MB MC
Thinking Like
An Economist
MB MC
Overview 1
Chapter 1 introduces the concept of
scarcity as applied in economics (also the
No-Free-Lunch Principle),It presents the
unavoidable fact that our needs and wants
are unlimited and resources available to
satisfy them are limited,
MB MC
Overview 2
The chapter goes on to show that making
decisions based on the comparison of costs and
benefits is a useful approach to decision making in
an environment of scarcity,It addresses the
problems created by ignoring relevant costs (e.g,
opportunity costs) and including irrelevant costs
(e.g.,sunk costs),and using average rather than
marginal analysis,The difference between micro
and macro economics is presented,as well as the
use of marginal analysis and the concept of
opportunity cost.
MB MC
Chapter 1,Thinking Like an Economist Slide 4
Introduction
Question;
What is the Optimal Class Size?
To maximize learning without consideration of cost?
How would considering costs change our answer?
A personal tutorial course in economics might cost
$20,000
A class of 300 students might cost $100/student
MB MC
Chapter 1,Thinking Like an Economist Slide 5
Introduction
What is the Optimal Class Size?
What trade-offs must university
administrators and students consider when
choosing class size?
MB MC
Chapter 1,Thinking Like an Economist Slide 6
Economics,Studying
Choice In a World of Scarcity
Wants vs,Resources
Scarcity
Choices
MB MC
Chapter 1,Thinking Like an Economist Slide 7
Economics,Studying
Choice In a World of Scarcity
The Scarcity Principle
Boundless wants cannot be satisfied with
limited resources,
Therefore,having more of one thing
usually means having less of another.
Because of scarcity we must make choices.
MB MC
Chapter 1,Thinking Like an Economist Slide 8
Economics,Studying
Choice In a World of Scarcity
Economics
The study of how people make choices
under conditions of scarcity and of the
results of those choices for society.
MB MC
Chapter 1,Thinking Like an Economist Slide 9
Economics,Studying
Choice In a World of Scarcity
The Cost-Benefit Principle
An individual (or a firm or a society) should
take an action if,and only if,the extra
benefits from taking the action are at least
as great as the extra costs
MB MC
Chapter 1,Thinking Like an Economist Slide 10
Economics,Studying
Choice In a World of Scarcity
Choosing the Optimal Class Size
Revisited
Assumptions:
Two class sizes,100 and 20
Introductory economics classes have 100
students
Question
Should the class size be reduced to 20
students?
MB MC
Chapter 1,Thinking Like an Economist Slide 11
Economics,Studying
Choice In a World of Scarcity
Assume
The cost of a class with 20 students is $1,000
per student more than a class of 100 students
What do you think
Would it be a good idea to reduce the class
size?
MB MC
Chapter 1,Thinking Like an Economist Slide 12
Applying The Cost-Benefit Principle
Rational Person
Someone with well-defined goals who tries
to fulfill those goals as best he or she can
MB MC
Chapter 1,Thinking Like an Economist Slide 13
Applying The Cost-Benefit Principle
Should you walk downtown to save $10
on a $25 computer game?
The benefit of going downtown = $10
The cost of going downtown is the dollar
value of everything you give up to go
downtown
MB MC
Chapter 1,Thinking Like an Economist Slide 14
Applying The Cost-Benefit Principle
Should you walk downtown to save $10
on a $25 computer game?
Estimating the cost
How much could someone have to pay to walk
downtown?
If you would walk downtown for $9,the trip’s
cost is $9.
The benefit ($10) exceeds the cost of ($9)
of buying the game downtown
MB MC
Chapter 1,Thinking Like an Economist Slide 15
Applying The Cost-Benefit Principle
Economic Surplus
The benefit of taking any action minus its
cost
The goal of economic decision makers is to
maximize their economic surplus
MB MC
Chapter 1,Thinking Like an Economist Slide 16
Applying The Cost-Benefit Principle
Opportunity Cost
The value of the next-best alternative that
must be forgone to undertake an activity
MB MC
Chapter 1,Thinking Like an Economist Slide 17
Applying The Cost-Benefit Principle
Assume
The benefit of buying the game downtown
is $10
The cost of making the trip is $12
Questions
What is your economic surplus from buying
the game downtown?
