7 Principles to Thinking Like an Economist

1. Scarcity Forces Trade-offs

• Trade-offs are alternatives that must be given up when one is chosen rather than another.
• CONNECTION: What is a trade-off you have made recently?

2. Cost-Benefit Analysis

• Most economic decisions can be made by thinking of the cost of an action relative to the benefits received.
• CONNECTION do a cost-benefit analysis of one year of high school.

3.Thinking at the Margin

• Most decisions involve choices about doing a little more or less.
• Adding one or subtracting one from an activity/etc. is called thinking at the margin.
• Marginal Benefit vs. Marginal Cost
• Ex. Studying for an additional hour for your economics test after already studying for two.

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Thinking at the Margin

• CONNECTION: What is the 1^st thing you do when your parents ask you to clean your room?

4. Incentives Matter

• People respond to incentives in predictable ways.
• CONNECTION What is the most effective incentive to get you to class on time?

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5. Trade Makes People Better Off

• Focusing on what we do well and then trading with others increases productivity and provides more and better choices for all.
• CONNECTION What is an example of trade improving your life today?

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Trade Problem�

• Scenario: A plane carrying a group of teachers and students crashed in the ocean. 2 students and 2 teachers survived and reached a deserted island. Being natural enemies, they initially separated and started their own tribes. The only food to eat on the island is fish and the only freshwater source is very difficult to reach. Each person must consume 1 unit of fish per day and 1 unit of water per day to survive.

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• Each student is capable of acquiring either 2 fish per day or 2 water per day. Each teacher is capable of acquiring either 3 fish per day or 2 water per day. Prove to me that both groups would be better off by trading.

6. Markets Coordinate Trade

• When buyers and sellers are allowed to operate freely it is usually more efficient and people are more likely to get what they want.
• “The Invisible Hand”
• CONNECTION: How does this cartoon illustrate the principle of markets coordinate trade

7. Future Consequences Count

Decisions made today have long-term consequences people don’t always consider.

• Unintended consequences always happen and economists try to predict them
• CONNECTION: What might be an unintended consequence of teaching your children not to talk to strangers.

Processing

• Why do economy seats on airplanes cost different amounts?

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• Why do people pay more for name-brand products when there are generic brands of the same product available for less?

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• Why do police officers get paid so much less than professional baseball players?

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• Why does a five-day Disneyland pass cost only 2.5 times what a one-day pass costs?

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Choose 2 of the economic enigmas. Follow these steps to apply an economic way of thinking to help explain your enigmas.

1. Write your economic enigma in your notebook. Then list any economic principles that help explain your enigma.

2. Choose the one principle that you believe best explains your enigma. Explain why this principle provides the best explanation.

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