ECONOMIC
REASONING
PRINCIPLES (AKA
“ERP’S)
How Do We Define Economics?
 The study of how people seek to satisfy their wants and needs
by making choices (when limited resources are available)
 Resources : human, natural, capital, and entrepreneurial. These
productive resources are used to create the goods and services people
want.
 Why must we make choices?
 Resources are scarce : wants exceed limited resources
 *This is the basic economic problem*
Allocation: We decide who gets it? (“Guns vs. Butter”)
Scarcity
 How then are these UNLIMITED wants satisfied by
LIMITED resources?
 A Price Must Be Paid…EVERYTHING HAS A PRICE!!!!!
 This is how it is decided who receives the resources that they
want
 Which brings us to our next point…
TANSTAA“F”L
There Ain’t No Such Thing As A
“FREE” Lunch
 NOTHING ON THIS EARTH IS FREE!!!!!
EVERYTHING HAS A PRICE…IN THE EYES OF AN
ECONOMIST!
Lefkowitzs’ ECONOMIC REASONING
PRINCIPLES
 People choose, and
individual choices are
the source of social
outcomes.(#1)
IS
Why do people have to make a
choice?
 Scarcity forces us to choose
 Unlimited wants > limited
resources
 Not making a choice is itself a
choice
 Based on perceptions of expected
costs and benefits of alternatives
 Factors driving choices can be
material, behavioral, moral, or some
combination of all three.
WHY ARE YOU IN THIS CLASS RIGHT
NOW?
 Application of Opportunity Costs
 Cost / Benefit Analysis
 It’s the best of your alternatives
Your decision might change if………
Trade-Offs
 Trade Offs:
 What is given up whenever a course of
action is chosen over another
 All Individuals, Businesses, Governments,
and Large Groups of People face Tradeoffs (“Guns or Butter”)
Question for Understanding
Think of a decision you are about to make
 What are the trade-offs?
Lefkowitzs’ ECONOMIC REASONING
PRINCIPLES
 ALL CHOICES
INVOLVE COSTS (#2)
 people receive benefits and
incur costs when they make
decisions.
Opportunity Cost
 Opportunity Cost
 The cost of a choice is the value of the next-best alternative foregone,
measurable in time or money; NOT NECESSARILY A MONETARY
VALUE
 It is not what “could” you do, but what “would” you do
 Every decision/choice has an opportunity cost…no matter
what!
Opportunity Cost Analysis
Decision Maker: YOU
Alternatives:
Perceived
Benefits
Choice
Opp. Cost
Benefits
Refused
Should I get a
job?
Should I
participate in
sport?
Would you pick these up if you
approached this?
What would be the opportunity cost of this decision?
Would you pick this up if you
approached this?
What is the incentive to pick up this as opposed to the pennies?
Lekfowitzs’ ECONOMIC REASONING
PRINCIPLES
 PEOPLE RESPOND TO
INCENTIVES IN
PREDICTABLE WAYS.
(#3)
 Choices are influenced by
incentives, the rewards that
encourage and the punishments that
discourage actions. When incentives
change, behavior changes in
predictable ways.
When incentives (Prices) change, behavior
changes in predictable ways.
 When prices go up consumers demand a larger/smaller
quantity?
Lefkowitzs’ ECONOMIC REASONING
PRINCIPLES
 Institutions are the “rules of
the game” that influence
choices. (#4)
What are the “rules of the game” (the
accepted and expected forms of social
interaction) in:
Dating ?
Institutions Influence Choices
Laws, customs, moral
principles, superstitions,
and cultural values
influence people’s
choices within an
economic system
•
•
•
What to Produce?
How to Produce It?
For Whom to Produce
It?
Why are some countries rich and others poor?
Low, Middle and High Income
Can institutions change? Oh yes!
 About 30 years ago, China began legal changes designed to
mimic those of capitalism
 Result: per capita income now > six times higher than it was
 About 30 years ago, Zimbabwe began undoing the capitalist
institutions that had made it among richest in Africa
 Result: per capita income now roughly ninety percent lower than it
was
The poverty of some nations and the wealth of
others is not an accident; it is the result of choices
Lefkowitzs’ ECONOMIC REASONING
PRINCIPLES
 VOLUNTARY TRADE
CREATES WEALTH
(#5)
I
VOLUNTARY TRADE CREATES WEALTH
 Trying to produce everything
yourself limits both production
and consumption
 What do you “do best”?
• Sell what you produce
• Buy what you can’t
Lefkowitzs’ ECONOMIC REASONING
PRINCIPLES
 CONSEQUENCES OF
OUR CHOICES LIE IN
THE FUTURE (#6)
(
I