Transcript An Economic Way of Thinking

An Economic Way of
Thinking
Standards Addressed: 12.1.1-12.1.3 & 12.2.1-12.2.2
Ms. Ramos
Alta Loma High School
Introduction
Where did economics come
from?
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http://www.ft.com/cms/s/8f2829fa-0daf-11de-8ea30000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F8f2829fa-0daf-11de-8ea30000779fd2ac.html&_i_referer=
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Birth of Economics
Adam Smith
• The Wealth of
Nations, 1776
• Argued
competition is the
key to a healthy
economy
• “father of modern
economics”
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http://newcreationperson.wordpress.com/2009/09/01/does-thebible-support-capitalism/
• “Every man is rich or poor
according to the degree in
which he can afford to
enjoy the necessaries,
conveniences, and
amusements of human
life.”
– Adam Smith
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What is
Economics All
About?
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In pairs:
• What do you think economics is
about?
• What problem has to be dealt
with?
• What “tools” will we be using
this semester?
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1- Everyday Mysteries and
Economic Enigmas
• Economic enigmas
– Puzzles/riddles that might be
explained through analysis
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Steven E. Landsburg
The Armchair Economist: Economics and
Everyday Life, 1993
• “First, it is about observing the
world with genuine curiosity and
admitting that it is full of mysteries.
Second, it is about trying to solve
those mysteries in ways that are
consistent with the general
proposition that human behavior is
usually designed to serve a purpose”
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Economic Enigmas
• Why is it legal to drive while eating a
cheeseburger or drinking coffee but
illegal while talking on a cellphone?
• Why do most stores place men's
fashion on the lower floors and
women's fashions on the higher
floors?
• Why are seat belts required in cars
but not school buses?
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• Why is milk sold in rectangular
containers while soda is sold in round
ones?
• Why are DVDs sold in larger packages
than CDs when the disc is the same
size?
• Why does Apple sell its black laptops
for $150 more than the identically
configured white ones?
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2- How People Use Limited Resources
to Satisfy Unlimited Wants
• Resources
– Limited/
scarce
– Alternative
uses
• Wants
– unlimited
• 2 Branches of
Economics
– Micro
• Individuals,
households,
businesses
– Macro
• Economy as
a whole
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3- The Science of Decision
Making
http://www.withamymac.com/news/2009/10/15/unheal
thy-salads/
http://meghnavillagerestaurants.webs.com/malays
iancafe.htm
• How do people make decisions?
– Should I buy a salad or burger
for lunch?
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– If a salad, lettuce
or spinach?
– Do I add
tomatoes, bell
peppers,
cucumbers?
– What salad
dressing?
http://www.blogher.com/special-offer-wish-bone
http://www.texomaliving.com/spring-salad
http://blogs.smarter.com/homegarden/tag/salad/
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http://www.rachelleb.com/tag/in-n-out/
http://find.myrecipes.com/recipes/recipefinder.dyn?action=displayRecip
e&recipe_id=10000000226398
– Do I get a beef burger or
turkey burger?
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4- What Is and What Should Be:
Positive vs. Normative Economics
• Positive Economics
– EX: What impact will increased
enrollment, salary increases, and rising
maintenance have on next year’s budget?
• Normative Economics
– EX: What actions should we take now to
reduce expenses in order to balance
next year’s budget?
• ** Most economists are positive
economists
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Analyzing
everyday
enigmas
Analyze how
economies work
-Positive
Policy
recommendations
-Normative
Teaching better
decision making
Economics
is about…
Study how ppl
use resources
to satisfy
wants
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On the left side of your
notebook:
What were the Name two
Why did you
last 3 items
options you had buy what you
you purchased?
did?
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What 7 Principles
Guide an
Economic Way of
Thinking?
