An Economic Way of Thinking

1. An Economic Way of Thinking Chapter 1

2. Introduction • Why are some people and nations wealthy and others poor? • Economics-social science • Adam Smith-Scotish Economist and philosopher was one of the first to consider the above questions

3. Adam Smith • Competition is the Key • Freedom from government interference • In the Newly forming United States, Smith’s ideas took root • The Wealth of Nations- Key writing of Smith

4. More on Smith • Smith proposed that people want more than the basic necessities, things that make life easier. • “The father of Modern Economics”

5. What is Economics all about? • In Freakonomics, Steven Levitt and Stephen Dubner argue that economics • “ is about stripping a layer or two from the surface of modern life and seeing what is happening underneath”

6. Everyday Mysteries • Enigmas-puzzles or riddles that might be explained through analysis. • Refer to examples I have give you

7. I Can’t Get No Satisfaction • Economics-traditionally is the study of how people satisfy unlimited wants, with limited resources • Resource-anything used to produce a good or service.

8. Two Main Branches of Economics Microeconomics Macroeconomics • Looks at specific individuals, households or businesses • Looks at entire workings of the whole economy.

9. What it is and What it should be Positive Economics Normative Economics

10. 7 Principles of Economics • 1.Scarcity Forces Tradeoffs (Opportunity Cost) • If you choose one thing something else is lost or given up • Also the No Free Lunch Principle

11. Principle 2 Costs Vs. Benefits • It is one way we make choices. • We weigh cost(money, time etc…) vs benefits(new car, vacation etc…) • Done by a cost-benefit analysis

12. Principle 3 Thinking at the Margin • Similar to cost vs. benefit • Examples (study and extra hour, produce an extra good)

13. Principle 4 Incentives Matter • People respond to incentives in a predictable way. • An Incentive is something that motivates • Key to understanding most modern enigmas is “what was the incentive?”

14. Principle 5 Trade Makes People Better Off • Allows you to gather goods more cheaply by purchase or trade than producing yourself. • Focus on what we do well then trade with others to acquire our needs and wants.

15. Principle 6 Markets Coordinate Trade • A market is anywhere buyers and sellers come together. • When buyers and sellers interact with

16. Principle 7 Future Consequences Count