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Economics - PowerPoint PPT Presentation

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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.