Can you turn all of this into concise and detailed review?
1. What is economics? 2. What does it mean to think like an economist? ● Write down the first 10 words that come to mind when you see the word “economics.” ● How would you define economics right now with the information you know? A ECONOMICS IS A WAY OF THINKING B ● You can see ordinary events and “everyday puzzles” in a new way by applying economic principles. Examples: 1. Why are motorists who receive costly speeding tickets typically granted large fine reductions just for appearing in court, even though they oǪer no evidence of special circumstances when they appear in court? 2. Why are some professional athletes who have not graduated from college paid so much money for playing games when college graduates who perform worthy services -- nurses, police, teachers, etc. -- receive much smaller salaries? C ECONOMICS IS A WAY OF THINKING Economics: The study of how people choose to use their limited resources to satisfy their unlimited wants. THIS QUESTION WILL BE ON AN EXAM! D The Fundamental Economic Problem: Scarcity: The condition in which our wants are greater than the resources available to satisfy them. E Activity: Windfall ● Imagine you have just been given $100,000 dollars. Create a written list of things you would do with this money and estimate the monetary cost of each item. You must spend it all. You cannot put any in “savings.” ● Unfortunately, the situation has changed and you are only going to receive $20,000. Make a new list of things you would do with this money and estimate the monetary cost of each item. F As the Windfall Activity shows… SCARCITY FORCES CHOICES Scarcity is at the center of the science of economics because scarcity forces choices. Our wants are unlimited, and our resources are limited, so scarcity exists and people must therefore make choices. We must choose how to use our limited resources. We must choose which wants we will try to satisfy and which we will leave unsatisfied. Economics is all about studying the choices that people make as a result of scarcity. G H ECONOMICS AS A WAY OF THINKING ● Economics is also the science of decision making. ○ Develops decision-making skills. ○ Helps predict the choices people will make. I POSITIVE ECONOMICS NORMATIVE ECONOMICS Describes how things are and why; involves analyzing how economies work Determines the “best choice” based on specific criteria; involves making policy recommendations ECONOMICS AS A WAY OF THINKING J
LN 2 - Principles of Economics PT1 Scarcity, Costs & Benefits, Incentives and Future Consequences Review 1. What is the fundamental economic problem? Why is this a problem? 2. What is the difference between positive economics and normative economics? A ● Money, taxes, banking, and trade are economics, but economics principles apply to much more. ● Economics is a way of thinking about the wider world → seeing ordinary events in a new way Review Cont’d B Principle 1: Scarcity Forces Choices Our wants are unlimited, and our resources are limited, so scarcity exists and we must make choices about how to use our resources. C Some examples of scarcity forcing choices are obvious: ● You only have enough money to buy a snowboard or a bike, but not both. ● You can earn overtime by working on Fourth of July or you could spend the day with your family. Principle 1: Scarcity Forces Choices D But some examples are less obvious: ● Even accepting a “free lunch” involves scarcity and choices ○ The No-Free Lunch Principle: The lunch was free to you, but someone had to pay in some way. When YOU accept a free lunch, someone else has to give something up ■ Examples of this? Principle 1: Scarcity Forces Choices E Principle 2: Choices Have Costs and Benefits How do we decide which option to choose? COST-BENEFIT ANALYSIS! ● Cost: Negatives / what you lose (IE: money, time, effort, other sacrifices. ● Benefit: Positives/what you gain. ● People choose something when the benefits of doing so are greater than the costs. F Principle 2: Choices Have Costs and Benefits Do Now: Make a list of the costs and benefits of going to college: BENEFITS COSTS G Thinking-at-the-margin principle: Most choices involve thinking in terms of a little more or a little less of something, rather than all or nothing ● Examples: Study one more hour, buy one more pair of shoes, eat one more slice of pizza, etc. Principle 2: Choices Have Costs and Benefits H So, we often engage in a comparison of marginal costs and benefits. ● Marginal cost—what you give up to add one more unit of something ● Marginal benefit—what you gain by adding one more unit Principle 2: Choices Have Costs and Benefits I Example: You’ve spent 2 hrs studying for a test. Should you study another hour or go to bed? The answer depends on whether