Where should you buy the game?
MB MC
Chapter 1,Thinking Like an Economist Slide 18
Applying The Cost-Benefit Principle
The Role of Economic Models
Economic models are abstract constructs
(simplified descriptions) that allow us to
analyze situations in a logical way
Other examples of abstract models
A computer model of climate change
A road map
MB MC
Chapter 1,Thinking Like an Economist Slide 19
Four Important Decision Pitfalls
Example
Should you walk downtown to save $10 on
a $2,020 laptop computer?
Pitfall 1,Measuring costs and benefits
as proportions rather than absolute
dollar amounts
question
Which is more valuable,saving $100 on a
$2,000 plane ticket to Tokyo or saving $90
on a $200 plane ticket to Chicago?
MB MC
Chapter 1,Thinking Like an Economist Slide 20
Four Important Decision Pitfalls
Pitfall 2,Ignoring Opportunity Costs
Example:
Should you use your frequent-flyer coupon to
fly to Fort Lauderdale for spring break?
Assume:
Round trip airfare is $500 and is equal to your
frequent flyer coupon
Other costs equal $1,000
MB MC
Chapter 1,Thinking Like an Economist Slide 21
Four Important Decision Pitfalls
Pitfall 2,Ignoring Opportunity Costs
Assume (continued)
The most you are willing to pay for the Fort
Lauderdale trip is $1,350
Alternate use for the frequent flyer coupon is to
attend a wedding in Boston and the Boston
airfare is $400
Without the coupon
Benefits = $1,350
Cost = $1,400 ($400 opportunity cost + $1,000
other costs)
MB MC
Chapter 1,Thinking Like an Economist Slide 22
Four Important Decision Pitfalls
Pitfall 2,Ignoring Opportunity Costs
The key to using the concept of opportunity
cost correctly lies in recognizing precisely
what taking a given action prevents us
from doing.
MB MC
homework
P19,Review questions,1~4
Problems,1; 5
Review p1~9
Preview p10~18
MB MC
LECTURE 2 (2005.9.15)
Class today:
1,Recap
2,Answers to homework
3,P10~18
MB MC
RECAP
Scarcity
Economics
The scarcity principle
The cost-benefit principle
Economic surplus
Opportunity cost
MB MC
Chapter 1,Thinking Like an Economist Slide 26
Four Important Decision Pitfalls
Pitfall 3,Failure To Ignore Sunk Costs
Sunk cost
A cost that is beyond recovery at the
moment a decision must be made
The only costs that should influence a
decision about whether to take an action
are those that we can avoid by not taking
the action
MB MC
Chapter 1,Thinking Like an Economist Slide 27
Four Important Decision Pitfalls
Pitfall 3,Failure To Ignore Sunk Costs
Example 1.4
How much should you eat at an all-you-can-eat
restaurant?
Assume
Price = $5
20 randomly selected guests will get lunch on the house
Question
If all diners are rational,will there be any difference in the
average quantity of food consumed by these two groups?
MB MC
Chapter 1,Thinking Like an Economist Slide 28
Four Important Decision Pitfalls
Pitfall 4,Failure To Understand the
Average-Marginal Distinction
Average Cost
The total cost of undertaking n units of an
activity divided by n
Average Benefit
The total benefit of undertaking n units of an
activity divided by n
MB MC
Chapter 1,Thinking Like an Economist Slide 29
Four Important Decision Pitfalls
Pitfall 4,Failure To Understand the
Average-Marginal Distinction
Marginal Benefit
The increase in total benefit that results from
carrying out one additional unit of an activity
Marginal Cost
The increase in total cost that results from
carrying out one additional unit of an activity
MB MC
Chapter 1,Thinking Like an Economist Slide 30
Four Important Decision Pitfalls
Pitfall 4,Failure To Understand the
Average-Marginal Distinction
Example 1.5
Should NASA expand the space shuttle
program from four launches per year to five?
