ADAM SMITH
• 18TH CENTURY POLITICAL ECONOMIST AND PHILOSOPHER
• 1776 – WROTE THE WEALTH OF NATIONS
• “COMPETITION IS THE KEY TO A HEALTHY ECONOMY”
• “INVISIBLE HAND” – I.E. MARKETS CONTROL ECONOMIC
DECISIONS
• GOVERNMENTS SHOULD NOT
INTERVENE
WHAT IS ECONOMICS ALL
• ASKING QUESTIONS AND THEN SOLVING OR EXPLAINING
ABOUT? EVERYDAY MYSTERIES AND ENIGMAS = PUZZLES OR RIDDLES
THAT MIGHT BE EXPLAINED THROUGH AN ECONOMIC
ANALYSIS
• HOW PEOPLE – INDIVIDUALS AND GROUPS – CHOOSE TO
USE LIMITED RESOURCES TO SATISFY UNLIMITED WANTS
• RESOURCE = ANYTHING USED TO PRODUCE AN ECONOMIC
GOOD OR A SERVICE
• ALL RESOURCES ARE SCARCE
• ALL RESOURCES HAVE ALTERNATIVE USES
2 MAIN BRANCHES OF
ECONOMICS
• LOOKS AT ECONOMIC
DECISION MAKING BY
INDIVIDUALS,
HOUSEHOLDS, AND
BUSINESSES
• FOCUSES ON THE
WORKINGS OF AN
ECONOMY AS A
WHOLE
• SUPPLY AND
DEMAND, PRICES
MICROECONOMICS
MACROECONOMICS
THE SCIENCE OF DECISION
MAKING – WHAT IS AND
WHAT SHOULD BE
• POSITIVE ECONOMICS – DESCRIBES HOW THINGS ARE
• NORMATIVE ECONOMICS – FOCUSES HOW THINGS
OUGHT TO BE (ANALYSIS/ADVICE/OPINION)
SEVEN PRINCIPLES OF
ECONOMIC THINKING
1.
2.
SCARCITY FORCES TRADEOFFS:
•
•
•
LIMITED RESOURCES FORCE PEOPLE TO MAKE CHOICES
PEOPLE FACE TRADE-OFFS WHEN THEY CHOOSE
THIS IS KNOWN AS THE “NO-FREE-LUNCH-PRINCIPLE”
COSTS VS. BENEFITS:
•
•
PEOPLE CHOOSE SOMETHING WHEN THE BENEFITS OF DOING
SO ARE GREATER THAN THE COSTS
COST-BENEFIT ANALYSIS, WHICH “OUTWEIGHS” THE OTHER?
SEVEN PRINCIPLES OF ECONOMIC THINKING
3.
THINKING AT THE MARGIN:
•
•
4.
MOST DECISIONS INVOLVE CHOICES ABOUT A LITTLE MORE OR
A LITTLE LESS OF SOMETHING
DECISIONS INVOLVE COMPARING MARGINAL COST = WHAT
YOU GIVE UP TO ADD ONE MORE UNIT, VERSUS MARGINAL
BENEFIT = WHAT YOU GAIN BY ADDING ONE MORE UNIT
INCENTIVES MATTER:
•
•
INCENTIVE = SOMETHING THAT MOTIVATES A PERSON
PEOPLE RESPOND TO INCENTIVES IN PREDICTABLE WAYS
SEVEN PRINCIPLES OF ECONOMIC THINKING
5.
TRADE MAKES PEOPLE BETTER OFF:
• FOCUSING ON WHAT WE DO WELL AND TRADING WITH OTHERS
GIVES US BETTER CHOICES
6.
MARKETS COORDINATE TRADE:
• MARKETS BRING BUYERS AND SELLERS TOGETHER
• DO BETTER THAN INDIVIDUALS AT COORDINATING EXCHANGE
BETWEEN BUYERS AND SELLERS
• ARE EFFICIENT BECAUSE TRADE UNTIL BOTH SATISFIED
7.
FUTURE CONSEQUENCES COUNT:
• TODAY’S DECISIONS HAVE FUTURE (OFTEN UNINTENDED)
CONSEQUENCES