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Economics. The Seven Principles of Economics. Warm Up: Think Like an Economist. If you could choose between two nearly identical products–one that is free and one that you have to pay for–which would you choose? Why ?

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The Seven Principles of Economics

warm up think like an economist
Warm Up: Think Like an Economist
  • If you could choose between two nearly identical products–one that is free and one that you have to pay for–which would you choose? Why?
  • If you were opening a new business, would you select a location closer to or farther away from a business that sold similar or even identical product? Why?
  • If you could make a small change in your daily routine that would save you time and money, would you make the change? Why or why not?
  • Economics IS more than just money, taxes, banking, and trade
  • Economists have developed principles that represent a specific way of thinking
  • The number of principles may change depending on the economist, but the overall message is the same
principle 1 scarcity forces tradeoffs
Principle #1: Scarcity Forces Tradeoffs
  • Remember the definition of “Economics”
    • Four Words: What are they? (L R, U W)
  • Scarcity
    • the condition that results because people have limited resources but unlimited wants
  • Must make choices
  • Every choice involves tradeoffs
    • No such thing as a free lunch
  • What choices and tradeoffs do you think about or make?
principle 2 costs vs benefits
Principle #2: Costs vs. Benefits
  • Principle #1 makes us choose, but how do we decide?
  • Economists assume that people make choices based on estimated costs and benefits
  • Cost v. Benefit analysis
    • Lists
    • Weighted calculations
  • What are the costs v. benefits of sleeping one hour later each day?
principle 3 thinking at the margin
Principle #3: Thinking at the Margin
  • Margin is the border or outer edge
    • “A little more” or “a little less” rather than all or nothing
  • Usually decisions are not a wholesale change
  • Marginal cost: What you give up to add “one unit” to an activity
  • Marginal benefit: What you gain by adding one more unit
  • Example: Studying. Should you study 2 hours for Econ, or 3?
principle 4 incentives matter
Principle #4: Incentives Matter
  • Costs and benefits influence our behavior
  • They are INCENTIVES
  • People respond to them
  • Can be positive or negative
  • What are some examples you can think of?
principle 5 trade makes people better off
Principle #5: Trade Makes People Better Off
  • Why don’t we all make our own clothes, or grow our own food?
  • Adam Smith: none of us is equally skilled at everything
  • Concentrate on what we do best, and trade for the rest!
  • Examples?
principle 6 markets direct trade
Principle #6: Markets Direct Trade
  • What is a market to you?
  • Economists take a larger view
    • A market is any arrangement that brings buyers and sellers together to do business
    • Can exist anywhere
  • When markets operate freely, both sides will trade until each is satisfied (theory)
  • Result is efficient market
  • Adam Smith: Invisible Hand
principle 7 future consequences count
Principle #7: Future Consequences Count
  • Do people think long term or short term?
  • Generally shortsighted; they look for immediate benefits and costs
  • Decisions always have long term consequences, though
  • Example: 1968 VT law banned road side billboards; result---people built large sculptures and statues to get attention (19 ft Genie, giant squirrel)
  • Unintended Consequences
  • Now you know the principles, it is time to put them into action by analyzing some data on real world situations.
  • But first…
  • You will now take on the role of economists
    • you will practice analyzing enigmas and applying the principles of economic thinking to explain each enigma in groups.
    • 3 enigmas around the room.
    • Use the handouts provided to complete your group work.