economic reasoning principles (aka “erp’s). how do we define economics? the study of how people...
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ECONOMIC REASONING PRINCIPLES (AKA “ERP’S)
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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”)
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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…
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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!
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Lefkowitzs’ ECONOMIC REASONING PRINCIPLES
People choose, and individual choices are the source of social outcomes.(#1)
IS
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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.
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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………
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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”)
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Question for Understanding
Think of a decision you are about to make
What are the trade-offs?
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Lefkowitzs’ ECONOMIC REASONING PRINCIPLES
ALL CHOICES INVOLVE COSTS (#2)
people receive benefits and incur costs when they make decisions.
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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!
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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
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Would you pick these up if you approached this?
What would be the opportunity cost of this decision?
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Would you pick this up if you approached this?
What is the incentive to pick up this as opposed to the pennies?
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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.
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When incentives (Prices) change, behavior changes in predictable ways.
When prices go up consumers demand a larger/smaller quantity?
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Lefkowitzs’ ECONOMIC REASONING PRINCIPLES
Institutions are the “rules of the game” that influence choices. (#4)
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What are the “rules of the game” (the accepted and expected forms of social interaction) in:
Dating ?
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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?
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Why are some countries rich and others poor?
Low, Middle and High Income
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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
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The poverty of some nations and the wealth of others is not an accident; it is the result of choices
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Lefkowitzs’ ECONOMIC REASONING PRINCIPLES
VOLUNTARY TRADE CREATES WEALTH
(#5)
I
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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
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Lefkowitzs’ ECONOMIC REASONING PRINCIPLES
CONSEQUENCES OF OUR CHOICES LIE IN THE FUTURE (#6)
( I