2. 1. Everything has a cost.
TINSTAAFL “There is not such thing as a free
lunch.”
Every action costs someone time, effort, or lost
opportunity to do something else.
Opportunity Cost is the value of the next best
choice you did not make.
Not all costs are in dollars and cents.
See video: Economics Made
Memorable, Opportunity Costs, part 1
3. 2. People choose for good reasons.
People make decisions based on what they believe is
most important to them
While this may vary from person to person, it is
usually the same for most people for any given
choice
Rational Choices involve weighing the benefits
against the costs – “cost benefit analysis”
See video: Economics Made
Memorable, Opportunity Costs, part 2
4. 3. Incentives matter.
When people make their Rational Choices and
weighing the benefits against the costs, they are
comparing the incentives involved in making the
decision
When incentive change, people’s behavior changes in
predictable ways
Incentives can be positives, such as a reward or
added benefit, or a punishment or additional cost
5. 4. People create economic systems to influence
choices and incentives.
Economic Systems are a means of a society
answering the three basic economic questions:
1. What to produce?
2. How to produce them?
3. For whom will they be produced?
6. 4. People create economic systems to influence
choices and incentives.
Coordinating the needs of the people in a society
takes the cooperation of many people involved
There are rules, written and unwritten that guide
people’s behavior by adding incentives to trade in
certain ways
See videos:
Return to Mocha, part 1
Return to Mocha, part 2
Return to Mocha, part 3
7. 5. People gain from voluntary trade.
People will trade when they believe the trade will
make them better off
Like any Rational Choice, trade is another decision
people will have to decide upon weighing benefits
against the cost
Economic Systems are about trade, and therefore
about making Rational Choices
8. 6. Economic thinking is marginal thinking.
“Marginal” is the economists term for “one more”
In economics, decisions are made “on the margin” –
“How much benefit will I gain from one more
______ ?”
Remember, as long as MB ≥ MC, we continue
to make that choice
See the example of Park Hopper passes to Disney
World
9. 6. Economic thinking is marginal thinking.
• Normally we think of the average, “How much will a
trip cost per day?”
• In economics we think on the margin, “How much
will one more day cost?” • It is clear that the
Total Total Price / Marginal
Days Price Day Price cost of buying an
1 $120 $120.00 $120 additional day
2 223 111.50 103 decreases rapidly:
3 287 95.67 64 • Day 1: $120
4 298 74.50 9 • Day 2: $103
5 306 61.20 8
• Day 3: $64
6 314 52.33 8
• Day 4: $9
7 322 46.00 8
Current rates for Park Hopper tickets to Walt Disney World, Florida • Day 5-7: $8 each
10. 7. The value of a good or service is affected by
people’s choices.
Value is personal; it is determined by the preferences
of the buyers and sellers
Keeping in mind rule #2, people seek to maximize
their benefit while incurring the least cost
Therefore, the value of any given trade-off is based
on any individual person’s evaluation of the cost-
benefit analysis
This includes the decision to buy AND the decision
to sell
11. 8. Economic actions create secondary effects.
Every decision has side effects both direct and
indirect (these are called Externalities or Spill-Overs)
These secondary effects, where predictable, are part
of the cost-benefit analysis
When these secondary effects are not predicted the
will result in additional cost or benefits that are not
reflected in the initial decision
12. 8. Economic actions create secondary effects.
In an Market economy, whenever any information is
unknown or unavailable in the decision making
process, it is considered a “market failure.”
A Market Failure occurs whenever any of the
requirements for a competitive market (such as,
adequate competition, knowledge of prices and
opportunities) are lacking.
13. 8. Economic actions create secondary effects.
Examples of Secondary Effects
1. Aspirin
Aspirin is a very inexpensive pain reliever and fever
reducer. When invented, it was considered a “miracle drug”
for these reasons.
Initially unknown, aspirin also thins the blood making it
less likely to clot and has become an important treatment
for people with heart conditions
People who take aspirin are receiving this extra benefit at
no extra cost – A Positive Externality or Spill Over Benefit
14. 8. Economic actions create secondary effects.
Examples of Secondary Effects
2. Independence from Foreign Oil
As the world becomes more industrialized, more nations
demand fossil fuels causing prices to rise.
A big push in the United States is find and utilize more
sources of fossil fuels domestically, for example, by
increasing drilling.
While increasing the domestic supply of oil may lower
prices of gasoline, a secondary effect would include
pollution and environmental disasters such as oil spills out
at sea – A Negative Externality or Spill-Over Cost
15. 8. Economic actions create secondary effects.
Because people behave in (mostly) predictable
ways, the institutions such as government and
businesses will make choices expecting secondary
effects that will impact the decisions people and
consumers will make.
In this way, creating these secondary effects amounts
to changing the incentive as per rule #3
16. 9. The test of a theory is its ability to predict.
Theories differ from laws in that theories have not
been tested on every single possibility
In economics, most of what is dealt with is theory
since only MOST people behave in predictable ways
Theories and models are the basis for economic
prediction and is what makes economics useful as a
study