Nine basic principles of economics geared for an introductory high school course.

1. The Economic Way of Thinking
INTRODUCTION TO ECONOMICS

2. 1. 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

3. 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

4. 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

5. 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?

6. 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

7. 5. People gain from voluntary trade.
 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

8. 6. 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

9. 6. Economic thinking is marginal thinking.
• 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
Total Total Price / Marginal
Days Price Day Price cost of buying an
1 $120 $120.00 $120 additional day
2 223 111.50 103 decreases rapidly:
3 287 95.67 64 • Day 1: $120
4 298 74.50 9 • Day 2: $103
5 306 61.20 8
• Day 3: $64
6 314 52.33 8
• Day 4: $9
7 322 46.00 8
Current rates for Park Hopper tickets to Walt Disney World, Florida • Day 5-7: $8 each

10. 7. 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

11. 8. Economic actions create secondary effects.
 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

12. 8. Economic actions create secondary effects.
 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.

13. 8. Economic actions create secondary effects.
 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

14. 8. Economic actions create secondary effects.
 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

15. 8. Economic actions create secondary effects.
 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

16. 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