the benefit of an extra hour of studying outweighs the cost of losing an hour of sleep and therefore being less well-rested during a test. Principle 2: Choices Have Costs and Benefits J Principle 3: Incentives Matter ● An incentive is something that motivates a person to take a particular course of action. ○ Costs and benefits act as incentives ● When economists want to understand why people do what they do, they start looking for incentives K “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 and Stephen J. Dubner, Freakonomics Principle 3: Incentives Matter L ● Incentives come in many forms, both positive and negative ○ A positive incentive is used to encourage a behavior ○ A negative incentive is used to discourage a behavior ● What are some examples of positive incentives? ○ Teachers use points/grades to encourage students to complete assignments ○ Schools use awards to motivate students ○ Workplaces use awards and financial bonuses to motivate workers Principle 3: Incentives Matter M ● What are some examples of negative incentives? ○ Parents use threat of punishment, such as loss of privileges, to discourage bad behavior ○ Governments use jail/fines to discourage law-breaking (ie, speeding ticket → reduction in future speeding) Principle 3: Incentives Matter N Principle 3: Incentives Matter But incentives often do not function as intended! O Principle 3: Incentives Matter Q More examples of incentives gone wrong: ● Farwell’s Farbuck Loophole of 2019 Law of Unintended Consequences: The actions of people and governments often have effects that are unexpected (a reasonable person would not have anticipated them) So think carefully when you set up incentives! Principle 3: Incentives Matter R Principle 4: Future Consequences Count S ● In general, when people make decisions, they are “short-sighted” and tend to be most concerned with immediate costs/benefits. ● Future-Consequences-Count Principle: Decisions made today have consequences not only for today but also in the future Principle 4: Future Consequences Count T Part of thinking like an economist = trying to imagine all the possible consequences of a decision, including long-term consequences “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences…The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.” -Henry Hazlitt, Economics in One Lesson Principle 4: Future Consequences Count U
LN 3 - Principles of Economics - Part 2 Trade and Markets Review (don’t look at your notes) ● According to economists, why is there “no free lunch”? ● You’ve had two ice cream sandwiches, and you’re trying to decide whether to eat another. What is the “marginal cost” and “marginal benefit” in this scenario? ● What is an incentive? A Principle 5: Trade Makes People Better Off ● Trade is the voluntary exchange of goods and services B Principle 5: Trade Makes People Better Off C What you learned in the simulation: ○ Since trade is a voluntary exchange, people trade when the exchange is in the self-interest of each person involved ○ People won’t trade if it won’t benefit them. So… trade makes people better off as long as they have accurate information Principle 5: Trade Makes People Better Off D Adam Smith observed the world around him and developed many economic theories, including theories about why trade makes people better off. Adam Smith (1723 - 1790): ● a Scottish economist and philosopher ● considered the “father of economics” ● in 1776, published The Wealth of Nations, which became the basis of modern free-market economic theories Principle 5: Trade Makes People Better Off E Why doesn’t your family make its own clothes? Build its own furniture? Grow all its own food? Produce its own medicine? Principle 5: Trade Makes People Better Off F “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 to 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.” Principle 5: Trade Makes People Better Off G Trade-Makes-People-Better-Off Principle: By focusing on what we do well and then trading with others for what they do well, we will end up with more and better choices than by trying to do everything ourselves. This principle is strongly connected to the ideas of specialization and division of labor. Principle 5: Trade Makes People Better Off H Specialization – doing one task/job very well • Leads to division of labor – breaking up production into specialized tasks for increased productivity • Increases how fast things are created • Increases the quality of things created Consider Adam Smith’s description of a pin factory in The Wealth of Nations: I “One man draws out the wire, another straightens it up, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations… I have seen a small factory of this kind where ten men only were employed… who could, when they exerted themselves, make