Benefits
o $24 billion (average of $6 billion/launch)
Costs
o $20 billion (average of $5 billion/launch)
MB MC
Chapter 1,Thinking Like an Economist Slide 31
Four Important Decision Pitfalls
0 0 0 0
1 3 3 3
2 7 3.5 4
3 12 4 5
4 20 5 8
5 32 6.4 12
Assume,Average Benefit = Marginal Benefit
= $6 billion
Total Cost Average Cost
# of Launches ($ billion) ($ billion/launch) Marginal Cost
What is the optimal number of launches?
MB MC
Four Important Decision Pitfalls
The Not-All-Cost-and-Benefits-
Matter-Equally Principle:
Some costs and benefits(for
example,opportunity costs and marginal
costs and benefits) matter in making
decisions,whereas others(for
example,sunk costs and average costs
and benefits) don’t.
MB MC
Chapter 1,Thinking Like an Economist Slide 33
Economics,Micro and Macro
Microeconomics
The study of individual choice under
scarcity and its implications for the
behavior of prices and quantities in
individual markets
Adam smith-----is usually considered the
founder of the field of Microeconomics
The Wealth of Nations,1776
MB MC
Chapter 1,Thinking Like an Economist Slide 34
Economics,Micro and Macro
Macroeconomics
The study of the performance of national
economies,and of the policies that
governments use to try to improve that
performance
John Maynard Keynes
General Theory of Employment,interest
and money,1935
MB MC
complements
经济学的基本问题 ——需求的无限性与资源的稀缺性
经济体系的五大功能
1.生产什么 (WHAT)
解 2.如何生产 (HOW) 微观经济学的任务
3.为谁生产 (WHO)
决 4.经济（国民收入）增长
5.资源充分利用 宏观经济学的任务
MB MC
微观经济学内容框架（ 补充）
产 品 市 场要 素 市 场企业家庭市场结构理论供求理论厂商理论消费者行为理论要素理论与一般均衡理论生产理论成本理论
MB MC
,经济学家的思想无论是否正确，其力量之大都超过对它们的通常理解。事实上，世界总是受这些思想统治的。
许多自以为不受任何理论影响的实践家却往往是某个已故经济学家的奴隶。” — Keynes
MB MC
Complements
Capitalism
An economic system in which most
property (land and capital) is privately
owned,in such an economy,private
markets are the primary vehicles used
to allocate resources and generate
incomes.
MB MC
Complements
Socialism
A political theory that holds that all(or
almost all)the means of production,
other than labor,should be owned by
the community,This allows the
return on capital to be shared more
equally than under capitalism.
MB MC
Complements
Market economy
Command economy(centrally
planned economy)
Mixed economy
MB MC
Chapter 1,Thinking Like an Economist Slide 41
The Approach of This Text
Focus on core economic concepts
Learning economics through
applications
MB MC
Chapter 1,Thinking Like an Economist Slide 42
Economic Naturalism
Using insights from economics to help
make sense of observations from
everyday life
MB MC
Chapter 1,Thinking Like an Economist Slide 43
Economic Naturalism
Question
Why do so many computer hardware
manufacturers include more than $1,000
worth of,free” software with a computer
selling for only slightly more than that?
Why don’t automobile manufacturers make
cars without heaters?
Why do the keypad buttons on drive-up
automatic teller machines have Braille dots?
