Eight Guideposts to Economic Thinking - PowerPoint PPT Presentation

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Eight Guideposts to Economic Thinking

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  1. Eight Guideposts to Economic Thinking

  2. 1.The use of scarce resources to produce a good or service is always costly • TINSTAAFL • Opportunity Cost • Explicit and Implicit costs (monetary and non-monetary costs

  3. 2. We assume decision makers are rational; therefore they will economize. • Assumption of rational behavior means people try to maximize their benefits and minimize their costs. • Firms seek to maximize profits • People seek to maximize utility (satisfaction)

  4. 3. Incentives matter • Choice is influenced in a predictable way by changes in economic incentives. • For example, if students are ticketed for J walking, they won’t do it as much. • This is a Basic Assumption in all of economics

  5. 4. Economic thinking is marginal (additional) thinking. • Choice always involves changing the current situation (status quo), so we analyze costs and benefits of making the change. • Example: what is the cost of buying one more piece of pizza; what is the benefit. • If marginal cost exceeds marginal benefit, don’t do it.

  6. 5. Information is costly, but it helps us make better choices. • How much should we spend to obtain information? You want to buy a car. You will probably spend a lot of time and maybe money to learn about the different cars. You want to buy a pencil. How much time and money will you spend to research different pencils? • Rational ignorance?

  7. 6. Economic actions generate secondary effects in addition to immediate effects. • We place a tax on imported sugar. The immediate effect is to protect sugar producers in the U.S. The secondary effect is that the price of sugar rises for all consumers and they have less to spend on other products. • Corn for ethanol – food prices skyrocket

  8. 7. The value of a good is subjective (personal). • Preferences differ between individuals. • This is what makes trade beneficial to both parties. • Example: Garage sale – I sell something I don’t want for $1.00. The person who buys it prefers the item more than the dollar. I prefer the dollar. We both win.

  9. 8. The test of a theory is its ability to predict. • Economic thinking is scientific thinking. • We develop a theory, with certain assumptions. We test the theory. Does the theory correctly predict how the real world operates? • Problem: We can’t perform controlled experiments in economics very easily.

  10. REVIEW • 1. Scarce goods have a cost TINSTAAFL • 2. Individuals choose purposefully • 3. Incentives (disincentives) matter • 4. Economics looks at the margin • 5. Information is helpful, but costly • 6. Economic actions generate secondary effects • 7. The value of a good is subjective • 8. The test of a theory is its ability to predict