Common Sense

Economics
What Everyone Should Know about Wealth and Prosperity
Lesson One

Part One: Twelve Key Elements of

Economics: Introduction, pp: 5-6

By the end of this lecture, we will:

1) have some classroom instructions,
2) get an idea about the book, and
3) study the definition of economics.
 Our book …..

An easy and friendly approach to economics by

focusing on those ideas which can help you
understand economics (wealth, prosperity,
stagnation, markets, etc.)
Teaches the proper way of economic thinking to
make better decisions.
Presents the principles of economics by reflecting
on common sense e.g. why do people buy a
cheap product?
 Our book …..

Four parts:
I. Twelve Key Elements of Economics:
II. Seven Major Sources of Economic Progress
III. Ten Key Elements of Economic Thinking about the
Role of Government [How economic thinking is
affected by the role of the government]
IV. Twelve Key Elements of Practical Personal
Finance
Introduction, pp: 5-6

Study each statement and answer the question

that follows each one:
- There is a 50% sale on iPhone X .... Will you buy
it? Explain.
- Which one is better to study and why: Physical
Education or Medicine? Explain.
- “I want to eradicate unemployment” … Will you
vote for me? Explain.
“Economics is about how incentives
[monetary or non-monetary] affect those
choices and shape our lives”.
The reasons for an economic choice …
Economic thinking affects cost, value,
prosperity, etc.
Integration of economic principles in our
mindsets.
Lesson Two

Part One: Twelve Key Elements of

Economics: Incentives Matter, pp: 6-9

Objectives:
1) We will start with a review, and then
2) We will study the first element of economic
thinking (incentives).
 Study the following questions:
1) How will the cost of a product affect people’s economic
decisions?
2) How would the business of a swimming pool be like in winter?
3) How would a reward system affect employees’
performance?
4) Was it easy to predict the behavioral outcome in each
question? Why?
 Changes in incentives influence people’s behavior in a
predictable way. (This is the basic postulate of economics).
 “Changes in market prices alter incentives in a manner that
works to coordinate the actions of buyers and sellers.”
 Examples:
I. Buyers want a product  sellers are not willing (able) to provide
it  prices increase  sellers provide more of that product 
buyers buy less.
II. An increase in prices  sellers provide more of that item 
buyers purchase less  sellers reduce prices…
- This continues till demand and production are brought to a state
of balance (i.e. are coordinated).
- (Further examples in the book)
Incentives can also affect political choices or
orientations.
Incentives matter regardless of:
- the political system (capitalism vs socialism),
- The personality type (selfish vs altruistic: would
you save a person in a raging, gushing river
or in a still lake of water?)
- The person (Mother’s Teresa)
 Review of main points:
 We have seen that:
1) Individuals, organizations, countries, companies, etc.
make economic choices based on their incentives,
2) Incentives determine how Individuals, organizations,
countries, companies, etc. will act,
3) Incentives are present regardless of the political
system, mentality, personality type, place …. or any
other characteristic related to people, organizations,
countries, companies, etc.
Lesson Three:

Part One: Twelve Key Elements of Economics: There

is no such thing as free lunch: Goods are scarce
and therefore we have to make choices (pp: 9-12)

Objectives:
1) Pop-up quiz.
2) Study the second element of economic
thinking (no free lunch).
What is common between having a walk and
buying a new car?
What didn’t Einstein have in order for him to
complete his career in physics?
Resources are limited and scarce.
Everything has a cost; we trade-off all the time
i.e. the economic term is opportunity cost.
What is the opportunity-cost of each of the
following prompts:
1)Becoming a footballer.
2)Wanting to pursue a writing career.
3)Buying biscuits.
4)Manufacturing a car.
5)Spending money on personal luxuries.
Opportunity costs could be:
a. monetary
b. materialistic (e.g. a product or item you
exchange with another one),
c. affectional (e.g. dedicating time to take of
someone),
d. abstract (e.g. the time you spend doing
something), or
e. existential (e.g. pursuing a career)
Consumers’ opportunity costs i.e. spending
money on one item instead of the other.
Producers’ opportunity costs i.e. allocating
resources (e.g. lumber, steel, sheet rock, etc.)
to produce a product (e.g. building a house)
means that those resources will not be used to
make a different product (e.g. a school).
Resources of high costs indicate that they are of a high
value.
Profit-seeking companies will seek other less costly
alternatives: This is the incentive of free and open
markets.
Government policies help convince those companies
by the cost by introducing taxes or subsidies [an
amount of money granted by the government].
Market incentives will not be able to guide consumers
to what they should, by default, highly value.
Governments can shift costs but they cannot
eliminate them e.g. free education or free
medication.
How would a woman feel about being a
housewife when she has a degree?
How would an increase in earnings affect
birth rate and population growth?
Lesson Four:

