EconomicsEconomics

Economic Reasoning: Why are We Economic Reasoning: Why are We A Nation of Couch Potatoes?A Nation of Couch Potatoes?

Welcome to the exciting world of economics!Welcome to the exciting world of economics! Definition: The social science that deals with Definition: The social science that deals with

how society allocates scarce resources how society allocates scarce resources among its unlimited wants and needs by among its unlimited wants and needs by examining alternatives and considering the examining alternatives and considering the opportunity costs for each alternativeopportunity costs for each alternative

Economic reasoning can be used to explain Economic reasoning can be used to explain a wide range of human behavior.a wide range of human behavior.

Why are We A Nation of Couch Why are We A Nation of Couch Potatoes?Potatoes?

Which well known people do Americans Which well known people do Americans tend to admire?tend to admire?

How are Americans’ exercise and diet habits How are Americans’ exercise and diet habits changing?changing?

Why are We A Nation of Couch Why are We A Nation of Couch Potatoes?Potatoes?

On the one hand, Americans admire people On the one hand, Americans admire people who look slender and physically fit.who look slender and physically fit.

Why are We A Nation of Couch Why are We A Nation of Couch Potatoes?Potatoes?

On the other hand, according to the Center On the other hand, according to the Center of Disease Control and Preventionof Disease Control and Prevention– ~25% of Americans are getting enough exercise ~25% of Americans are getting enough exercise – ~35% are overweight~35% are overweight– Percentage of children who are overweight has Percentage of children who are overweight has

doubled since the early 1970sdoubled since the early 1970s

Why are We A Nation of Couch Why are We A Nation of Couch Potatoes?Potatoes?

Economic Mystery: Why do an increasing Economic Mystery: Why do an increasing number of Americans, the same people who number of Americans, the same people who admire the trim, slender look so often admire the trim, slender look so often featured in the media, exercise too little and featured in the media, exercise too little and eat too much?eat too much?

True or False?True or False?

Few Americans know that exercising more and eating less Few Americans know that exercising more and eating less can help many people become healthier.can help many people become healthier.

Exercise and a healthful diet are free.Exercise and a healthful diet are free. In jobs that involve physical work, exercise is like a fringe In jobs that involve physical work, exercise is like a fringe

benefit.benefit. The price of food has been increasing.The price of food has been increasing. Passive modes of entertainment like-TV and video games-Passive modes of entertainment like-TV and video games-

are popular.are popular. Common jobs in the past-in mining, farming, and Common jobs in the past-in mining, farming, and

manufacturing-were much safer than today’s jobs in manufacturing-were much safer than today’s jobs in technology, law and finance.technology, law and finance.

Solve the Mystery!Solve the Mystery!

Read Activity 1 and answer the questions on Read Activity 1 and answer the questions on a separate sheet of paper (10 minutes).a separate sheet of paper (10 minutes).

Guide to Economic ReasoningGuide to Economic Reasoning

People choose.People choose. People’s choices involve costs.People’s choices involve costs. People respond to incentives in predictable ways.People respond to incentives in predictable ways. People create economic systems that influence People create economic systems that influence

economic choices and incentiveseconomic choices and incentives People gain when they trade voluntarily.People gain when they trade voluntarily. People’s choices have consequences that lie in People’s choices have consequences that lie in

the future.the future.

Applying Economic Reasoning to Applying Economic Reasoning to Couch Potatoes!Couch Potatoes!

What are some of the costs associated with What are some of the costs associated with failure to exercise enough and being failure to exercise enough and being overweight?overweight?

What incentives might influence people to What incentives might influence people to exercise less and eat more?exercise less and eat more?

How might you solve the mystery?How might you solve the mystery? What are some ways to change the What are some ways to change the

incentives associated with exercise and incentives associated with exercise and diet?’diet?’

Applying Economic Reasoning to Applying Economic Reasoning to Couch Potatoes!Couch Potatoes!

Periods 1,3,4 Homework: Read the following articles and Periods 1,3,4 Homework: Read the following articles and come prepared to discuss them. Please also print them come prepared to discuss them. Please also print them out. “Watering the Food Desert” and “Not Too Rich or Too out. “Watering the Food Desert” and “Not Too Rich or Too Thin” posted on my website.Thin” posted on my website.

Period 2: Read the following articles and come prepared to Period 2: Read the following articles and come prepared to discuss them. Please also print them out." Disparities in discuss them. Please also print them out." Disparities in Obesity Prevalence Due to Variation in the Retail Food Obesity Prevalence Due to Variation in the Retail Food Environment” and “Self Regulation and the Response to Environment” and “Self Regulation and the Response to Concerns About Food and Beverage Marketing to Children Concerns About Food and Beverage Marketing to Children in the United States” posted on my website.in the United States” posted on my website.