among them… upwards of 48,000 pins in a day… But if they had all worked separately and independently… they certainly could not each of them have made twenty… in a day.” Specialization Encourages Trade • When people specialize, they no longer produce everything for themselves. They focus on what they do best. • Encourages trade because they must trade to obtain things they do not produce • Levels of specialization depend on population • Highly populated areas can be highly specialized due to lots of people doing different jobs • Rural areas forced to be less specialized (population not big enough to support a range of specialists) J Trade Can Make Us Wealthier Wealth: total value of all of the things a person owns Trade promotes wealth in 3 ways: 1. Gets goods to those who value them • Example: Garage sale 2. Increases the quantity and variety of goods 3. Lowers the cost of goods • Opens people to cheaper products from different markets • Example: cheaper labor in Bangladesh = lower prices • Also opens to larger markets – allowing mass production (large-scale manufacturing) • Example: Large bread company buys flour at low bulk prices → savings passed to consumers in form of lower bread prices K Specialization Improves Standard of Living Societies that rely on specialization have a higher standard of living than those that don’t specialize • Standard of living refers to the degree of wealth and material comfort available to a person or community • Can be measured many different ways: life expectancy at birth, school enrollment, adult literacy, and more L M Principle 6: Markets Coordinate Trade N Principle 6: Markets Coordinate Trade O ● What is a market? A supermarket? A farmer’s market? Economists view markets broadly. ● Market—any arrangement that brings buyers and sellers together to do business with each other ● can be an actual physical place (ie, farmer’s market) ● can be a non-physical space (ie, the Internet) Principle 6: Markets Coordinate Trade P Free Market—a market with little or no government interference. Buyers and sellers trade until satisfied. ● Economists believe that a free market is the most efficient type of market Principle 6: Markets Coordinate Trade Q ● Markets-Coordinate-Trade Principle: Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers. ● So… according to this principle, what should governments do about the economy? Principle 6: Markets Coordinate Trade R Adam Smith used “invisible hand” metaphor to describe the efficiency of a free market Explain the invisible hand metaphor in your own words. ● According to this metaphor, an individual’s pursuit of economic self-interest can promote the well-being of society as a whole Principle 6: Markets Coordinate Trade S According to the video, what should governments do about the economy? ● Leave it alone! According to the video, why do governments sometimes need to intervene? ● Under the invisible hand, economies sometimes are too slow to adjust to changing conditions, and people suffer in the meantime Principle 6: Markets Coordinate Trade T Economists usually assume that people will act rationally. Rational behavior model: People behave rationally by making self-interested decisions that they think will fulfill their wants and needs to the greatest extent possible. • Usually, this model assumes that people do not take into account the well-being of others when they act Principle 6: Markets Coordinate Trade U Potential pitfalls of the rational behavior model: 1. Does not deal with social values, such as charity, that might curb self-interest 2. Does not account for decisions based on limited or false information When we study supply and demand, you will gain a better understanding of how free markets coordinate trade. Two More Principles... V We will discuss two more principles in this course, but not until later on. Write these in your notes: 7. Skills and Knowledge Influence Income 8. Government Policies Have Benefits and Costs Your group will be assigned 1 principle from our 6 covered in detail. Your poster must have the following: ● Write the principle in large lettering ● Provide a subtitle that conveys how the principle affects our daily lives, etc. (insightful, clever, humorous) ● Provide a large primary focus visual that illustrates the principle ● Write one short, compelling, memorable example that conveys how this principle works and why it matters to our lives ● One poster per principle (across all classes combined) will be hung on the wall. Members will receive Farbucks. Principle Poster Project Project Team Members Group Number Principle for Poster 1 vs 7 Scarcity Forces Choices 2 vs 8 Costs & Benefits 3 vs 9 Incentives Matter 4 vs 10 Future Consequences Count 5 vs 11 Trade Makes People Better Off 6 vs 12 Markets Coordinate Trade