THE ECONOMIC WAY OF THINKING

“AN APPARATUS OF THE MIND”

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. (John Maynard Keynes)

FUNDAMENTAL IDEA = individuals take those actions they think will yield them the largest net advantage.
Miser and spendthrift
Saint or sinner
Consumer or seller
Politician or business executive
Cautious calculator or spontaneous improviser

2nd FUNDAMENTAL IDEA = the actions people take in pursuit of their own interests create the alternatives available to others. That is, social coordination is a process of continuing mutual adjustment.
Rush hour traffic
Changes in perceived cost and benefit change other’s behavior

BIASES (ASSUMPTIONS) OF ECONOMIC THEORY
1. People choose
a. Events are the product of people’s choices
2. Only individual persons choose—individuals are the unit of explanation
3. People choose rationally, not capriciously.
a. Compare expected costs and benefits (emotional, physical, monetary, etc)
b. Learn from mistakes
4. All interactions among choices are “market processes”
a. Market= the arrangements people have for exchanging with one another.
i. A PROCESS, NOT A PLACE
ii. EXAMPLES: Stock Market, garage sales, a singles bar



DEMAND: Substitutes everywhere!
1. We need a new car
2. Our city needs more water
3. Everyone should have all the medical they need regardless of ability to pay

But, Prices, Costs and Substitutes…

WHAT ARE PRICES?
Condensed information about available opportunities
quality, cost of competing products, scarcity, demand
Relative Value
WHAT IS THE MESSAGE WHEN SOMETHING HAS A LOW PRICE?

WHAT IS COST?
Money costs and other costs
Cost = the calue of sacrificed opportunities