Principles of Economics:

If you learn and can remember the following principles after you complete this course, you will know more than the majority of Americans about economics.

1. Everything has a cost, or more precisely what economists call an opportunity cost!

Every choice, every alternative, whether it’s a personal decision about how to spend a check you receive for your birthday or a vote in the U.S. Congress on a new program, has an opportunity cost

If something appears free to you, either someone else is paying for it, or you are paying for it without knowing it. (e.g. Queuing costs).

Economists say, “There is no such thing as a free lunch!”

2. Every choice also has benefits.

3. Not all costs and benefits are obvious.

q Some costs and benefits are explicit; others are implicit.

q Costs and benefits often affect third parties.

q Some costs and benefits don’t accrue until “the long run,” i.e. sometime in the future.

Thus, for any choice it is important to ask:

q Who benefits and who is harmed (and to what extent)?

q What costs and benefits occur upfront (i.e. in the short-run), and what costs and benefits don’t occur until later (i.e. the long-run), and how large are each of those costs and benefits?

4. Value is not the same as cost.

5. Voluntary exchange is a positive sum game à Both parties gain from a voluntary transaction

1. Economists derive two types of insights about issues and problems: positive and normative insights.

q Positive insights are statements of fact, or more specifically, analyses of issues and problems in the economy.

q Normative insights are statements of opinion.

2. The principal social contributions made by economists are in their positive insights.

q Economists have no particular expertise in normative insights, i.e. matters of opinion.

3. Economists derive positive insights (i.e. they analyze issues and problems) by applying theories (or models) to derive explanations or predictions about those issues and problems.

q Why are things the way they are? For example, why has the unemployment rate in the U.S. increased over the last few years?

q What would happen to the unemployment rate if the Federal Government increased the budget deficit?