ECONOMIC REASONING PRINCIPLES (AKA “ERP’S)

How Do We Define Economics?The study of how people seek to satisfy their wants and needs by making choices (when limited resources are available)

Resources : human, natural, capital, and entrepreneurial. These productive resources are used to create the goods and services people want.

Why must we make choices? Resources are scarce : wants exceed limited resources

*This is the basic economic problem*

Allocation: We decide who gets it? (“Guns vs. Butter”)

ScarcityHow then are these UNLIMITED wants satisfied by LIMITED resources?

A Price Must Be Paid…EVERYTHING HAS A PRICE!!!!!

This is how it is decided who receives the resources that they want

Which brings us to our next point…

TANSTAA“F”L

There Ain’t No Such Thing As A “FREE”

Lunch

NOTHING ON THIS EARTH IS FREE!!!!!EVERYTHING HAS A PRICE…IN THE EYES OF AN ECONOMIST!

Lefkowitzs’ ECONOMIC REASONING PRINCIPLES

People choose, and individual choices are the source of social outcomes.(#1)

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Why do people have to make a choice? Scarcity forces us to choose

Unlimited wants > limited resources

Not making a choice is itself a choice

Based on perceptions of expected costs and benefits of alternatives

Factors driving choices can be material, behavioral, moral, or some combination of all three.

WHY ARE YOU IN THIS CLASS RIGHT NOW?Application of Opportunity Costs Cost / Benefit AnalysisIt’s the best of your alternatives

Your decision might change if………

Trade-OffsTrade Offs:

What is given up whenever a course of action is chosen over another

All Individuals, Businesses, Governments, and Large Groups of People face Trade-offs (“Guns or Butter”)

Question for Understanding

Think of a decision you are about to make

What are the trade-offs?

Lefkowitzs’ ECONOMIC REASONING PRINCIPLES

ALL CHOICES INVOLVE COSTS (#2)

people receive benefits and incur costs when they make decisions.

Opportunity CostOpportunity Cost

The cost of a choice is the value of the next-best alternative foregone, measurable in time or money; NOT NECESSARILY A MONETARY VALUE

It is not what “could” you do, but what “would” you do

Every decision/choice has an opportunity cost…no matter what!

Opportunity Cost Analysis

Alternatives:

Should I get a job?

Should I participat

e in sport?

Perceived Benefits

Choice

Opp. Cost

Benefits Refused

Decision Maker: YOU

Would you pick these up if you approached this?

What would be the opportunity cost of this decision?

Would you pick this up if you approached this?

What is the incentive to pick up this as opposed to the pennies?

Lekfowitzs’ ECONOMIC REASONING PRINCIPLES

PEOPLE RESPOND TO INCENTIVES IN PREDICTABLE WAYS. (#3)

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

When incentives (Prices) change, behavior changes in predictable ways.

When prices go up consumers demand a larger/smaller quantity?

Lefkowitzs’ ECONOMIC REASONING PRINCIPLES

Institutions are the “rules of the game” that influence choices. (#4)

What are the “rules of the game” (the accepted and expected forms of social interaction) in:

Dating ?

Institutions Influence Choices

Laws, customs, moral principles, superstitions, and cultural values influence people’s choices within an economic system

• What to Produce?• How to Produce

It?• For Whom to

Produce It?

Why are some countries rich and others poor?

Low, Middle and High Income

Can institutions change? Oh yes!

About 30 years ago, China began legal changes designed to mimic those of capitalismResult: per capita income now > six times higher than it was

About 30 years ago, Zimbabwe began undoing the capitalist institutions that had made it among richest in AfricaResult: per capita income now roughly ninety percent lower than it was

The poverty of some nations and the wealth of others is not an accident; it is the result of choices

Lefkowitzs’ ECONOMIC REASONING PRINCIPLES

VOLUNTARY TRADE CREATES WEALTH

(#5)

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VOLUNTARY TRADE CREATES WEALTH

Trying to produce everything yourself limits both production and consumption

What do you “do best”?• Sell what you produce

• Buy what you can’t

Lefkowitzs’ ECONOMIC REASONING PRINCIPLES

CONSEQUENCES OF OUR CHOICES LIE IN THE FUTURE (#6)

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