the economic way of thinking

The Economic Way of Thinking

Personal Finance Institute July 21, 2014

Flash Drive’sContents

Test Your Best!

http://www.vcee.org/resources/view/14

Online Resources Part II

Unit Two- Economic Systems

Unit Two- Economic Systems

Unit Two- Economic Systems

What is Economics?

It’s not just about money!

* Or…Let’s Learn Economic Concepts in Two Slides

ECONOMICS 101*

ECONOMICS 101Economics is the study of _________

(as they pertain to _________, _________, and the _________).

Every nation has productive resources

__________________Resources from the earth, unaltered by

man

__________________People’s effort, skills,

and knowledge

__________________Man-made resources used over and over

which are used to produce

and

__________________G

ood

s use

d in

pro

du

ction

to

beco

me p

art o

f a

pro

du

ct

to be __________________ or __________________ with money (savings).

choicesgovernmentproducersconsumers

capitalhumannatural

bartered

servicesgoods

intermediate

purchased

however

Productive resources, and therefore, goods and services, are

limited

Human wants (needs) are basically unlimited

economic __________________ (resulting in

__________________ __________________)

when answering three basic economic

questions

___________ goods and services will be produced?

___________ will the goods and services be produced?

___ _______ will the goods and services be

distributed?

Answering these questions most efficiently creates the need for

___________________ and ___________________ resulting in trade.

Consequently, buyers (consumers) and sellers (producers) have to make

Economics: ___________ - __________ under ___________.

____

____

__ __

____

____

_B

uyers

an

d s

elle

rs a

nsw

er

?’s

___________ ___________G

overn

men

t an

swers ?’s

resulting in

mar

ket e

cono

my

comm

and economy

scarcitymakingdecision

interdependencespecialization

To whomHowWhat

costopportunity

choices

SCARCITY

Definition of Economics

The study of how people make decisions when faced with a scarcity of resources.

What personal resources do you possess? What choices do you make due to scarcity?

What is scarcity? Why is it so crucial to economics?

• Scarcity exists when resources are limited and people’s wants are unlimited.

• Scarcity forces people to make choices about the use of resources.

Cost – Benefit AnalysisTool used for deciding whether or not an action should

be taken by comparing its benefits and costs.

Importance of ToolFor Future Decisions – an intentional consideration of less

obvious decision variables that may be important to the outcome

For Past Decisions – provides context for the decision - helping to understand why the action was taken and evaluate whether

we made the most rational decision.

Tool #1: Cost – Benefit AnalysisPersonal Example - Past

CostsNegative Incentives

BenefitsPositive Incentives

Should I attend this in-service?

Tool #1: Cost – Benefit AnalysisPersonal Example - Past

CostsNegative Incentives

BenefitsPositive Incentives

It’s my vacation! Might learn something that will make my job easier

Boredom Student test scores will be higher

Less time with family Economic tools will help me and students personally

Should I attend this in-service? 1 = not very important 10 = very important

Tool #1: Cost – Benefit AnalysisPersonal Example - Past

CostsNegative Incentives

BenefitsPositive Incentives

Less time with family Might learn something that will make my job easier 10

Boredom Student test scores will be higher

It’s my vacation! 8 Economic tools will help me and students personally

Should I attend this in-service? 1 = not very important 10 = very important

Tool #1: Cost – Benefit AnalysisPersonal Example - Past

CostsNegative Incentives 1-10

BenefitsPositive Incentives 1-10

Less time with family 7 Might learn something that will make my job easier

9

Boredom 2 Student test scores will be higher 5

It’s my vacation! 8 Economic tools will help me and students personally

7

Total 17 Total 21

Should I attend this in-service?1 = not very important 10 = very important

What was given up when I m

ade my choice? Was this OK?

Decision-Making ModelsPersonal Example

Tool necessary when deciding among various alternatives

(not…to do or not to do one alternative)

by considering the costs and benefits of each alternative against predetermined

criteria .

How do you decide?

PACEDIdentify the problemList alternatives or choicesState the criteria – What’s most important?EvaluateDecide

PACEDDecisionGrid

Criteria Criteria Criteria Criteria

Alternative

Alternative

Alternative

Should Lincoln go to Ford Theater?

P: STATE THE PROBLEM

?

Guide to Economic Reasoning (HDG)

Tool is used to “think like an economist” by allowing one to

(1) make better decisions and (2) make sense of situations in which the facts seems to be

at odds with our sense of what ordinary experiences and good judgment would suggest.

Economic Reasoning = Critical Thinking = Life Skill

The Guide to Economic Reasoning

1. People choose.People manage their lives by making choices. They

choose the alternative which seems best to them because it involves the least cost and greatest benefit.

Examine the costs and benefits of the alternatives that are available.

Identify the choice being made and who is making that choice.

2. All choices involve costs. All decisions come with costs. “There is no such thing as

a free lunch.”

Determine what is being given up when a choice is made.

Opportunity cost is the second best choice people give up when they make their best choice

3. People respond to incentives. Incentives are actions or rewards that encourage

people to act. When incentives change, people's behavior changes in predictable ways.

Identify the incentives that are motivating each choice.

Analyze how and why a person’s behavior changes when responding to incentives.

Incentives

4. Economics systems influence individual choices and incentives.

How people cooperate is governed by written and unwritten rules. As rules change, incentives change and behavior changes.

Examine the rules of the economic system and identify who created these rules.

Identify ways the rules have changed and how these changes have influenced behavior.

5. People gain when they trade voluntarily.

People can produce more in less time by concentrating on what they do best. The surplus goods or services they produce can be traded to obtain other valuable goods or services.

Determine whether trade is taking place and identify the reasons for action or inaction.

6. The consequences of choices lie in the future.

Economics stresses making decisions about the future because it is only the future that we can influence. We cannot influence things that have happened in the past.

Analyze how decisions made in the past have influenced the present

Predict how decisions made today will change the future.

Understanding the Market System

• A market is any kind of arrangement that allows the potential buyers and sellers of a particular good or service to interact.

• Face to face transactions are not necessary with today’s technology.

In a free market system…

Decisions about what, how, and for whom to produce are made without any centralized coordination or control .

How are these questions decided in a free market system?

The Magic of Markets• What did you have for dinner last night?• How did this type of food arrive in your house?• How did you know what and how much to buy

for dinner?• How did the store it was purchased from know

that someone would buy it?• How does the local fast food restaurant know

how many workers to schedule for each shift?

The Magic of Markets

• What would happen if there was a sudden change in consumer preference for a good and buying patterns where significantly reduced?

• What would happen if higher productions costs significantly reduced the supply of a good?

Don’t take Markets for granted!

Markets provide incentives for producers to make and offer to sell their goods and services day after day, year after year, in the marketplace.

(supply)

Markets provide consumers with the many types and qualities of goods and services that want.

(demand)

The Economic Way of Thinking

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Lesson 1

Wants > Resources = Scarcity

Money

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