Economic Way of Thinking (1 of 8)

Six key ideas define the economic way of thinking:

• A choice is a tradeoff.
• People make rational choices by comparing benefits and
costs.
• Benefit is what you gain from something.
• Cost is what you must give up to get something.
• Most choices are “how-much” choices made at the
margin.
• Choices respond to incentives.

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Economic Way of Thinking (2 of 8)
A Choice Is a Tradeoff
The economic way of thinking places scarcity and its
implication, choice, at center stage.
You can think about every choice as a tradeoff—an
exchange—giving up one thing to get something else.
On Saturday night, will you study or have fun?
You can’t study and have fun at the same time, so you must
make a choice.
Whatever you choose, you could have chosen something
else. Your choice is a tradeoff.

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Economic Way of Thinking (3 of 8)
Making a Rational Choice
A rational choice is one that compares costs and benefits
and achieves the greatest benefit over cost for the person
making the choice.
Only the wants of the person making a choice are relevant to
determine its rationality.
The idea of rational choice provides an answer to the first
question: What goods and services will be produced and in
what quantities?
The answer is: Those that people rationally choose to buy!

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Economic Way of Thinking (4 of 8)
How do people choose rationally?
The answers turn on benefits and costs.
Benefit: What You Gain
The benefit of something is the gain or pleasure that it
brings and is determined by preferences
Preferences are what a person likes and dislikes and the
intensity of those feelings.

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Economic Way of Thinking (5 of 8)
Cost: What You Must Give Up
The opportunity cost of something is the highest-valued
alternative that must be given up to get it.
What is your opportunity cost of going to a live concert?
Opportunity cost has two components:
1. The things you can’t afford to buy if you purchase the
concert ticket.
2. The things you can’t do with your time if you attend the
concert.

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Economic Way of Thinking (6 of 8)
How Much? Choosing at the Margin
You can allocate the next hour between studying and instant
messaging your friends.
The choice is not all or nothing, but you must decide how
many minutes to allocate to each activity.
To make this decision, you compare the benefit of a little bit
more study time with its cost—you make your choice at the
margin.

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Economic Way of Thinking (7 of 8)
To make a choice at the margin, you evaluate the
consequences of making incremental changes in the use of
your time.
The benefit from pursuing an incremental increase in an
activity is its marginal benefit.
The opportunity cost of pursuing an incremental increase in
an activity is its marginal cost.
If the marginal benefit from an incremental increase in an
activity exceeds its marginal cost, your rational choice is to
do more of that activity.

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Economic Way of Thinking (8 of 8)
Choices Respond to Incentives
A change in marginal cost or a change in marginal benefit
changes the incentives that we face and leads us to change
our choice.
The central idea of economics is that we can predict how
choices will change by looking at changes in incentives.
Incentives are also the key to reconciling self-interest and
the social interest.

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Economics: A Social Science and
Policy Tool (1 of 4)
Economist as Social Scientist
Economists distinguish between two types of statement:
• Positive statements

• Normative statements

A positive statement can be tested by checking it against

facts.
A normative statement expresses an opinion and cannot be
tested.

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Economics: A Social Science and
Policy Tool (2 of 4)
Unscrambling Cause and Effect
The task of economic science is to discover positive
statements that are consistent with what we observe in the
world and that enable us to understand how the economic
world works.
Economists create and test economic models.
An economic model is a description of some aspect of the
economic world that includes only those features that are
needed for the purpose at hand.

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Economics: A Social Science and
Policy Tool (3 of 4)
• A model is tested by comparing its predictions with the
facts.
• But testing an economic model is difficult, so economists
also use:
– Natural experiments
– Statistical investigations
– Economic experiments

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Economics: A Social Science and
Policy Tool (4 of 4)
Economist as Policy Adviser
Economics is a toolkit for advising governments and
businesses and for making personal decisions.
All the policy questions on which economists provide advice
involve a blend of the positive and the normative.
Economics can’t help with the normative part—the goal.
But for a given goal, economics provides a method of
evaluating alternative solutions—comparing marginal
benefits and marginal costs.

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Economists in the Economy (1 of 8)
What are the jobs available to an economics major?
Is the number of economics jobs expected to grow or shrink?
How much do economics graduates earn?
What are the skills needed for an economics job?

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Economists in the Economy (2 of 8)
Jobs for an Economics Major
A major in economics opens the door to the pursuit of a
masters or Ph.D. and a career as an economist.
The work of economists varies enormously, but it includes:
Collecting and analyzing data on the production and use of
resources, goods, and services;
Predicting future trends; and
Studying ways of using resources more efficiently.
Economists work in private firms, government, and
international organizations.

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Economists in the Economy (3 of 8)
Economics majors also work
as market research analysts,
financial analysts, and budget
analysts.
Figure 1.3 shows the relative
number of jobs for economists
and analysts that use
economic ideas and tools.

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Economists in the Economy (4 of 8)
Will Jobs for Economists Grow?
The BL S forecasts that from 2019 to 2029 jobs for:
1. Economists with a Ph..D. will grow by 14 percent.
2. Budget analysts will grow by 3 percent.
3. Financial analysts will grow by 5 percent.
4. Market research analysts will grow by 18 percent.

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Economists in the Economy (5 of 8)
Earnings of Economics Majors
Earnings depend on the job and the level of qualifications.
Web source payscale.com reports economists earn from
$56,500 to $139,600, with a median of $105,100 a year.
An economics major with a Ph. D., who gets a job as an
economist, earns about $150,000 a year by mid-career.
Pay in “analyst” jobs averages $55,000 a year for market
research and $82,000 a year for financial analysts.

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Economists in the Economy (6 of 8)
Figure 1.4 shows starting
salaries of college graduates
and mid-career salaries.
Economics majors are not the
highest earners.
But at mid-career, they earn
$140,000 a year, more than
most other majors.

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Economists in the Economy (7 of 8)
Skills Needed for Economics Jobs
Employers look for five skills:
1. Critical-thinking skills
2. Analytical skills
3. Math skills
4. Writing skills
5. Oral communication skills

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Economists in the Economy (8 of 8)
Diversity Challenge for
Economics Profession
Compare the change from
1995 to 2015 in the
percentages of women and
minorities with economics
degrees and STE M degrees.
Economics profession needs
to attract more women and
minorities at all levels.

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