ECONOMIC GUIDEPOSTS n n AP Economics Introduction to

ECONOMIC GUIDEPOSTS n n AP Economics Introduction to Economic Thinking

Do You Think Like An Economist? n n n n n Because it is desirable, sunshine is scarce. Because it is limited, polio is scarce. Children are scarce mainly because their parents spend money on them for food, shelter, education, and other things. The main cost of going to college is tuition, room, and board. If mass transportation fares are raised, almost everyone will take the trains anyway. The more useful the good, the higher is the price. If one nation produces everything better than another nation, there is no economic reason for those two nations to trade. A non-regulated monopoly charges the highest possible price. Most businesses do not care about consumers; they just want higher profits. If someone makes an economic gain, someone else loses.

Scarce Goods Have A Cost— There Are No Free Lunches n n TINSTAAFL Economic thinking recognizes that the provision of a scarce good involves a cost. We must give up other things if we are to have more of a scarce good. Economic goods are not free.

Decision Makers Choose Purposefully—They Economize n n n Decision makers have some basis for their evaluation of alternatives – UTILITY is the benefit or satisfaction that an individual expects from the choice of a specific alternative. UTILITY is highly subjective— differing widely from one person to another person

Incentives Matter—Human Choice Is Influenced In A Predictable Way By Changes In Economic Incentives n n Economic reasoning recognizes that many factors help determine how people make decisions. Morality and incentives could be strong determinants of economic reasoning. As the personal benefits from choosing an option increase, a person will be more likely to choose that option. As the costs associated with the choice of an item increase, the person will be less likely to choose that option.

Economic Thinking is Marginal Thinking n n Decisions made to change the status quo are considered marginal. These decisions always involve the effects of net additions to or subtractions from the current conditions. Marginal means additional Marginal benefits and costs determine the wisdom of our decisions

Information Is Scarce Therefore, Knowledge About The Future Is Scarce n n n Rational decision-makers recognize that it is costly to obtain information and make complex calculations Although additional information and techniques that improve one’s decisionmaking capabilities are valuable, often the potential benefit is less than its expected cost. Sensible consumers will conserve on these limited resources--just as they conserve on other scarce resources.

Remember The Secondary Effects —Economic Actions Often Generate Secondary Effects In Addition To Their Immediate Effects n Secondary effects are effects that are directly related to the initial policy and whose influence might only be seen or felt with the passage of time.

The Value of A Good Or Service is Subjective n n Preferences differ between individuals. Seldom will one individual know how others value an item.

The Test Of A Theory Is Its Ability To Predict—Economic Thinking Is Scientific Thinking n n The usefulness of an economic theory is its ability to predict the future consequences of economic actions. Economists develop economic theories from an analysis of how incentives will affect decision-makers. The theory is then tested against events in the real world—through testing economists confirm or reject theory. Economics does not seek to predict the behavior of a specific individual; instead, it focuses on the general behavior of a large number of individuals