Economics Unit 1Why do you need to study economics?

Economic Reasoning Principle #1People choose, and individual choices are the

source of social outcomes

• Scarcity necessitates choices: not all of our desires can be satisfied. [Factors of Production]

• At $0 we cannot get all of the stuff we want (Land, Labor, and Capital) that we want

• People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

• Your choice to be at Lincoln High School instead of . . . ?

Scarcity

• We live in a world in which there are– Limited resources– Unlimited wants

• The combination is called scarcity– “Everyone” (even Mother Teresa!) has unlimited wants– “Everyone” (even Bill Gates!) has limited resources

• Scarcity is NOT optional: everyone faces it

• choices → TRADE-OFFS → forgone alternatives

OPPORTUNITY COST!

• choosing is refusing!• the cost of something is what you give up

OPPORTUNITY COST!

Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes.

• Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

Choose Between Alternatives

Economic Reasoning Principle #2 Choices impose costs; people receive benefits

and incur costs when they make decisions

• The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

• Your choice this semester on how you spend your time

Choice, cost and conflict

• Because of scarcity, we (and Lincoln High and the DMPS) must make choices– More of “this” means less of “that”:

a cost is incurred– What shall we choose to have?– Who shall live, and who shall die?

• Hence, a world of scarcity is a world of conflict

Opportunity cost

• Highest-valued foregone alternative– the value (to you!) of the next-best alternative

that you sacrificed• It is always subjective– You know your costs

• It is sometimes objective– Sometimes I can measure your costs in, say,

dollars and cents

The Cost of Something Is What You Give Up to Get It

Should Tiger Woods do his own yard work?Should Yao Ming do his own house-work?What else could they do? …

The Cost of Something Is What You Give Up to Get It

Should Lebron James and Dwight Howard have gone to college?Jackie Chan or You?What else could they do? …

Economic Reasoning Principle # 2: Choices impose costs; people receive benefits and incur costs when they make decisions.

• The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

• What did you give up to be here?

• Should you go to college?

More ExamplesWhy attend college right after high school?Getting bumped from a flight?20 minute phone call or a Coke?

auto industry bailout?financial industry bailout?health care reform?Iraq war?BP oil spillcollege for everyone?

Economic Reasoning Principle #3 People respond to incentives in predictable

ways• Choices are influenced by incentives, the rewards that

encourage and the punishments that discourage actions.

• When incentives change, behavior changes in predictable ways.

• Consider the incentives given to you at Lincoln High School

Why are some countries rich/poor?

http://en.wikipedia.org/wiki/File:GDP_PPP_Per_Capita_Worldmap_2008_CIA_Factbook.svg

• The rules of the game determine the outcome!

• The rules of the game shape how decisions are made.

• Decisions determine outcomes.

The Rules of the Game

Choose Between Alternatives

Why do we care?

"What is YOUR solution?“

"There are no solutions," I said. "There are only trade-offs.“

"The people DEMAND solutions!" she shot back angrily.

The people can demand square circles if they want. But that doesn't mean that they will get them.

Quote From Thomas Sowell

Opportunity Cost!

Economics for Leaders

Economics for Leaders

Policy Conundrum

There are no SOLUTIONS.There are just TRADE-OFFS.

Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes.

• Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

Economic Reasoning Principle # 2: Choices impose costs; people receive benefits and incur costs when they make decisions.

• The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

• What did you give up to be here?

• Should you go to college?

Economic Reasoning Principle # 3: People respond to incentives in predictable ways.

• Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.

• People generally do what makes them better off.

• Marginal Cost, Marginal Benefit

Economics for Leaders