THE ECONOMIC WAY OF THINKING

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THE ECONOMIC WAY OF THINKING
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According to John Maynard Keynes

• The Theory of Economics does not furnish a body
  of settled conclusions immediately applicable to
  policy. It is a method rather than a doctrine,
  an apparatus of the mind, a technique of thinking
  which helps its possessor to draw correct
  conclusions.

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The Economic Way of Thinking

• Everything has a cost.
• People choose for good reasons.
• Incentives matter.
• People create economic systems to influence
  choices and incentives.
  
• People gain from voluntary trade.

• Economic thinking is marginal thinking.
• The price of a good or service is affected by
  peoples choices.
  
• Economic actions create secondary effects.
• The test of a theory is its ability to predict.

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A Test Of Economic Reasoning

• The best things in life are free?

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True or False????

• Anything worth doing is worth doing right.

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A Tough One.

• Life is priceless

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A Fair Trade?

• The purpose of economic activity is to improve
  the well-being of some people at the expense of
  others.

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Mystery and Intrigue?

• Economic theory is not very useful because human
  behavior is not predictable.

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The Decision Tree

• For grades 1-3
• Students limit discussion to two choices
• Introduces good (benefits) and bad (cost)
  alternatives
  
• Clearly identifies opportunity cost

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The Decision Tree model

• Your parents have given you a choice for your
  birthday party. You and your friends can either
  rent videos and games and stay home with pizza or
  you can go to a paint ball place.

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The Decision Tree
EVERYONE COMFORTABLE
UNUSUAL
EXCITING
MORE FRIENDS
DANGEROUS
TYPICAL
EXPENSIVE
PAINTBALL
HOME
TIME
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The Decision Tree
PAINTBALL
EVERYONE COMFORTABLE
UNUSUAL
EXCITING
MORE FRIENDS
DANGEROUS
TYPICAL
EXPENSIVE
PAINTBALL
HOME
TIME
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The Decision Tree
PAINTBALL
EVERYONE COMFORTABLE
UNUSUAL
EXCITING
MORE FRIENDS
DANGEROUS
TYPICAL
EXPENSIVE
PAINTBALL
HOME
TIME
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The Decision Grid
criteria
alternatives
A USEFUL TECHNIQUE
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The Problem
A typical family of four is vacationing at the
Jersey shore. They have set aside one day for fun
and adventure on the open seas. They can rent jet
skis, wind surf boards or sailboats. Anthony, the
13 year old, wants to drive something fast
through the water but Angela, the fifth grader,
has heard a lot about jet skis polluting the
water. Mom is concerned about safety and she also
wants to do something together as this is family
time. Dad is a little concerned about money as
all their other activities have cost more than he
had planned.
WHAT SHOULD THEY DO?
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The Decision Grid
criteria
togetherness
low cost
no pollution
safety
adventure
alternatives
12
2
5
3
1
1
Jet skis
Wind surf boards
2
4
2
3
5
15
5
4
4
3
5
21
sailboats
18
beach
3
1
5
5
4
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The Decision Grid
criteria
togetherness
low cost
no pollution
safety
adventure
alternatives
12
2
5
3
1
1
Jet skis
Wind surf boards
2
4
2
3
5
15
5
4
4
3
5
21
sailboats
18
beach
3
1
5
5
4
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The Handy Dandy Guide

• People choose.
• All choices involve cost.
• People respond to incentives in predictable
  ways.
  
• Economic systems influence individual choices and
  incentives.
  
• Voluntary trade creates wealth.
• The consequences of choices lie in the future.