5. What Is Economics?
What are “Trade-Offs”?
All of the options to choose from when deciding how
to fulfill a Need
When deciding which food to eat, all the different
options are your trade-offs.
6. Life is about choices and the choices we make impact
us now and in the future.
Focus of lesson:
How do our choices about education, career and
income influence our future options?
It’s All About the Choices
7. What is Scarcity?
Something is Scarce if it is limited and people desire it
What are Trade-Offs?
The choices (options) we choose from
What are Opportunity Costs?
The value of the next best option we did not choose
It’s All About the Choices
8. Read the story “A Mystery of Two Families” and
answer the questions
What is wealth?
Excess (or surplus) of a desirable item that can be used to
exchange for needs and wants
Basic Principles of Economic Reasoning
9. Read the story “A Mystery of Two Families” and
answer the questions
So, why are the Robinsons wealthier than the
Murrays?
Robinsons spend less than they earn
Robinsons are saving for future, especially retirement
Robinsons are investing in their future by advancing their
earning potential
Robinsons are investing in their children’s future
Basic Principles of Economic Reasoning
10. “Knowledge is Power”
The more information you have about your trade-offs, the
better decisions you can make.
Basic Principles of Economic Reasoning
11. 1. People Choose (Everything has a cost)
TINSTAAFL “There is not such thing as a free
lunch.”
Every action costs someone time, effort, or lost
opportunity to do something else.
Opportunity Cost is the value of the next best
choice you did not make.
Not all costs are in dollars and cents.
See video: Economics Made Memorable,
Opportunity Costs, part 1
12. 2. People choose for good reasons.
People make decisions based on what they believe is
most important to them
While this may vary from person to person, it is
usually the same for most people for any given
choice
Rational Choices involve weighing the benefits
against the costs – “cost benefit analysis”
See video: Economics Made Memorable,
Opportunity Costs, part 2
13. 3. Incentives matter.
When people make their Rational Choices and
weighing the benefits against the costs, they are
comparing the incentives involved in making the
decision
When incentive change, people’s behavior changes in
predictable ways
Incentives can be positives, such as a reward or
added benefit, or a punishment or additional cost
14. 4. People create economic systems to influence
choices and incentives.
Economic Systems are a means of a society
answering the three basic economic questions:
1. What to produce?
2. How to produce them?
3. For whom will they be produced?
15. 4. People create economic systems to influence
choices and incentives.
Coordinating the needs of the people in a society
takes the cooperation of many people involved
There are rules, written and unwritten that guide
people’s behavior by adding incentives to trade in
certain ways
See videos:
Return to Mocha, part 1
Return to Mocha, part 2
Return to Mocha, part 3
16. 5. People gain from trade voluntarily.
People will trade when they believe the trade will
make them better off
Like any Rational Choice, trade is another decision
people will have to decide upon weighing benefits
against the cost
Economic Systems are about trade, and therefore
about making Rational Choices
17. 6. People’s Choices Have Consequences for the
Future.
Every decision has side effects both direct and
indirect (these are called Externalities or Spill-Overs)
These secondary effects, where predictable, are part
of the cost-benefit analysis
When these secondary effects are not predicted the
will result in additional cost or benefits that are not
reflected in the initial decision
18. 6. People’s Choices Have Consequences for the
Future.
In an Market economy, whenever any information is
unknown or unavailable in the decision making
process, it is considered a “market failure.”
A Market Failure occurs whenever any of the
requirements for a competitive market (such as,
adequate competition, knowledge of prices and
opportunities) are lacking.
19. 6. People’s Choices Have Consequences for the
Future.
Examples of Secondary Effects
1. Aspirin
Aspirin is a very inexpensive pain reliever and fever
reducer. When invented, it was considered a “miracle drug”
for these reasons.
Initially unknown, aspirin also thins the blood making it
less likely to clot and has become an important treatment
for people with heart conditions
People who take aspirin are receiving this extra benefit at
no extra cost – A Positive Externality or Spill Over Benefit
20. 6. People’s Choices Have Consequences for the
Future.
