits,
oceans and rivers.
• The ingenuity of humans is
often required in order to
transform these natural
productive inputs.

13. ECONOMIC WAY OF THINKING
Scarcity and Poverty Are Not The Same Thing!

14. ECONOMIC WAY OF THINKING
• Poverty implies some basic level of a
need.
• Absence of poverty implies that the
basic level has been attained.
• The absence of scarcity implies that
we have as much of all the goods we
would like.
• However, even in the wealthiest
countries, production capabilities
cannot keep up the pace with
material desires.
• People always want more goods and
services than they already have.

15. ECONOMIC WAY OF THINKING
Economic Way of Thinking Explained

16. ECONOMIC WAY OF THINKING: EXPLAINED
• Economics is a method approach, a way of thinking.
• Despite the many philosophical differences of economists, there is
a common ground in the approach of economics.
• This common ground is known as economic theory.
• Economic Theory: a set of definitions, postulates, and principles assembled
in a manner that makes clear the “cause and effect” relationship of
economics data.
• Think of it as a roadmap or a guidebook for economists.
• Establishes reference points indicating what to look for, and how economic
issues are interrelated.
• For the most part, the basic economic principles are merely common sense.

17. ECONOMIC WAY OF THINKING
Eight Guideposts to Economic Thinking

18. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• The economic way of thinking
requires the incorporation of
certain guidelines.
• These are the basic building
blocks of economic theory.

19. ECONOMIC WAY OF THINKING: GUIDEPOSTS
1. The use of scarce resources to produce a good is always costly.
• The use of resources to produce one good diverts the resources
away from the production of other goods that are also desired.

20. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• This is where the concept of opportunity costs comes into play.
• Opportunity Cost can be defined as: the highest valued benefit that must
be sacrificed as the result of choosing an alternative.
• For Example: If you use one hour of your scarce time to study economics,
you will have one hour less time to watch television, read magazines, sleep,
work at a job, or study other subjects.
• The cost of study time for other subjects may be the highest valued option
that you will now have to forego because of the additional time spent
studying economics.

21. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• Central Point: Economic thinking recognizes that the use of a
scarce resource always involves a cost.
• The use of more resources to do one good will force us to reduce
our production of other goods.

22. ECONOMIC WAY OF THINKING: GUIDEPOSTS
2. Decision-makers choose purposefully; therefore, they will
economize.
• Individuals make decisions purposefully, always seeking to choose
the option they expect to be most consistent with their personal
goals.
• Purposeful decision-making leads to economizing behavior.

23. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• Economizing Behavior can be defined as: decisions that are based
on the objective of gaining a specific benefit at the least possible
cost.
• A corollary of economizing behavior implies that when choosing among
items of equal cost, individuals will choose the option that yields the
greatest benefit.

24. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• Correspondingly, when choosing among alternatives of equal cost,
economizing decision-makers will select the option that yields the
greatest benefit. Purposeful decision-makers will not deliberately pay
more for something than is necessary.
• Purposeful choosing implies that decision makers have some basis for
their evaluation of alternatives.
• Economists refer to this evaluation as utility, the benefit or satisfaction
that an individual expects from the choice of a specific alternative.
• The utility of an alternative is highly subjective, often differing widely
from person to person.

25. ECONOMIC WAY OF THINKING: GUIDEPOSTS
3. Incentives matter-human choice is influenced in a predictable
way by changes in economic incentives.
• Incentives matter.
• People will be more likely to choose an option as the benefits
expected from that option increase.
• In contrast, higher costs will make an alternative less attractive,
reducing the likelihood that it will be chosen.
• This guidepost to clear economic thinking might be called the
basic postulate of all economics.

26. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• As the personal benefits from choosing an option increase, other
things constant, a person will be more likely to choose that
option.
• In contrast, as the personal costs associated with the choice of an
item increase, the individual will be less likely to choose that
option.
• For a group, this basic economic postulate suggests that making an
option more attractive will influence more people to choose it.

27. ECONOMIC WAY OF THINKING: GUIDEPOSTS
4. Economic thinking is marginal thinking
• Marginal costs and marginal benefits (utility) are fundamental to
economizing behavior. Economic reasoning focuses on the impact
of marginal changes.
• Economists define marginal as: a term used to describe the
effects of a change, given the current situation.
• Example: The marginal cost is the cost of producing an additional unit of a
product, given the producer’s facility and production rate.
• Marginal choices always involve the effects of net additions to or
subtractions from the current situations.

28. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• The word “additional” is often used as a substitute for marginal.
• Example: What is the marginal (or additional) cost of producing one more
automobile?
• Marginal decisions may involve large or small changes.
• The one more unit could be a new plant or a new stapler.
• It is marginal because it involves additional costs and additional
benefits.

29. ECONOMIC WAY OF THINKING: GUIDEPOSTS
5. While information can help
us make better choices, its
acquisition is costly. Thus, we
will almost always make
choices based on limited
knowledge.

30. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• Since information is scarce and costly to acquire, the choices of
people will be based on limited knowledge.
• Information that will help us make better choices is valuable.
• Like other resources, however, it is also scarce and therefore
costly to acquire.
• As a result, individuals will economize on their search for
information just as they economize on the use of other scarce
resources.

31. ECONOMIC WAY OF THINKING: GUIDEPOSTS
6. Economic actions often generate secondary effects in addition
to their immediate effects. Failure to consider these secondary
effects is the most common source of economic error.
In addition to their initial impact, economic events often alter
personal incentives in a manner that leads to important secondary
effects that may be felt only with the passage of time.

32. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• Economists refer to the term secondary effects.
• Economic consequences of an initial economic change, even though they are
not immediately identifiable.
• Secondary effects will be felt only with the passage of time.
• In economics, the immediate, short term effects that are highly
visible are often quite different from the long term effects.
• Changes in economic policy often alter the structure of incentives,
which indirectly affect things like how much people work, earn
and invest, and care for things in the future.

33. ECONOMIC WAY OF THINKING: GUIDEPOSTS
7. The value of a good or service is subjective.
• The value of a good or service is subjective and will differ
according to the individual.
• Preferences differ, sometimes dramatically, between individuals.
• Even for a given individual, circumstances can change from day to
day.

34. Economic Way of Thinking: Guideposts
8. The test of a theory is its
ability to predict. Economic
thinking is scientific thinking.

35. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• The test of an economic theory is its ability to predict and explain
events in the real world.
• The usefulness of an economic theory is proved by its ability to
predict the future consequences of economic action.

36. ECONOMIC WAY OF THINKING: GUIDEPOSTS
• Economic theory is derived from scientific thinking.
• Development of theory from basic postulates and the testing of the
implications of that theory as to their consistency with events in the real
world.
• Good theories are consistent with and help explain real-world events.
• Theories that are inconsistent with the real-world are invalid and must be
rejected.

37. ECONOMIC WAY OF THINKING: CLASS
PARTICIPATION
• The government should provide goods such as health care,
education, and highways because it can provide them for free.
True or False? Explain.