Lecture 1 | Thinking Like an Economist

Introduction to Economics

• Economics is a study of choices and decision-making. Everyone is an implicit economist, making choices daily without formal knowledge of economics.

• Core Principles of Economics: Understanding these principles is essential as they apply to both individuals and businesses.

• The course will cover four foundational economic principles, emphasizing their relevance and familiarity.

Principle 1: Cost-Benefit Principle

• Definition: The Cost-Benefit Principle states that individuals weigh costs against benefits when making choices.

• Example: Deciding whether to buy a granola bar from a vending machine.

  • Cost: Known monetary expense (e.g., $2 for the granola bar).

  • Benefit: More subjective and may require introspection (e.g., how much you value hunger satisfaction).

• Willingness to Pay: A key component in determining the benefits of a choice, which varies per person and circumstance.

  • Example of coffee: If someone's willingness to pay for a coffee is greater than its price, they will purchase it.

• Economic Surplus: Difference between willingness to pay and cost. For instance, if someone is willing to pay $3 for the granola bar but it costs $2, the surplus is $1.

Principle 2: Opportunity Cost Principle

• Definition: The Opportunity Cost Principle states that the true cost of something is what you give up to choose it (the next best alternative).

• Example: Choosing between attending university and working full time.

  • Implicit Cost: Includes tuition and forgone wages which inform the economic decision to enroll in school.

• Scarcity: A fundamental concept that drives the necessity for making choices due to limited resources.

• Opportunity Cost Calculation: Adding both explicit costs (tuition, books) and implicit costs (forgone salary) gives a clearer picture of the costs of a decision.

Principle 3: Marginal Principle

• Definition: Involves making decisions based on the additional benefit versus the additional cost from increasing the quantity of something.

• Marginal Decisions: Focus on the benefits derived from consuming one more unit of a product or making one more decision, such as finishing one more slice of pizza.

• Example: Deciding how many slices of pizza to eat. The first slice may be very satisfying, but each additional slice may provide less satisfaction (diminishing returns).

Principle 4: Interdependence Principle

• Definition: Your best choices depend not only on your own decisions but also on the choices of others, market trends, and future expectations.

• Example: Buying shoes is influenced by the preferences of others; an increase in demand can affect availability and pricing.

• Network Effect: Individual decisions contribute to larger economic patterns that can affect broader market outcomes.

Conclusion

• Understanding these core principles equips individuals and businesses to make informed economic decisions.

• Review these principles regularly to enhance decision-making skills in various aspects, including personal finance, business strategy, and daily choices.