MB MC
Homework
1,P19 PROBLEMS,2; 7;
2,Review chapter 1
3,Preview p23~31
MB MC
End of
Chapter
MB MC
Lecture 3(2005.9.20)
Class today:
1.Recap:(p19) core principles and
key terms
2.answers to review questions and
problems
3.supplementary exercises
4.appendix,p23~31
Thinking Like
An Economist
MB MC
Overview 1
Chapter 1 introduces the concept of
scarcity as applied in economics (also the
No-Free-Lunch Principle),It presents the
unavoidable fact that our needs and wants
are unlimited and resources available to
satisfy them are limited,
MB MC
Overview 2
The chapter goes on to show that making
decisions based on the comparison of costs and
benefits is a useful approach to decision making in
an environment of scarcity,It addresses the
problems created by ignoring relevant costs (e.g,
opportunity costs) and including irrelevant costs
(e.g.,sunk costs),and using average rather than
marginal analysis,The difference between micro
and macro economics is presented,as well as the
use of marginal analysis and the concept of
opportunity cost.
MB MC
Chapter 1,Thinking Like an Economist Slide 4
Introduction
Question;
What is the Optimal Class Size?
To maximize learning without consideration of cost?
How would considering costs change our answer?
A personal tutorial course in economics might cost
$20,000
A class of 300 students might cost $100/student
MB MC
Chapter 1,Thinking Like an Economist Slide 5
Introduction
What is the Optimal Class Size?
What trade-offs must university
administrators and students consider when
choosing class size?
MB MC
Chapter 1,Thinking Like an Economist Slide 6
Economics,Studying
Choice In a World of Scarcity
Wants vs,Resources
Scarcity
Choices
MB MC
Chapter 1,Thinking Like an Economist Slide 7
Economics,Studying
Choice In a World of Scarcity
The Scarcity Principle
Boundless wants cannot be satisfied with
limited resources,
Therefore,having more of one thing
usually means having less of another.
Because of scarcity we must make choices.
MB MC
Chapter 1,Thinking Like an Economist Slide 8
Economics,Studying
Choice In a World of Scarcity
Economics
The study of how people make choices
under conditions of scarcity and of the
results of those choices for society.
MB MC
Chapter 1,Thinking Like an Economist Slide 9
Economics,Studying
Choice In a World of Scarcity
The Cost-Benefit Principle
An individual (or a firm or a society) should
take an action if,and only if,the extra
benefits from taking the action are at least
as great as the extra costs
MB MC
Chapter 1,Thinking Like an Economist Slide 10
Economics,Studying
Choice In a World of Scarcity
Choosing the Optimal Class Size
Revisited
Assumptions:
Two class sizes,100 and 20
Introductory economics classes have 100
students
Question
Should the class size be reduced to 20
students?
MB MC
Chapter 1,Thinking Like an Economist Slide 11
Economics,Studying
Choice In a World of Scarcity
Assume
The cost of a class with 20 students is $1,000
per student more than a class of 100 students
What do you think
Would it be a good idea to reduce the class
size?
MB MC
Chapter 1,Thinking Like an Economist Slide 12
Applying The Cost-Benefit Principle
Rational Person
Someone with well-defined goals who tries
to fulfill those goals as best he or she can
MB MC
Chapter 1,Thinking Like an Economist Slide 13
Applying The Cost-Benefit Principle
Should you walk downtown to save $10
on a $25 computer game?
The benefit of going downtown = $10
The cost of going downtown is the dollar
value of everything you give up to go
downtown
MB MC
Chapter 1,Thinking Like an Economist Slide 14
Applying The Cost-Benefit Principle
Should you walk downtown to save $10
on a $25 computer game?
Estimating the cost
How much could someone have to pay to walk
downtown?
If you would walk downtown for $9,the trip’s
cost is $9.
The benefit ($10) exceeds the cost of ($9)
of buying the game downtown
MB MC
Chapter 1,Thinking Like an Economist Slide 15
Applying The Cost-Benefit Principle
Economic Surplus
The benefit of taking any action minus its
cost
The goal of economic decision makers is to
maximize their economic surplus
MB MC
Chapter 1,Thinking Like an Economist Slide 16
Applying The Cost-Benefit Principle
Opportunity Cost
The value of the next-best alternative that
must be forgone to undertake an activity
MB MC
Chapter 1,Thinking Like an Economist Slide 17
Applying The Cost-Benefit Principle
Assume
The benefit of buying the game downtown
is $10
The cost of making the trip is $12
Questions
What is your economic surplus from buying
the game downtown?