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P1: Scarcity Forces Tradeoffs
• Desires unlimited BUT
resources are scarce
• Scarcity-forces-tradeoffs
principle
– PEOPLE MAKE CHOICES
• No-free-lunch principle
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P2: Costs vs. Benefits
• Costs: what you spend
• Benefits: what you gain
• Costs-vs-benefits principle: ppl
choose x when benefit greater
than cost
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P3: Thinking at the Margin
• Margin: border
• Thinking-at-the-margin principle:
most choices are about a little
more/less, rather than a whole
change
• Marginal cost: what give up to add 1
unit
• Marginal benefit: gain by adding 1 unit
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• Incentives are the cornerstone
of modern life. And
understanding them- or, often,
ferreting them out- is the key
to solving just about any riddle,
from violent crime to sports
cheating to online dating.
– Steven D. Levitt & Stephen J. Dubner,
» Freakonomics, 2006
Do you think the above statement is true?
Discuss with a partner.
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P4: Incentives Matter
http://www.midwestsportsfans.com/2008/12/2008hesiman-trophy-candidates/
http://pages.cthome.net/tollandhistorical/Jail.htm
• Incentives-matter principle: ppl
respond in predictable ways
– Positive & negative
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• It is the maxim of every prudent
master of a family never to attempt
to make at home what it will cost him
more to make than buy. The taylor
[tailor] does not attempt to make his
own shoes, but buys them of the
shoemaker. The shoemaker does not
attempt to make his own clothes, but
employs a taylor.
– Adam Smith, The Wealth of Nations, 1776
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P5: Trade Makes People Better
Off
• Trade-makes-people-better-off
principle: focus on what do well
& trade for the rest– we will
end up with more & better
choices
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P6: Markets Coordinate Trade
• Markets-coordinate-trade
principle: mkts are better at
coordinating exchanges btn
buyers & sellers
– Invisible hand- Adam Smith
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P7: Future Consequences Count
• Future-consequences-count
principle: decisions made today
have future consequences
• Law of unintended consequences
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P8: Monetary & Fiscal Policies
Affect People’s Choices
• Ex; income redistribution,
regulation of prices, trade
policies, gov regulations
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P9: Skills & Knowledge Influence
Income
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With a partner discuss:
• Which principle do you think
is most important? Why?
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What Tools Do
Economists Use?
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http://opinionsandexpressions.wordpress.com/2008/09/12/large-hadron-collider-and-human-curiosity
http://www.blogtrepreneur.com/2007/11/15/the-economics-behind-selling-blog-advertising
/
/
http://www.errorsofenchantment.com/2010/10/25/texas-an-economic-model-for-new-mexico
/
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Scientific Method
• Data
– Factual info
– Analyze
existing &
historical
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Graphs
• Visual representation
• Variables: quantity that can
vary
• Examine relationships
• Axis:x- horizontal, y- vertical
• Curve: any line of plotted data
points
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http://www.youtube.com/watch?v=jbkSRLYSojo
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Economic Models: Simplified
Representations of Reality
• Allow focus on effects of one
change at a time
• Structured thinking
• Rational-behavior model
– Decision to fill wants & needs to
greatest extent
– Decisions based on own best
interest
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Example 1
• Pollyanna Pumpernickel, a mother of two,
decides to purchase a 16 ounce bag of
Double Dot Caramel Nougat Clusters at
the MegaMart Discount Super Center
for $1.29 rather than paying $1.79 for a
12 ounce bag at the Curious Curt's
Convenience Corner.
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Example 2
• Professor Grumpinkston, of the
Ambling Institute of
Technology, decides to use the
same textbook for his course in
the spring semester as the fall
semester so that he does not
have to prepare a new set of
lecture notes.
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Example 3
• Roland Nottingham, a registered
voter, decides not to vote in the
Shady Valley mayoral election
because the incumbent mayor,
Victor Thurgood is the only
candidate and he needs to spend
election day mowing and fertilizing
his yard before the rain comes.
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• In each case, the chosen option
is the rational course of action
that leads to an improvement in
satisfaction for the decision
maker. The choice generates
more satisfaction rather than
less.
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• Models are approximations
– Explain & predict how the
economy operates
• “Ceteris paribus”
– “other things being equal”
– Change only one aspect
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