Article Tasks Step 1Article Tasks Step 1

Please read and code your assigned article. Please read and code your assigned article. Put an * by any material you think is a main Put an * by any material you think is a main

idea.idea. Put an ! by any material you think is Put an ! by any material you think is

surprising or interesting.surprising or interesting. Put a ? by any material you do not Put a ? by any material you do not

understand/have questions about.understand/have questions about.

Article Tasks Step 2Article Tasks Step 2

Get in groups of 4 people with the same Get in groups of 4 people with the same article and answer the questions about your article and answer the questions about your article.article.

Article Tasks Step 3Article Tasks Step 3

Find a partner who did not read the same Find a partner who did not read the same article as you and do the following:article as you and do the following:– Summarize the article for your partner.Summarize the article for your partner.– Identify and explain at least one item from each Identify and explain at least one item from each

coding category (*,!, ?)coding category (*,!, ?)– Explain how your article relates to the Couch Explain how your article relates to the Couch

Potato lesson (Does it contradict or support the Potato lesson (Does it contradict or support the lesson? How and why?)lesson? How and why?)

Key Idea #1: ScarcityKey Idea #1: Scarcity

Chief economic problem—faced in all Chief economic problem—faced in all societiessocieties

Condition of having to choose among Condition of having to choose among alternativesalternatives

Idea of limited resources and unlimited Idea of limited resources and unlimited wants and needswants and needs

Scarce good versus free goodScarce good versus free good

Key Idea #2: ChoiceKey Idea #2: Choice

Scarcity leads us to choose between Scarcity leads us to choose between alternativesalternatives

Choices are on an individual (micro) and Choices are on an individual (micro) and societal (macro) levelsocietal (macro) level

Three economic questionsThree economic questions– What should be produced?What should be produced?– How should goods and services be produced?How should goods and services be produced?– For whom should goods and services be For whom should goods and services be

produced?produced?

Economic Reasoning Economic Reasoning Principle #1: Principle #1: People choose, and People choose, and individual choices are the individual choices are the source of social outcomes.source of social outcomes.

Scarcity necessitates choices: not all Scarcity necessitates choices: not all of our desires can be satisfied. People of our desires can be satisfied. People make these choices based on their make these choices based on their perceptions of the expected costs and perceptions of the expected costs and benefits of the alternatives.benefits of the alternatives.

Review:

Key Idea #3: Opportunity CostKey Idea #3: Opportunity Cost

Definition: the value of the best alternative Definition: the value of the best alternative forgone when making any choiceforgone when making any choice

Most important concept in economicsMost important concept in economics TINSTAAFLTINSTAAFL

Choices impose costs; Choices impose costs; people receive benefits and people receive benefits and incur costs when they make incur costs when they make decisions.decisions.

The cost of a choice is the value The cost of a choice is the value of the of the next-best alternativenext-best alternative foregone, measurable in time or foregone, measurable in time or money or some alternative money or some alternative activity given up.activity given up.

Opportunity Cost:

How Do You Know WhenHow Do You Know When

Scarcity Forces You to Scarcity Forces You to

CHOOSECHOOSE

Something Is Scarce?

SCARCITY CHOICE

Opportunity Cost: Opportunity Cost: the foregone alternativethe foregone alternative

Think: “next-best”

Scarcity IS:Scarcity IS: Even in the face of Even in the face of

abundance . . .abundance . . .

What’s scarce when you’reWhat’s scarce when you’re in the Mall of America?in the Mall of America? at the all-you-can-eat buffet?at the all-you-can-eat buffet?

Opportunity Cost = Opportunity Cost = the Next-Best the Next-Best

AlternativeAlternative

Identifying Opportunity Cost:Identifying Opportunity Cost:– What are the What are the consideredconsidered alternatives? alternatives?– Prioritize the alternatives – What is the Prioritize the alternatives – What is the

best and what is the “next-best”?best and what is the “next-best”? What What wouldwould you do – not what you do – not what couldcould you do? you do? What does the decision-maker perceive to be What does the decision-maker perceive to be

the benefits of each alternative?the benefits of each alternative?

People’s Choices are always People’s Choices are always RATIONALRATIONAL

Rational choice = choosing the Rational choice = choosing the alternative that has the greatest excess alternative that has the greatest excess of benefits over costs.of benefits over costs.