Examples of Secondary Effects
2. Independence from Foreign Oil
As the world becomes more industrialized, more nations
demand fossil fuels causing prices to rise.
A big push in the United States is find and utilize more
sources of fossil fuels domestically, for example, by
increasing drilling.
While increasing the domestic supply of oil may lower
prices of gasoline, a secondary effect would include
pollution and environmental disasters such as oil spills out
at sea – A Negative Externality or Spill-Over Cost
21. 6. People’s Choices Have Consequences for the
Future.
Because people behave in (mostly) predictable ways,
the institutions such as government and businesses
will make choices expecting secondary effects that
will impact the decisions people and consumers will
make.
In this way, creating these secondary effects amounts
to changing the incentive as per rule #3
22. Name some decisions you might make now that will
impact you in the future?
Basic Principles of Economic Reasoning
(thought)
23. Most high school students believe school is boring.
Yet most students graduate from high school.
Why do students stay in school if school is so boring?
The Boring School Mystery. Or… Why do some
jobs pay more than others?
24. Let’s look at some reasons for dropping out and
staying in school.
Choose “D” for dropout and a “S” for stay in
The Boring School Mystery. Or… Why do some
jobs pay more than others?
25. 1. High school dropouts can get a job and thus
provide more financial help for their families than
their friends in high school can.
2. High school graduates will have higher incomes in
the future than the incomes of high school
dropouts.
3. High school graduates are able to go on to college.
4. High school students must follow school rules,
which limit freedom.
The Boring School Mystery. Or… Why do some
jobs pay more than others?
26. 5. High school dropouts can work full-time and have
a better car, clothes, and social life than their
friends in high school.
6. Parents are happy when their children graduate
from high school.
7. School activities, such as sports and the arts, are
fun for many students.
8. Increased knowledge opens up increased choices
and opportunities.
The Boring School Mystery. Or… Why do some
jobs pay more than others?
27. Name some future consequences of deciding to drop
out of school AND stay in school.
The Boring School Mystery. Or… Why do some
jobs pay more than others?
28. Focus: INCOME
Two types
1. Wages
what you get in exchange for your work
sometimes earned as a salary
2. Rent (Payments received)
given in exchange for using property (ex. Uhaul, storage units,
rent)
The Boring School Mystery. Or… Why do
some jobs pay more than others?
29. Name some people you think have high wages.
Why are their incomes so high?
The Boring School Mystery. Or… Why do some
jobs pay more than others?
30. Read “Why Some Jobs Pay More Than Others”
The Boring School Mystery. Or… Why do some
jobs pay more than others?
31. 6. Economic thinking is marginal thinking.
“Marginal” is the economists term for “one more”
In economics, decisions are made “on the margin” –
“How much benefit will I gain from one more
______ ?”
Remember, as long as MB ≥ MC, we continue
to make that choice
See the example of Park Hopper passes to Disney
World
32. 6. Economic thinking is marginal thinking.
Days
Total
Price
Total Price /
Day
Marginal
Price
1 $120 $120.00 $120
2 223 111.50 103
3 287 95.67 64
4 298 74.50 9
5 306 61.20 8
6 314 52.33 8
7 322 46.00 8
Current rates for Park Hopper tickets to Walt Disney World, Florida
• Normally we think of the average, “How much will a
trip cost per day?”
• In economics we think on the margin, “How much
will one more day cost?” • It is clear that the
cost of buying an
additional day
decreases rapidly:
• Day 1: $120
• Day 2: $103
• Day 3: $64
• Day 4: $9
• Day 5-7: $8 each
33. 7. The value of a good or service is affected by
people’s choices.
Value is personal; it is determined by the preferences
of the buyers and sellers
Keeping in mind rule #2, people seek to maximize
their benefit while incurring the least cost
Therefore, the value of any given trade-off is based
on any individual person’s evaluation of the cost-
benefit analysis
This includes the decision to buy AND the decision
to sell
34. 9. The test of a theory is its ability to predict.
Theories differ from laws in that theories have not
been tested on every single possibility
In economics, most of what is dealt with is theory
since only MOST people behave in predictable ways
Theories and models are the basis for economic
prediction and is what makes economics useful as a
study