An Economic Way of Thinking

Unit One

What is Economics?

…because the crucial and complex issues impacting your life today are largely economic in nature:• Physical survival/Jobs• Gas prices/energy crisis• The environment• World interdependence• Terrorism

Economics is the study of the use of SCARCE resources to satisfy unlimited human wants.

WHY DO I NEED TO LEARN ABOUT ECONOMICS?

U.S. Economic Goals

• UNRESTRICTED DECISION MAKING

U.S. Economic Goals• ECONOMIC EFFICIENCY– Best Use of Scarce Resource

U.S. Economic Goals

• ECONOMIC EQUITY

U.S. Economic Goals

• ECONOMIC SECURITY

U.S. Economic Goals

• FULL EMPLOYMENT

U.S. Economic Goals

• PRICE STABILITY

U.S. Economic Goals

• ECONOMIC GROWTH

Work with a partner to rank the U.S. economic goals from least important to most important - be ready to give an explanation of the reasons behind your ranking...

1. ____2. ____3. ____4. ____5. ____6. ____7. ____

Why are these questions being asked?

With your partner, discuss what the answers to these questions might tell you about a particular society/government

Adam Smith

• Adam Smith was a Scottish philosopher who became the “father of modern economics”

• He introduced a new way of thinking about economic ideas

• He wrote the book An Inquiry Into the Nature and Causes of the Wealth of Nations which was published in 1776

Wealth of Nations• On of the main ideas of this book is that free

market competition is the best way to create wealth; people acting in their own self-interest will benefit the society as a whole

• He introduced the idea of an “invisible hand” which guides the markets

• Advocated a Laissez-faire (hands off) approach from the government towards the economy

• These ideas form the basis for the capitalistic economic system

Economy and Scarcity

• What is an economy? A system used to manage limited resources• What is scarcity?The condition that results from people having limited resources- anything used to produce an economic good or service and unlimited wants. http://www.youtube.com/watch?v=OS_9A_EA30M

Economic Enigmas

• 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?

Economic Terms

• Resource- anything used to produce an economic good.

• Microeconomics-looks at economic decisions made by individuals, households, and businesses

• Macroeconomics- focuses on the workings of the economy as a whole

Economic Terms

• Positive economics- focuses on how things are, data, facts, numbers

• Normative economics- focuses on how things ought to be; giving advice, making policy decisions, setting budgets, etc.

http://www.youtube.com/watch?v=DOZ5nfgGTtI&list=PLBEgyQ49zuIegSWCemPQWxYjP3GlFBfNe

The Seven Principles of Economics• Scarcity forces Tradeoffs (no Free Lunch)- you are

giving up one thing to get another. Every choice involves tradeoffs for someone

• Costs vs. Benefits- The principle tells us that people choose something when the benefits of doing something are greater than the costs

costs- are what you spend to get something (money, time, effort, etc.)

benefits- are what you gain • Cost benefit analysis is a tool economists use to

calculate costs and benefits Turn to page 7 in your text

7 Economic Principles• Thinking at the Margin- most decisions we make involve

either a little more or a little less not all or nothing Marginal Benefit- what you gain by adding one more unit of something

Marginal Cost- what it costs to add one more of something

• Incentives Matter- costs and benefits influence our behavior, they act as an incentive

Incentive- something that motivates a person to take a particular course of action; can be positive

or negative http://www.youtube.com/watch?v=W2hhIWbz0Ns

7 Principles of Economics

• Trade Makes People Better Off- by doing what we do well and trading with others for what they do well, we end up with better choices

• Markets Guide Trade-markets will generally do better than anyone or anything in coordinating exchanges between buyers and sellers

markets- any arrangement that brings buyers and sellers together to conduct business

7 Economic Principles

• Long Term Effects (Future Consequences)- decisions made today have consequences not only today but in the future as well; some of them will be unintended consequences

Economic Tools

• Data- factual information• Variable- is a quantity that can change• Graph- a visual representation of the

relationship between two given sets of data

Economic Tools

Y axis shows income levels

x axis shows different years 1975-2005

Curve shows levels of education

Economic Models• Economic model- a simplified representation

of reality that allows economists to focus on one change at a time