Nine Economic Principles

Nine economic principles. One goal.

Nine economic principles create the foundation of all programs and lessons developed and taught by the California Council on Economic Education, CCEE. Just mentioning the word economics can sound complex to students, but when broken down into a simple idea, lessons are fun and actionable. CCEE programs and workshops have earned a 97% teacher-approval rating because all lessons are classroom-ready and easy to use. CCEE’s focus is to make economics understandable for teachers and students alike. When we do so:

California’s students will be prepared to participate in the global economy as responsible workers, consumers, savers and citizens.

1. People choose

Economics is about choosing from alternative ways to use scarce resources to accomplish goals. All economic analysis focuses on how people choose. Children are constantly making choices, which become more important and more complicated as they grow. It is important that they recognize that the choices they make today influence them for the rest of their lives. As Professor Dumbledore said to Harry Potter, “It is our choices, Harry, that show what we truly are, far more than our abilities.” Once students accept the fact that they choose, they can lose the “victim” mentality. Although some things do happen to them, by and large, their lives are a result of their choices.

2. Every choice has a cost

While many attribute the statement, “There is no such thing as a free lunch” to an economist, it is really not the economic way of thinking. This is because things don’t have costs, choices do. There is no denying that a choice involves selecting one alternative from at least two. The economist’s concept of cost is that something is given up when choosing something else. The alternative that was given up is the cost of the choice, called “opportunity cost.” Opportunity cost is not all of the alternatives you could have selected; it is what is lost by the choice you did make.

3. Benefit/cost analysis is useful

Every choice we make involves benefit/cost analysis either implicitly or explicitly; it is the primary tool of economic reasoning. In using scarce resources to achieve goals, it is helpful to do so in a systematic manner. Benefit/cost analysis, or decision making, includes five steps:

  1. Identify the goal and the resources available to achieve the goal. For most students, the goal will be to maximize their wealth (defined as “the subjective evaluation of their well being,” not money), by using their human capital in a particular situation.
  2. Identify alternative ways to achieve the goal and narrow the options down to two.
  3. Evaluate the advantages and disadvantages of each option.
  4. Choose one of the alternatives.
  5. Identify the best alternative not selected as the opportunity cost of the choice.

Request a Decision-Making Apron, a tool to help students visualize the decision-making process and teach Benefit/Cost Analysis.

4. Incentives matter

When developing public policy concerning the use of scarce resources, it is essential to think about the incentives provided by the policy. For example, if legislation to protect endangered species takes property rights away from landowners, then the legislation may inadvertently provide incentives to those landowners to destroy the very animals the legislation sought to protect. Some public policies provide incentives that lead to unintended consequences. Prices are incentives to produce and disincentives to consume.

5. Exchange benefits the traders

The phrase “One person’s trash is another’s treasure” is true because of the subjective value each individual places on wealth. Wealth is the subjective evaluation of one’s well being, not an amount of money. The Principle of Exchange states that two parties with equal information will voluntarily exchange only if they gain more than they give. This is not a statement that people are selfish. If one party gives a thing of great monetary value to another, the giver is gaining a feeling of satisfaction and self worth even if he is receiving something of lesser monetary value. This is, in fact, an exchange and the giver is adding to his well being by giving.

6. Markets work with competition, information, incentives, and property rights

An economy accomplishes two tasks: 1) production of goods and services desired by society and 2) facilitation of exchange between parties.

In a market economy, these two tasks are done using the least amount of resources for the greatest amount of good if the four conditions (competition, information, incentives, property rights) are present. Competition involves buyers competing against other buyers for scarce goods and services and sellers competing against other sellers for customers. Profit is the major incentive of a market economy and competition is the major regulator. “Market failures” usually occur when one of the four conditions does not exist. When they do exist, markets are efficient.

7. Skills and knowledge influence income

Many students assume the government will decide their income. If this is the case, there is little incentive to develop their human capital. It is important that they recognize how labor markets work. Applying the Principle of Exchange, employers will hire workers if the employers expect to gain more than they give. Salaries of some entertainers, executives, and athletes make perfect sense if those paying the salaries expect the individual to bring in more revenue than they are being paid.

Today’s students will enter a highly technological, information-oriented economy. Demand for workers in those areas is high and income is high. There are plenty of jobs in low-skilled sectors, but those jobs pay a low income. Students should recognize that individual wages are determined by the supply of and demand for those workers and reflect the relative scarcity of those workers. Market imperfections exist in labor markets just as they do in product markets.

8. Monetary and fiscal policies affect people’s choices

Three goals of macroeconomic policy are economic growth, full employment and price stability. Students should know how these goals are measured so they can assess the health of the economy and recognize the implications for them as workers, consumers and savers. They should learn to distinguish real and nominal data in order to evaluate economic indicators. Monetary policy is constantly in the news and students should be able to evaluate both monetary and fiscal policy by learning how to read basic indicators that affect the mortgage they may one day become responsible for or the vote they will cast.

9. Government policies have benefits and costs

Government policies always involve trade offs. When governments use resources there is an opportunity cost. The benefits and the opportunity cost of particular policies are not distributed evenly; some reap the benefits while others pay the cost. Markets fail to work efficiently if even one condition is missing from competition, information, incentives or property rights. So too, government agents fail to work for the public interest when perverse incentives guide their actions. Students should learn to evaluate whether the benefit of each government program outweighs the opportunity cost and whether the distributive effects of the policy are desirable. They should also evaluate whether an inefficient market outcome is better or worse than an inefficient government outcome for particular policies. Students should investigate whether there are unintended consequences of particular government actions.

Check the calendar for an upcoming workshop to learn how to use the Teacher Guide to the California Economics Standards and other ways CCEE applies these nine economic principles.


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