Where should you buy the game?
MB MC
Chapter 1,Thinking Like an Economist Slide 18
Applying The Cost-Benefit Principle
The Role of Economic Models
Economic models are abstract constructs
(simplified descriptions) that allow us to
analyze situations in a logical way
Other examples of abstract models
A computer model of climate change
A road map
MB MC
Chapter 1,Thinking Like an Economist Slide 19
Four Important Decision Pitfalls
Example
Should you walk downtown to save $10 on
a $2,020 laptop computer?
Pitfall 1,Measuring costs and benefits
as proportions rather than absolute
dollar amounts
question
Which is more valuable,saving $100 on a
$2,000 plane ticket to Tokyo or saving $90
on a $200 plane ticket to Chicago?
MB MC
Chapter 1,Thinking Like an Economist Slide 20
Four Important Decision Pitfalls
Pitfall 2,Ignoring Opportunity Costs
Example:
Should you use your frequent-flyer coupon to
fly to Fort Lauderdale for spring break?
Assume:
Round trip airfare is $500 and is equal to your
frequent flyer coupon
Other costs equal $1,000
MB MC
Chapter 1,Thinking Like an Economist Slide 21
Four Important Decision Pitfalls
Pitfall 2,Ignoring Opportunity Costs
Assume (continued)
The most you are willing to pay for the Fort
Lauderdale trip is $1,350
Alternate use for the frequent flyer coupon is to
attend a wedding in Boston and the Boston
airfare is $400
Without the coupon
Benefits = $1,350
Cost = $1,400 ($400 opportunity cost + $1,000
other costs)
MB MC
Chapter 1,Thinking Like an Economist Slide 22
Four Important Decision Pitfalls
Pitfall 2,Ignoring Opportunity Costs
The key to using the concept of opportunity
cost correctly lies in recognizing precisely
what taking a given action prevents us
from doing.
MB MC
homework
P19,Review questions,1~4
Problems,1; 5
Review p1~9
Preview p10~18
MB MC
LECTURE 2 (2005.9.15)
Class today:
1,Recap
2,Answers to homework
3,P10~18
MB MC
RECAP
Scarcity
Economics
The scarcity principle
The cost-benefit principle
Economic surplus
Opportunity cost
MB MC
Chapter 1,Thinking Like an Economist Slide 26
Four Important Decision Pitfalls
Pitfall 3,Failure To Ignore Sunk Costs
Sunk cost
A cost that is beyond recovery at the
moment a decision must be made
The only costs that should influence a
decision about whether to take an action
are those that we can avoid by not taking
the action
MB MC
Chapter 1,Thinking Like an Economist Slide 27
Four Important Decision Pitfalls
Pitfall 3,Failure To Ignore Sunk Costs
Example 1.4
How much should you eat at an all-you-can-eat
restaurant?
Assume
Price = $5
20 randomly selected guests will get lunch on the house
Question
If all diners are rational,will there be any difference in the
average quantity of food consumed by these two groups?
MB MC
Chapter 1,Thinking Like an Economist Slide 28
Four Important Decision Pitfalls
Pitfall 4,Failure To Understand the
Average-Marginal Distinction
Average Cost
The total cost of undertaking n units of an
activity divided by n
Average Benefit
The total benefit of undertaking n units of an
activity divided by n
MB MC
Chapter 1,Thinking Like an Economist Slide 29
Four Important Decision Pitfalls
Pitfall 4,Failure To Understand the
Average-Marginal Distinction
Marginal Benefit
The increase in total benefit that results from
carrying out one additional unit of an activity
Marginal Cost
The increase in total cost that results from
carrying out one additional unit of an activity
MB MC
Chapter 1,Thinking Like an Economist Slide 30
Four Important Decision Pitfalls
Pitfall 4,Failure To Understand the
Average-Marginal Distinction
Example 1.5
Should NASA expand the space shuttle
program from four launches per year to five?
