Chapter 1: An Economic Way of Thinking

Adam Smith• Father of Economics• Said competition and a free

market is key to a healthy economy

Your age group is very powerful! Think about how you influence companies about spending money on manufacturing and advertising.

What is Economics?• The study of how people choose to use their limited resources

to satisfy their unlimited wants.

• Economics deals with things of any VALUE, not just monetary valueo Everyone has different values & wants

What I have….What I WANT….

• People make choices.

• People’s choices involve costs.

• People respond to incentives in predictable ways.

What is Economics?

Economics VocabularyMicroeconomics – economic decision making of individuals, households, and businesses

Macroeconomics – the workings of the economy as a whole

Positive Economics – focuses on facts and cause and effect relationships; “how things are”

Normative Economics – uses value judgments and opinions; “how things ought to be”

Scenarios to Figure Out Which type of economics would be used for each scenario –(2 answers for each question)Macro vs. Micro Positive vs. Normative1. Should you use part of your paycheck to buy a yearbook or pay your cellphone bill ? 2. What could Broad Run do to reduce the sports fee required to play sports? 3. What are the costs to build President Trump’s wall between Mexico and the U.S.? 4. Should the U.S. change the provision that allows the Senate & Congress to be paid when the federal government shuts down?

#1 Scarcity Forces Tradeoffs• Limited resources force people to make choices and face

tradeoffs when they choose• Scarcity- means in short supply

• Shortages are temporary (can be made again if the resources are available)

Scarcity Forces Tradeoffs Practice What are the tradeoffs of driving to school vs. taking the bus to school?

What are some of the tradeoffs you make when you decide to do sports/clubs?

What are the tradeoff to learning a new language beside the one you speak usually?

#2 Costs vs. Benefits• Costs – what you spend in money, time, effort, or other sacrifices from

making a decision

• Benefits – what you gain from something in terms of money, time, experience, or other improvements from making a decision

Costs vs. Benefits Example

#3 Thinking at the Margin-when we decide to add or subtract a little to or from what we

already have

Marginal benefit- what is gained by adding one more unit to an activity

marginal benefit > marginal cost = do more of it

Marginal cost- what is given up by adding one more unit to an activity

marginal cost > marginal benefit = do less of it

Thinking at the Margin Practice

If I sleep another 30 minutes, what do I give up?

Costs Benefits

#4 Incentives Matter• Something that motivates a person to do something • It can be either positive or negative

Cellphone

#5 Trade Makes People Better Off• We should focus on what we do well, and then trade with

others for the other stuff we need/want

#6 Markets Coordinate Trade• Any arrangement that brings buyers and sellers together to

do business with each other• Free markets are ones in which buyers and sellers trade

until both are satisfied

Invisible Hand - a term used by Adam Smith to describe his belief that individuals seeking their economic self-interest actually benefit society more than they would if they tried to benefit society directly.

What would be an example of the Invisible Hand at work? _____________________________________

#7 Future Consequences Count• Decisions made today have consequences not only for

today, but also for the future• Law of unintended consequences – actions of people and

governments always have effects that are not expected

For example, off the coast of Florida, old tires were used to build reefs to attract fish; unfortunately, over time, the tires began to disintegrate, polluting the water and the tires had to be removed

Future Consequences Count Practice

Can you think of an example of Future Consequences Count Principle?_______________________________________

What Tools Do Economists Use?Scientific Method • involves posing a question• researching the question• developing a hypothesis• conducting studies and collecting

information• analyzing the information• evaluating the hypothesis

Graphs• show the relationship between two

given sets of data• It is a simplification & does not

represent all the variables

X

Y

Economic Models – a simplified representation of reality that allows economists to focus on the effects of one change at a time

• Can take the form of an equations, computer program or diagram

• Useful for explaining and predicting how the economy works

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Works Cited List