Thinking Like an Economist Lecture 1 Manove
1. Think about the goods (not the money)
Ex: Black Monday (Oct 19, 1987)
U.S. stock market lost 22.6% of its value.
$500 billion seemed to disappear.
Where did it go?
Did society become $500 billion poorer because of the stock-
Let’s look at the goods:
Did factories disappear on Black Monday?
Did the CEO’s desk vanish from under his nose?
The material wealth of society did not change.
But investors revised their beliefs about its value—
This is bad for sellers of assets (like houses).
…but it may be good for buyers of assets, who can now get
them for cheap.
Effects on the production of goods and services???
2. Everything has a cost.
The cost of something is what you give up to get it.
Economists call this the “opportunity cost.”
Ex: The cost of an A on an econ exam?
o An evening of fun with your friends…
o …because you have to study instead
Ex: The cost of having kids?
o The freedom to do what you want when you want
(among other things)
What is the difference between the cost of something and its
o Answer: there is no difference.
The opportunity cost embodies the economic concept of cost.
The cost is the opportunity that has to be sacrificed in order
to get something or do something.
Ex: Do you want to buy an Alpha Romeo?
o Then you can’t afford a vacation in Italy.
o (The vacation is the opportunity cost of the car.)
Ex: Do you want to get an A in Economics?
o Then you cannot socialize with your friends every night.
o (Socializing with friends is an opportunity cost of the A.)
3. Rational Choices involve comparing costs and benefits. Time and resources are scarce (insufficient to satisfy all