ECONOMIC GUIDEPOSTS

1. ECONOMIC GUIDEPOSTS • AP Economics • Introduction to Economic Thinking

2. Do You Think Like An Economist? • 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.

3. Scarce Goods Have A Cost—There Are No Free Lunches • 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.

4. Decision Makers Choose Purposefully—They Economize • Decision makers have some basis for their evaluation of alternatives – UTILITY. • 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

5. Incentives Matter—Human Choice Is Influenced In A Predictable Way By Changes In Economic Incentives • 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.

6. Economic Thinking is Marginal Thinking • 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

7. Information Is ScarceTherefore, Knowledge About The Future Is Scarce • Rational decision-makers recognize that it is costly to obtain information and make complex calculations • Although additional information and techniques that improve one’s decision-making 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.

8. Remember The Secondary Effects—Economic Actions Often Generate Secondary Effects In Addition To Their Immediate Effects • 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.

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

10. The Test Of A Theory Is Its Ability To Predict—Economic Thinking Is Scientific Thinking • 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 the 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