The Economic Way of Thinking

Document Sample
The Economic Way of Thinking Powered By Docstoc
					 The Economic
Way of Thinking
Basic Foundations of the Economic
        Way of Thinking:
1. Everything Has a Cost
2. People Choose for Good Reasons
3. Incentives Matter
4. Systems Matter … and Influence Incentives
5. People Gain from Voluntary Trade
6. Economic Thinking is Marginal Thinking
7. The Value of a Good or Service is Affected by
   People’s Choices
8. Economic Actions Create Secondary Effects
    1. Everything Has a Cost
• “There is no such thing as a free lunch”
• Opportunity cost = the cost of the next
  best alternative
     2. People Choose for Good
• People always face choices
• Cost-benefit analysis
• Different people have different values 
  choices vary from person to person
• Business and government decisions are
  made by people
        3. Incentives Matter
• When incentives change, people’s
  behavior changes in predictable ways.
4. Systems Matter … and Influence
• Economic systems are governed by rules
• As rules change, incentives and behavior
• The success of market systems and the
  failure of communism are rooted in
   5. People Gain From Voluntary
• Voluntary trade is mutually beneficial
• If a trade is not beneficial to both parties,
  the trade would not take place
 6. Economic Thinking is Marginal
• Marginal choices involve the effects of
  additions and subtractions from current
• Marginal analysis is similar to cost-benefit
  analysis (weighing additional costs and
  additional benefits)
 7. The Value of a Good or Service
  is Affected by People’s Choices
• Goods and services do not have intrinsic
• Value is determined by the preferences of
  buyers and sellers (supply and demand)
    8. Economic Actions Create
         Secondary Effects
• Most economic actions cause secondary
  effects that are often unintentional
• Secondary effects can be positive or
• Must be analyzed when making a decision
 Mysteries: The
Law of Unintended
1. Three strikes law
• Several states have enacted laws
  requiring judges to impose tough
  sentences for a third felony conviction.
  The result? An increase in the murder
  rate. Explain this phenomenon.
2. Seat belt laws
• There’s no question that wearing seat
  belts helps protect drivers and
  passengers. But seat belts have led to an
  increase in pedestrian and cyclist deaths.
3. Saving horses from slaughter
• Thanks to the efforts of animal rights
  activists, horse slaughter is now banned in
  Texas and Illinois, home to the last three
  horse slaughterhouses in the United
  States. Some argue that this was bad
  news for horses. Why?
4. Reduced logging in National
• To protect the threatened northern spotted
  owl, a federal judge issued an injunction in
  1991 that greatly reduced logging in the
  national forests in the Pacific Northwest.
  Yet this policy may have resulted in more,
  not fewer, acres of forest being harvested
  worldwide. Why?
5. Steel tariffs
• In 2002, President Bush imposed a tariff
  on steel imports in order to protect the
  steel industry from foreign competition. He
  ended the tariff in 2003, partly because of
  evidence that the tariff was costing more
  American jobs than it was saving. Explain
  how that could happen.
6. Banning triple-trailer trucks
• Trucks with 3 trailers are 35% more likely
  to be involved in an accident than trucks
  with 2 trailers. Knowing this, many states
  have banned trucks with 3 trailers. The
  result . . . More accidents. What went
If we switched to triple-trailered trucks, each truck would
   have 135% as many accidents, but we'd need only 67%
   as many trucks. This means we'd have 1.35 × .67 =
   90.45% as many accidents with triple-trailered trucks as
   with double-trailered trucks.
7. Infant seats on airplanes
• Some politicians suggested requiring
  infant seats on airplanes, just as we do in
  cars. Economists intervened and
  explained that more infants would be killed
  as a result of this regulation. How can that

Shared By: