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Scarcity, Choice, and Economic Reasoning What is Economics? What is Economics? Economics is not all about money, math, and numbers!!! Money is a tool that allows people to trade easier. $ is not a resource. You can’t produce anything with it. What is Economics? Economics is the study of choice!!! Economics is the study of how humans choose to use scarce resources to achieve personal and social goals. Goals – what do we want? This is a good time to talk to you about a four-letter word: Tell me what you Needs Options Applications Needs: Something for which there is no alternative. Wants: Something that people make a choice to obtain depending upon the cost or sacrifice. Needs vs. Wants The concept “Needs” is not helpful when trying to explain or anticipate human behavior. “Needs” suggest individuals have no choice with regard to their behavior. “Wants” suggest that individuals choose among alternatives. Trade-Offs: alternative choices when spending money, time, or resources Needs only exist in the context of a Want Assumption All decisions are rational People are not stupid, pathetic, or sociopaths Yet, we often think they are when they do something we don’t like Is this person’s decision rational? http://www.humoroftheday.com/gallery/images/Pierced1.jpg Is this person being rational? Are these people being rational? You don’t know until you know what rational means! What is the definition of rational? Rational-- One’s behavior is consistent with what one wants. Is this person Is this person Are these people rational? rational? rational? We are ALL rational human beings!! Our behavior is always consistent with what we want. So, what do we want? Is it rational to be ignorant? Buying a Car VS Voting Common Sense Economics What Everyone Should Know About Wealth & Prosperity by James Gwartney, Richard Stroup, and Dwight Lee 12 Key Elements of Economics Twelve Key Elements of Economics Provide a bridge between common sense and basic principles of economics. Help you begin to “think like an economist.” Provide important insights with regard to how the world really works. 1. Incentives matter. 12 Key Elements of Economics What Are Incentives? Incentives are the anticipated rewards and penalties associated with choices. Changes in incentives alter the way people behave. Incentives influence behavior at all levels- personal, familial, business, government, and national. Inference Human choice is influenced in a predictable way by changes in incentives. Incentives Matter! Would the following cause you to change your behavior: Class attendance has no effect on your grade All students who play tuba get a full ride scholarship to college All students get the same grade no matter what their test scores All test questions come from the textbook and not the lecture. All students must rise and greet the instructor enthusiastically or they fail the course In the Workplace Selfishness vs. Self-Interest • • While people may be altruistic, self-interest prevails Example: Mother Theresa vs. John Muir Selfishness vs. Self-Interest • Mother Theresa would have sacrificed the wilderness of India to provide more hospitals Selfishness vs. Self-Interest • John Muir would have sacrificed more hospitals to protect more wilderness Selfishness vs. Self-Interest • • Each person’s concerns and vision are focused on a narrow set of ends – they are self-interested Each person is willing to see sacrifices made in other goals they deem less important in order to further their own goals Volunteerism… Incentives matter to everyone, including volunteers and charitable organizations. What incentives do volunteers have? Are they only monetary? Describe some incentives offered to encourage people to volunteer, donate blood and assist Habitat for Humanity in the building of houses.