An Economic Way of Thinking

1. An Economic Way of Thinking What Is Economics All About?

2. What Is Economics All About? • Economics is various things to various people • • Economics has a lot to do with asking questions about—and then solving or explaining—everyday mysteries and enigmas.

3. What Is Economics All About? Cont. • • Economics is the study of how people, individually and in groups, choose to use their limited resources to satisfy their unlimited wants. All resources are scarce because they exist in finite amounts. All resources have alternative uses.

4. Economics is the science of decision making, or of how people make choices • Positive economics describes how things are • Normative economics describes how things ought to be

5. What Seven Principles Guide an Economic Way of Thinking? • Scarcity-forces-tradeoffs principle: Limited resources force people to make choices and face tradeoffs when they choose. • Cost-versus-benefits principle: People choose something when the benefits of doing so are greater than the costs • Thinking-at-the-margin principle: Most decisions involve choices about a little more or a little less of something

6. What Seven Principles Guide an Economic Way of Thinking? • • Incentives-matter principle: People respond to incentives in generally predictable ways • Trade-makes-people-better-off principle: By focusing on what we do well and then trading with others, we will end up with more and better choices than by doing everything for ourselves

7. What Seven Principles Guide an Economic Way of Thinking? • Markets-coordinate-trade principle: Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers. • Future-consequences-count principle: Decisions made today have future (and often unintended) consequences.

8. What Tools Do Economists Use? Economists use many tools in their work • The scientific method involves posing a question, developing a hypothesis, conducting studies and collecting data, analyzing the data, and evaluating the hypothesis. • Graphs are two-dimensional representations of a three-dimensional world. They show relationships between two sets of data.

9. What Tools Do Economists Use? Cont. • Economic models are simplified representations of reality that help economists focus on the effects of one change at a time.