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.”