If ALL choices are rational, then the If ALL choices are rational, then the challenge is to understand the decision-challenge is to understand the decision-maker’s perception of costs and benefits.maker’s perception of costs and benefits.

Opportunity Cost Opportunity Cost AnalysisAnalysis

What was the 1st decision you made this morning?

Opportunity Cost Opportunity Cost AnalysisAnalysis

What was the 1st decision you made this morning?

Opportunity Cost Opportunity Cost AnalysisAnalysis

Alternatives:Alternatives: Get Up NowGet Up Now Don’t Get Up Don’t Get Up NowNow

Perceived Perceived BenefitsBenefits

ChoiceChoice

Opp. CostOpp. Cost

Benefits Benefits RefusedRefused

Decision Maker: YOU

Opportunity Cost Opportunity Cost AnalysisAnalysis

Alternatives:Alternatives: Get Up NowGet Up Now Don’t Get Up Don’t Get Up NowNow

Perceived Perceived BenefitsBenefits

Shower Shower bkfst bkfst

don’t rushdon’t rush

On time On time coffeecoffee

ChoiceChoice

Opp. CostOpp. Cost

Benefits Benefits RefusedRefused

Decision Maker: YOU

More sleep

Opportunity Cost Opportunity Cost AnalysisAnalysis

Alternatives:Alternatives: Get Up NowGet Up Now Don’t Get Up Don’t Get Up NowNow

Perceived Perceived BenefitsBenefits

Shower Shower bkfst bkfst

don’t rushdon’t rush

On time On time coffeecoffee

ChoiceChoice XXOpp. CostOpp. Cost

Benefits Benefits RefusedRefused

Decision Maker: YOU

More sleep

X

Opportunity Cost Opportunity Cost AnalysisAnalysis

Alternatives:Alternatives: Get Up Get Up NowNow

Don’t Get Up Don’t Get Up NowNow

Perceived Perceived BenefitsBenefits

Shower Shower bkfstbkfst

Coffee Coffee don’t rushdon’t rush

On timeOn time

ChoiceChoice XXOpp. CostOpp. Cost XX

Benefits Benefits RefusedRefused

More sleepMore sleep

Decision Maker: YOU

Use the concept of opportunity Use the concept of opportunity cost to discuss the following cost to discuss the following

questions:questions:

Who might choose to get bumped Who might choose to get bumped from a flight?from a flight?

Should Tiger Woods mow his own Should Tiger Woods mow his own lawn?lawn?

What is the cost of attending What is the cost of attending college?college?– for LeBron James? for LeBron James? – for you?for you?

People respond to People respond to incentives in predictable incentives in predictable

ways.ways. Choices are influenced by incentives, the Choices are influenced by incentives, the

rewards that encourage and the rewards that encourage and the punishments that discourage actions. punishments that discourage actions. When incentives change, behavior When incentives change, behavior changes in changes in predictablepredictable ways. ways.

Incentives may be positive or negative.Incentives may be positive or negative. Incentives may be monetary or non-Incentives may be monetary or non-

monetary.monetary.

Why study economics?Why study economics?

Affects daily livesAffects daily lives Helps us to make informed decisionsHelps us to make informed decisions Helps us become more effective citizensHelps us become more effective citizens

The Economic Way of Thinking: The Economic Way of Thinking: What differentiates economics from What differentiates economics from

other social sciences?other social sciences? Economists emphasize the role of Economists emphasize the role of

opportunity costs in analyzing choice opportunity costs in analyzing choice – Opportunity cost versus opportunity benefit Opportunity cost versus opportunity benefit

(what is gained by making a particular choice)(what is gained by making a particular choice)– Expected benefits of alternatives will affect Expected benefits of alternatives will affect

choiceschoices– As set of alternatives change, choices changeAs set of alternatives change, choices change

The Economic Way of Thinking: The Economic Way of Thinking: What differentiates economics from What differentiates economics from

other social sciences?other social sciences? Motivation for choices is to maximize value Motivation for choices is to maximize value

of some objective/and objectives defined by of some objective/and objectives defined by self interestself interest– Business owners motivation is to maximize Business owners motivation is to maximize

profitprofit– Consumers make choices to maximize Consumers make choices to maximize

satisfaction (utility)satisfaction (utility)– Self interest doesn’t necessarily mean that Self interest doesn’t necessarily mean that

people are greedy/selfishpeople are greedy/selfish

The Economic Way of Thinking: The Economic Way of Thinking: What differentiates economics from What differentiates economics from

other social sciences?other social sciences? Motivation for choices is to maximize value of Motivation for choices is to maximize value of

some objective/and objectives defined by self some objective/and objectives defined by self interestinterest– Economists study all sorts of choices: how people Economists study all sorts of choices: how people

choose life partners, voting, drug use etc.choose life partners, voting, drug use etc.– Decision making matrixDecision making matrix

