Five Powers of Economic Thinking 1. Resources cost more than you think. Accounting costs--$ cost Opportunity cost-- The next highest-valued alternative. 2. All decisions are rational - “Human Behavior reflects rational self-interest” Is this person’s decision rational? http://www.humoroftheday.com/gallery/images/Pierced1.jpg http://www.romandson.com/common/jpg/slap.jpg Is this person being rational? 3. All Decisions are Made at the Margin. Margin—the weighing of additional costs and additional benefits of a specific change in the current situation. http://www.new2usa.com/nova/english/00000226/penny.jpg http://seattlepi.nwsource.com/dayart/20010824/226Ground24Q.jpg Who in here would NOT pick this $100 bill up if you saw it lying on the ground? Why would you pick it up? MB are at least = MC Ex. Buying a diamond ring (pg. 5, McConnell-Brue) 10.00 5 days after the promotion started Chicago Blackhawks and Illinois State Lottery-One adult fan would be randomly chosen at each home game, and if the Blackhawks scored at exactly the 10-minute mark of the second period -- not a second over or under -- then that fan would win $1 million. 4. The answer to most questions is found in this simple statement: IT DEPENDS!! It’s going to rain tomorrow. Is that good or bad? I lied to you. It’s going to be sunny tomorrow. Is that good or bad? What are these? 5. People are maximizers We all want more than less. We want everything! You have $35,000 in your pocket and you are going to purchase a car. You have narrowed your search to two choices: YUGO BMW Edmund was a wise old man. And he was asthmatic. Thus, he has a tendency to wheeze. He decided he was breathing too much dirty air, and that he should put a new air cleaning system into his house. He talked to doctors, engineers, air system specialists, and sought opinions of anyone with an interest. He learned that the cleaner the air the more expensive the equipment he must install. And he did some heavy thinking about what it would mean to him to wheeze less. He learned the degree of comfort he would experience at different levels of clean air. He decided to place values on different amounts of clean air according to these comfort levels. The cost and benefit data are summarized in the following table: Percentage of Total Clean Air Benefits MB 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 50 130 205 269 319 351 371 386 398 406 0 50 80 75 64 50 32 20 15 12 8 Total Costs MC 0 45 50 58 68 81 96 116 150 200 280 0 45 5 8 10 13 15 20 34 50 80 Percentage of Total Clean Air Benefits MB 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 50 130 205 269 319 351 371 386 398 406 0 50 80 75 64 50 32 20 15 12 8 Total Costs MC 0 45 50 58 68 81 96 116 150 200 280 0 45 5 8 10 13 15 20 34 50 80 Percentage of Total Clean Air Benefits MB 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 50 130 205 269 319 351 371 386 398 406 0 50 80 75 64 50 32 20 15 12 8 Total Costs MC 0 45 50 58 68 81 96 116 150 200 280 0 45 5 8 10 13 15 20 34 50 80 + 5 + 80 + 147 + 201 + 238 +255 +255 +236 +198 +126 Important Terms in Economics Study Group Leaders Post Hoc Fallacy-- A false cause and effect relationship. A occurs before B; therefore, A is the cause of B. You load software onto you computer. The next day you turn on your computer and it doesn’t turn on. Without checking things out, you are sure it was the software that caused the problem. The picture on your old television goes out. You get up and smack the side of the TV. This fixes the TV. You are sure the next time your picture on your TV goes out, you can just smack the side and it will be fixed. Post Hoc Fallacy--A false cause and effect relationship. A occurs before B; therefore, A is the cause of B. Superstitions are post hoc fallacies. Fallacy of Composition-- What is true of a part is true of the whole. "A car makes less pollution than a bus. Therefore, cars are less of a pollution problem than buses." "Atoms are colorless. Cats are made of atoms, so cats are colorless." “All businessmen are crooks.”