7 Principles of Economics

1. 7 Principles of Economics Mr. Petersen 8th grade Economics

2. Preview • Respond to each question. • If you could choose between two nearly identical products—one that is free and one that you have to pay for—which would you choose? Why? • If you were opening a new business, would you select a location closer to or farther away from a business that sold a similar or even identical product? Why? • If you could make a small change in your daily routine that would save you time and money, would you make the change? Why or why not?

3. What is an economic principle? • Factors that help explain what may cause, or may happen, in any economic circumstance.

4. #1: The cost of something is what you give up to get it • Cost-benefit analysis • What types of costs are there? • Weigh the pros and cons of a purchase • Opportunity Cost: whatever must be given up in order to obtain some item

5. #2: People face tradeoffs • Is there such thing as a “free lunch”? • To get something, we have to give up something else. • Scarcity of an item drives trade off to occur • Question: How will you spend your weekend? • “Guns vs Butter”

6. #3 Think at the ‘margin’ • When people make decisions, they compare the costs and benefits of a “little bit more or a little bit less of something” • Marginal Benefit (MB): the extra benefit received from a small increase in the consumption of a good or service • Marginal Cost (MC): the increase or decrease in costs as a result in one more or one less unit of output

7. #4: Incentives matter • Incentive: something positive or negative that influences a person to act • People respond to incentives in predictable ways • If the interest rate on borrowing money goes down, more people will borrow money • When the price of a stock drops, more people will sell their stock • Example: Seat belt laws

8. #5: Trade makes people better off • People gain from their ability to trade with one another. • Not a win-lose scenario, but win-win • Stimulates competition and choice. • Trade allows people to specialize in what they do best.

9. #6: Market Coordinates Trade • Market Economy: an economic system where prices are determined and resources are allocated through decisions of many firms and household • Firm: Any produce of a good or service • Government regulation can upset the balance

10. #7: Future consequences count • Decisions made today will effect you later • Short-term and Long-term effect • Bullying example

11. Road trip

12. Economic Enigmas • Enigma: a puzzle that seems to defy common sense Can you answer these puzzles with economic principles?

13. Enigma #1 • Why do economy seats on airplanes cost different amounts?

14. Enigma #2 • Why do people pay more for name-brand produces when there are generic brands of the same product available for less?

15. Enigma #3 • Why do police officers get paid so much less than professional baseball players?

16. Enigma #4 • Why does a five-day Disneyland pass cost only 2.5 times what a one-day pass cost?

17. In conclusion… • Economic principles help us to understand the reasoning behind our decision making.