Define problemDefine problem List the alternativesList the alternatives List the criteria used to evaluate your alternativesList the criteria used to evaluate your alternatives Evaluate the alternativesEvaluate the alternatives Choose the best alternativeChoose the best alternative

The Economic Way of Thinking: The Economic Way of Thinking: What differentiates economics from What differentiates economics from

other social sciences?other social sciences? Individuals maximize choices by using Individuals maximize choices by using

marginal decision makingmarginal decision making– Margin—current level of activityMargin—current level of activity– Marginal decision making– deciding to do a little Marginal decision making– deciding to do a little

more or a little less of somethingmore or a little less of something

Microeconomics/MacroeconomicsMicroeconomics/Macroeconomics

MicroeconomicsMicroeconomics branch of economics that branch of economics that examines the choices and interaction of examines the choices and interaction of individuals concerning one product, firm, or one individuals concerning one product, firm, or one industry (how individual producers and industry (how individual producers and consumers respond to changes in market)consumers respond to changes in market)

MacroeconomicsMacroeconomics the branch of economics that the branch of economics that examines the behavior of the whole economy at examines the behavior of the whole economy at onceonce unit of analysis not individual but unit of analysis not individual but economy as a wholeeconomy as a whole

Micro or macro? You decideMicro or macro? You decide

Comparing unemployment rates of Germany Comparing unemployment rates of Germany and the United Statesand the United States

How the price of milk is determinedHow the price of milk is determined The impact of preservation of wilderness The impact of preservation of wilderness

areas on the logging industry and on the areas on the logging industry and on the price of lumberprice of lumber

Increases in US consumer demandIncreases in US consumer demand

Importance of Economic TheoryImportance of Economic Theory

Theory: simplified description of realityTheory: simplified description of reality– Why is theory important even if it is sometimes Why is theory important even if it is sometimes

incorrect or can’t predict outcomes 100% of the incorrect or can’t predict outcomes 100% of the time?time?

Model: simplified form of reality which shows Model: simplified form of reality which shows the relationship between different factorsthe relationship between different factors

Economic theory simplifies realityEconomic theory simplifies reality

Ceteris Paribus AssumptionCeteris Paribus Assumption

All other things unchangedAll other things unchanged Assumption that only one variable changes Assumption that only one variable changes

at a timeat a time Economists do this because they want to Economists do this because they want to

get a general sense of the direction of get a general sense of the direction of relationships relationships

Normative versus Positive Normative versus Positive StatementsStatements

Normative- a statement that makes a value Normative- a statement that makes a value judgmentjudgment

Positive-a statement of fact or a hypothesisPositive-a statement of fact or a hypothesis

Normative or Positive? You decide!Normative or Positive? You decide!

Ms. Hartsfield is shorter than most students Ms. Hartsfield is shorter than most students at SMCHS.at SMCHS.

Ms. Hartsfield has two of the cutest babies Ms. Hartsfield has two of the cutest babies ever!ever!

Ms. Hartsfield has two children.Ms. Hartsfield has two children. Ebenezer is a cloth snowman.Ebenezer is a cloth snowman.

Chapter 1 Appendix 1Chapter 1 Appendix 1

What is a graph? What does it illustrate?What is a graph? What does it illustrate? Origin of graphOrigin of graph SlopeSlope Independent variable-variable that induces Independent variable-variable that induces

the change (usually x [horizontal] axis)the change (usually x [horizontal] axis) Dependent variable-variable that responds Dependent variable-variable that responds

to the change (usually y [vertical] axis)to the change (usually y [vertical] axis)

Chapter 1 Appendix 1Chapter 1 Appendix 1

Positive slope/direct relationshipPositive slope/direct relationship

Negative slope/indirect relationshipNegative slope/indirect relationship

Movement along versus movement Movement along versus movement of the curveof the curve

Along: change from one point on the curve Along: change from one point on the curve to another that occurs when the dependent to another that occurs when the dependent variable changes in response to the variable changes in response to the independent variableindependent variable– Change in quantity supplied or demandedChange in quantity supplied or demanded

Of: new values of variable at each value of Of: new values of variable at each value of the other variablethe other variable– Change in supply or demandChange in supply or demand