ECONOMICS
The Seven Principles of
Economics
Introduction
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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
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Remember the definition of “Economics”
 Four
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Scarcity
Must make choices
Every choice involves tradeoffs
 No
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Words: What are they? (L R, U W)
such thing as a free lunch
What choices and tradeoffs do you think about or
make?
Principle #2: Costs vs. Benefits
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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
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calculations
What are the costs v. benefits of sleeping one hour
later each day?
Principle #3: Thinking at the Margin
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Margin is the border or outer edge
 “A
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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
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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
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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
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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
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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
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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
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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