ECONOMICS

The Seven Principles of Economics

Introduction

Economics IS more than just money, taxes, banking, and trade

Economists have developed principles that represent a specific way of thinking

The number of principles may change depending on the economist, but the overall message is the same

Principle #1: Scarcity Forces Tradeoffs

Remember the definition of “Economics” Four Words: What are they? (L R, U W)

Scarcity Must make choices Every choice involves tradeoffs

No such thing as a free lunch What choices and tradeoffs do you think

about or make?

Principle #2: Costs vs. Benefits Principle #1 makes us choose, but how

do we decide? Economists assume that people make

choices based on estimated costs and benefits

Cost v. Benefit analysis Lists Weighted calculations

What are the costs v. benefits of sleeping one hour later each day?

Principle #3: Thinking at the Margin

Margin is the border or outer edge “A little more” or “a little less” rather than

all or nothing Usually decisions are not a wholesale

change Marginal cost: What you give up to add

“one unit” to an activity Marginal benefit: What you gain by

adding one more unit Example: Studying. Should you study 2

hours for Econ, or 3?

Principle #4: Incentives Matter Costs and benefits influence our

behavior They are INCENTIVES People respond to them Can be positive or negative What are some examples you can think

of?

Principle #5: Trade Makes People Better Off

Why don’t we all make our own clothes, or grow our own food?

Adam Smith: none of us is equally skilled at everything

Concentrate on what we do best, and trade for the rest!

Examples?

Principle #6: Markets Direct Trade

What is a market to you? Economists take a larger view

A market is any arrangement that brings buyers and sellers together to do business

Can exist anywhere When markets operate freely, both sides

will trade until each is satisfied (theory) Result is efficient market Adam Smith: Invisible Hand

Principle #7: Future Consequences Count

Do people think long term or short term? Generally shortsighted; they look for

immediate benefits and costs Decisions always have long term

consequences, though Example: 1968 VT law banned road side

billboards; result---people built large sculptures and statues to get attention (19 ft Genie, giant squirrel)

Unintended Consequences

Conclusion

Now you know the principles, it is time to put them into action by analyzing some data on real world situations.

But first… http://

www.youtube.com/watch?v=VVp8UGjECt4