8 Basic Principles Economics: study of how people choose to use scarce resources to satisfy their wants
1. Everything has a cost: n “There is no such thing as a free lunch” • Nothing in life is REALLY FREE • You or someone else pays in: time, effort, lost opportunities Ex: Lunch or Education
2. People choose for good reason: n “Economize”- choose what they believe has the best combination of costs vs. benefits n Misunderstanding: decisions only cost you in terms of money ¨ Long commute to work?
3. Incentives influence people’s choices: n Incentives: benefit offered to encourage people to act in a certain way ¨ Increase benefits and reduce costs • Monetary: Economic, Moral, & Social • Non-Monetary:
Do all incentives work? n Day-Care Center (Israel) ¨ Pick up time 4 p. m. n n ¨ Parents are often late (Avg. : 8/wk) Result = anxious children and at least one teacher who has to wait. Economist Solution: n n Fine tardy parents (why, after all, should the day-care center take care of these kids for free? ) 10 -Day-care centers tested for 20 -weeks ¨ Found: 8 late pickups/week § Enact “fine” during fifth week § Late = $3/child/incident on top of regular $380/month bill ¨ Results: § Number of late pickups increased to 20/week
4. Economic systems influence peoples incentives and choices: n Economic system: way a society uses its resources to satisfy peoples wants ¨ Ex: Farming Community n Based on customs and traditions The economic systems that people live in have strong influence on their incentives/choices
5. People gain from “voluntary trade”: n 2+ people give up something they value for something else ¨ Both consider benefits of trade to be greater than costs ¨ EX: Job Employer
6. People’s choices influence the value of a good or service: n Good: things you buy (books, computers, ipods) Service: work you can buy (dental, car repairs) If Price (P) increases --> Buyers will buy less If Price (P) decreases --> Sellers want to sell less
7. People’s choices may have unintended consequences: n Hard to foresee consequences of choices ¨ Things don’t always turn out as expected… n EX: Switch from Horse and Buggy--> Car • Results: • Traffic Jams • Air Pollution • Creation of Jobs • Movement to Suburbs
8. Choices made today influence what happens tomorrow: n Life is not a lottery ¨ Current status (life)/How you live today is shaped by past choices. n EX: Financial Collapse
What are they thinking? n Puzzling Questions (answer two in your journal): Why don’t cities build high-speed rail systems to cut down on huge traffic jams? ¨ Why won’t teenagers baby-sit for $2 per hour? ¨ Why don’t students keep the school lunch room clean? ¨ Why don’t all students always try their best in their school courses? ¨
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