Personal Finance Lesson on What is the economic way of thinking?

Personal Finance Personal Finance Lesson onLesson on

What is the economic way of What is the economic way of thinking?thinking?

Economic VocabularyEconomic Vocabulary

Opportunity Cost – the next-best Opportunity Cost – the next-best alternative that is given up when a alternative that is given up when a choice is madechoice is made

Incentive- a reason or reward that Incentive- a reason or reward that motivates people to behave in motivates people to behave in predictable wayspredictable ways

Consequence – the result or effect of Consequence – the result or effect of a person’s behaviora person’s behavior

The economic way of thinking The economic way of thinking provides a method for analyzing provides a method for analyzing people’s behavior.people’s behavior.

Because time, space, and money Because time, space, and money are limited, and wants are unlimited, are limited, and wants are unlimited, people can’t have everything they people can’t have everything they want.want.

People must make choicesPeople must make choices Every choice has a costEvery choice has a cost People respond to incentivesPeople respond to incentives Choices have consequencesChoices have consequences

Answer these questions…Answer these questions…

Why should people use the economic Why should people use the economic way of thinking?way of thinking?

Why do people have to make choices?Why do people have to make choices? Why do economists say “there’s no Why do economists say “there’s no

such thing as a free lunch”?such thing as a free lunch”? How do incentives work?How do incentives work? What is a disincentive?What is a disincentive? What are consequences?What are consequences?

Why should people use the Why should people use the economic way of thinking?economic way of thinking?

By examining the costs and By examining the costs and benefits of decisions, people benefits of decisions, people will be more likely to make will be more likely to make good decisionsgood decisions

Why do people have to make Why do people have to make choices?choices?

Resources are limited, and Resources are limited, and wants are unlimited; people wants are unlimited; people cannot have everything they cannot have everything they want. That’s why they have want. That’s why they have to choose.to choose.

Why do economists say “there’s no Why do economists say “there’s no such thing as a free lunch”?such thing as a free lunch”?

Nothing is free, because Nothing is free, because every choices involves an every choices involves an opportunity costopportunity cost

How do incentives work?How do incentives work?

Incentives are rewards (both Incentives are rewards (both monetary and non-monetary) that monetary and non-monetary) that motivate behavior. Because motivate behavior. Because people tend to respond to people tend to respond to incentives in predictable ways, incentives in predictable ways, sometimes people’s behavior can sometimes people’s behavior can be changed by offering be changed by offering incentives.incentives.

What is a disincentive?What is a disincentive?

Just the opposite of an incentive; Just the opposite of an incentive; it is not a reward but a penalty. it is not a reward but a penalty. Many drivers slow down when Many drivers slow down when they see a police car because they see a police car because getting a $100 fine is a powerful getting a $100 fine is a powerful disincentivedisincentive

What are consequences? What are consequences?

The results of behavior are The results of behavior are consequences. Studying for a consequences. Studying for a test usually results in a good test usually results in a good grade; the good grade is a grade; the good grade is a consequenceconsequence

Your turn… Determine what is the Your turn… Determine what is the best incentive…best incentive…

#1#1

Bookbag – $11.99 (buying one)Bookbag – $11.99 (buying one)

Coupon 1 - 20% offCoupon 1 - 20% off

Coupon 2 – Save $2.00Coupon 2 – Save $2.00

The better incentive is coupon # ______The better incentive is coupon # ______

The reason is….The reason is….

#2#2

Snappy-Krunch Cereal - $2.59 per Snappy-Krunch Cereal - $2.59 per box (buy three boxes)box (buy three boxes)

Coupon 1 – Buy 2 Get 1 freeCoupon 1 – Buy 2 Get 1 free Coupon 2 – Save $1.00 per boxCoupon 2 – Save $1.00 per box The better incentive is coupon# The better incentive is coupon#

________________ The reason is….The reason is….

#3#3

Soccer shoes $69.95 a pair (buy 2 Soccer shoes $69.95 a pair (buy 2 pairs)pairs)

Coupon 1 – Buy one pair –get Coupon 1 – Buy one pair –get another at ½ priceanother at ½ price

Coupon 2 – 2 pairs $100.00Coupon 2 – 2 pairs $100.00

The better incentive is coupon# The better incentive is coupon# ________________

The reason is….The reason is….

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Scary movie festival $8.00 each night for 6 Scary movie festival $8.00 each night for 6 nights (attend all 6 nights)nights (attend all 6 nights)

Coupon 1 - 4 nights at regular price, ½ price Coupon 1 - 4 nights at regular price, ½ price the next two nightsthe next two nights

Coupon 2 – 5 nights at regular price – 6Coupon 2 – 5 nights at regular price – 6thth night freenight free

The better incentive is coupon # ______The better incentive is coupon # ______The reason is….The reason is….

#5#5

Pizza $18.99 (buy 2 pizzas)Pizza $18.99 (buy 2 pizzas) Coupon 1 – Save $2.00 on each pizza Coupon 1 – Save $2.00 on each pizza

Limit 2 Limit 2 Coupon 2 – Today only 2 pizzas $35.Coupon 2 – Today only 2 pizzas $35.

The better incentive is coupon# The better incentive is coupon# ________________

The reason is….The reason is….