Benefits
o $24 billion (average of $6 billion/launch)
Costs
o $20 billion (average of $5 billion/launch)
MB MC
Chapter 1,Thinking Like an Economist Slide 31
Four Important Decision Pitfalls
0 0 0 0
1 3 3 3
2 7 3.5 4
3 12 4 5
4 20 5 8
5 32 6.4 12
Assume,Average Benefit = Marginal Benefit
= $6 billion
Total Cost Average Cost
# of Launches ($ billion) ($ billion/launch) Marginal Cost
What is the optimal number of launches?
MB MC
Four Important Decision Pitfalls
The Not-All-Cost-and-Benefits-
Matter-Equally Principle:
Some costs and benefits(for
example,opportunity costs and marginal
costs and benefits) matter in making
decisions,whereas others(for
example,sunk costs and average costs
and benefits) don’t.
MB MC
Chapter 1,Thinking Like an Economist Slide 33
Economics,Micro and Macro
Microeconomics
The study of individual choice under
scarcity and its implications for the
behavior of prices and quantities in
individual markets
Adam smith-----is usually considered the
founder of the field of Microeconomics
The Wealth of Nations,1776
MB MC
Chapter 1,Thinking Like an Economist Slide 34
Economics,Micro and Macro
Macroeconomics
The study of the performance of national
economies,and of the policies that
governments use to try to improve that
performance
John Maynard Keynes
General Theory of Employment,interest
and money,1935
MB MC
complements
经济学的基本问题 ——需求的无限性与资源的稀缺性
经济体系的五大功能
1.生产什么 (WHAT)
解 2.如何生产 (HOW) 微观经济学的任务
3.为谁生产 (WHO)
决 4.经济（国民收入）增长
5.资源充分利用 宏观经济学的任务
MB MC
微观经济学内容框架（ 补充）
产 品 市 场要 素 市 场企业家庭市场结构理论供求理论厂商理论消费者行为理论要素理论与一般均衡理论生产理论成本理论
MB MC
,经济学家的思想无论是否正确，其力量之大都超过对它们的通常理解。事实上，世界总是受这些思想统治的。
许多自以为不受任何理论影响的实践家却往往是某个已故经济学家的奴隶。” — Keynes
MB MC
Complements
Capitalism
An economic system in which most
property (land and capital) is privately
owned,in such an economy,private
markets are the primary vehicles used
to allocate resources and generate
incomes.
MB MC
Complements
Socialism
A political theory that holds that all(or
almost all)the means of production,
other than labor,should be owned by
the community,This allows the
return on capital to be shared more
equally than under capitalism.
MB MC
Complements
Market economy
Command economy(centrally
planned economy)
Mixed economy
MB MC
Chapter 1,Thinking Like an Economist Slide 41
The Approach of This Text
Focus on core economic concepts
Learning economics through
applications
MB MC
Chapter 1,Thinking Like an Economist Slide 42
Economic Naturalism
Using insights from economics to help
make sense of observations from
everyday life
MB MC
Chapter 1,Thinking Like an Economist Slide 43
Economic Naturalism
Question
Why do so many computer hardware
manufacturers include more than $1,000
worth of,free” software with a computer
selling for only slightly more than that?
Why don’t automobile manufacturers make
cars without heaters?
Why do the keypad buttons on drive-up
automatic teller machines have Braille dots?
MB MC
Homework
1,P19 PROBLEMS,2; 7;
2,Review chapter 1
3,Preview p23~31
MB MC
End of
Chapter
MB MC
Lecture 3(2005.9.20)
Class today:
1.Recap:(p19) core principles and
key terms
2.answers to review questions and
problems
3.supplementary exercises
4.appendix,p23~31
