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Suggested homework… send us your thoughts and descriptions on the following…

This resource is directly from the Foundation for Teaching Economics. I believe that it is excellent food for thought, and a good way to initiate explicatory conversation. Note that the spelling is American English.

Enjoy!

The Foundation for Teaching Economics’ Economic Reasoning Propositions are a guide to the economic way of thinking. The “E.R.P.s” provide insight on how economists view the world and they give students a framework through which they can view the world through an economic lens. The E.R.P.s are a “tool kit” for solving economic mysteries, understanding social phenomenon, or making sense of current events. FTE lessons and activities are searchable by E.R.P. Hot Topics and lessons also utilize the E.R.P.s as a way to help students apply the economic way of thinking to the world around them.

5 ECONOMIC REASONING PROPOSITIONS (E.R.P.S)

ECONOMIC REASONING PROPOSITION #1:
People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

ECONOMIC REASONING PROPOSITION #2:
Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

ECONOMIC REASONING PROPOSITION #3:
People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.

ECONOMIC REASONING PROPOSITION #4:
Institutions are the “rules of the game” that influence choices. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system.

ECONOMIC REASONING PROPOSITION #5:
Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation, the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it.

Paradox of Value

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A lovely description of the famed Paradox of Value, Adam Smith. The author, Akshita Agarwal does a great job of simplifying matters and including important vocabulary.

Can you send me your own definitions or examples of:
Value
Opportunity Cost
Concept of utility
Marginal utility

How would you describe, for example, the paradox through a modern-day situation to a child?

Transcription:

00:06 Imagine you’re on a game show, and you can choose between two prizes:
00:10 a diamond
00:12 or a bottle of water.
00:14 It’s an easy choice.
00:15 The diamonds are clearly more valuable.
00:18 Now imagine being given the same choice again,
00:20 only this time, you’re not on a game show,
00:22 but dehydrated in the desert after wandering for days.
00:26 Do you choose differently?
00:28 Why? Aren’t diamonds still more valuable?
00:31 This is the paradox of value,
00:34 famously described by pioneering economist Adam Smith.
00:38 And what it tells us is that defining value is not as simple as it seems.
00:43 On the game show, you were thinking about each item’s exchange value,
00:47 what you could obtain for them at a later time,
00:50 but in an emergency, like the desert scenario,
00:52 what matters far more is their use value,
00:56 how helpful they are in your current situation.
00:59 And because we only get to choose one of the options,
01:01 we also have to consider its opportunity cost,
01:05 or what we lose by giving up the other choice.
01:08 After all, it doesn’t matter how much you could get from selling the diamond
01:11 if you never make it out of the desert.
01:14 Most modern economists deal with the paradox of value
01:17 by attempting to unify these considerations
01:20 under the concept of utility,
01:22 how well something satisfies a person’s wants or needs.
01:25 Utility can apply to anything from the basic need for food
01:28 to the pleasure of hearing a favorite song,
01:30 and will naturally vary for different people and circumstances.
01:35 A market economy provides us with an easy way to track utility.
01:38 Put simply, the utility something has to you
01:41 is reflected by how much you’d be willing to pay for it.
01:44 Now, imagine yourself back in the desert,
01:46 only this time, you get offered a new diamond or a fresh bottle of water
01:50 every five minutes.
01:52 If you’re like most people, you’ll first choose enough water to last the trip,
01:55 and then as many diamonds as you can carry.
01:58 This is because of something called marginal utility,
02:01 and it means that when you choose between diamonds and water,
02:04 you compare utility obtained from every additional bottle of water
02:07 to every additional diamond.
02:09 And you do this each time an offer is made.
02:12 The first bottle of water is worth more to you than any amount of diamonds,
02:16 but eventually, you have all the water you need.
02:19 After a while, every additional bottle becomes a burden.
02:22 That’s when you begin to choose diamonds over water.
02:25 And it’s not just necessities like water.
02:27 When it comes to most things, the more of it you acquire,
02:30 the less useful or enjoyable every additional bit becomes.
02:34 This is the law of diminishing marginal utility.
02:37 You might gladly buy two or three helpings of your favorite food,
02:40 but the fourth would make you nauseated,
02:42 and the hundredth would spoil before you could even get to it.
02:45 Or you could pay to see the same movie over and over until you got bored of it
02:49 or spent all of your money.
02:50 Either way, you’d eventually reach a point
02:52 where the marginal utility for buying another movie ticket became zero.
02:57 Utility applies not just to buying things, but to all our decisions.
03:01 And the intuitive way to maximize it and avoid diminishing returns
03:05 is to vary the way we spend our time and resources.
03:08 After our basic needs are met,
03:10 we’d theoretically decide to invest in choices
03:13 only to the point they’re useful or enjoyable.
03:15 Of course, how effectively any of us manage to maximize utility in real life
03:19 is another matter.
03:21 But it helps to remember that the ultimate source of value comes from us,
03:25 the needs we share,
03:26 the things we enjoy,
03:28 and the choices we make.