Part One: Twelve Key Elements of Economics: 3. Decisions are made

at the margin: If we want to get the most out of our resources,
options should be chosen only when the marginal benefits exceed
the marginal costs. (pp: 12-15)

 Objectives:
 By the end of this lecture, you will learn:
1) the marginal effects of an economic decision,
2) the meaning of marginal costs/benefits, and
3) a demonstration of these concepts.
 Study the following scenarios:

 Scenario One: Mike had an idea about a business project,

but he decided to abandon it because he wants a
business project without any costs. What is wrong with this
scenario?
 Scenario Two: Robert has an English teaching institution. It
costs him nearly 1500$ as monthly expenses costs to run the
institution and the overall monthly gains from the institution
are no more than 800$. Do you think this is a good business
project? Why?
 Referring to the two previous example scenarios,
which one is better in your own opinion and why?
 Scenario one has an “all-or-nothing” decision which is
not quite accurate; most decisions involve some
addition or subtraction (+/-).
 In scenario two the losses exceed the profit so it is a
losing business project.
Actions should be taken only when the benefits
exceed or are equal to the costs.
Marginal means additional; hence:
1)Marginal benefits
2)Marginal costs
This can be summed up by the term
“marginalism”.
Some more scenarios:

 Scenario three: There is air pollution in the air and by

removing this air pollution, people will be able to see
far away mountains. It will cost some 10,000,000$. Do
the marginal benefits exceed the marginal costs?
 Scenario four: Air pollution is costing the government
some 1,000,000$ losses in a manufacturing sector, so it
decided to spend 100,000$ to end up air pollution.
How would the amount of money dedicated to fight
pollution be beneficial? When would the government
decide to spend more or less money?
 Remember: When the marginal benefits are going
down, the marginal costs increase till that stage where
the marginal benefit exceed the marginal cost.
Lesson Five:

Part One: Twelve Key Elements of Economics:

4. Trade promotes economic progress, pp: 15-
18

Objective
By the end of this lecture, students will:
1) Learn the three different roles trade plays in
promoting economic progress.
 Which scenario expresses a trading
situation?
 Scenario One: Robert owns chair stores that sell tiers. Mike
has chain stores selling books. Mike sends a shipment of
books to Robert who does not know what to do with it
but must accept it because he owes Mile a lot of money.
 Scenario Two: A country that produces olive oil receives
a shipment of petroleum in exchange of its olive oil. That
country needs the petroleum in order to refine it into
gasoline and benzene.
Scenario two expresses a trading situation
because trade is:
1)a win-win transaction, and it is
2)established on the premise of mutual gain.
Three ways trade can boost economic
progress

Trade can increase the value of a product by

moving a product from one entity to
another. Can you think of any examples?
Flea markets?
Someone is offering you a product that you
need at a price less than the price of
actually producing it. But that person needs
a product you can produce efficiently. Will
you trade?
 Trade increases levels of consumption and production
because it allows us to do things that we do best
relative to cost.
 There are some countries that are known for the
production of specific products which they can trade
and get revenues to purchase expensive products
they cannot themselves produce.
 This is known as the law of comparative advantage.
 Trade allows having lower per-unit costs by adopting
large-scale production methods.
 Economies of scale stand for the act of producing a
large quantity of a product and selling it across
different markets.
Lesson Six:

Part One: Twelve Key Elements of Economics:

5. Transaction costs are an obstacle to trade.
pp: 18-19

By the end of this session, we will study

transaction costs and study the role of
middlemen.
How could trade be hindered in your
opinion?
Trading is limited or affected by physical
obstacles (mountains, rivers, valleys, etc.) or
the availability of information (prices of
products, sellers who want to sell, legal
regulations, etc.).
This is known as transaction costs.
What are the transaction costs involved in
producing, distributing and selling potatoes?
Middlemen are those people who help
others arrange trade and make better
choices. They help in reducing transaction
costs.
How do grocers help in reducing transaction
costs?
What about technology?
Lesson Six:
Part One: Twelve Key Elements of
Economics: 6. Prices bring the choices of
buyers and sellers into balance, pp: 20-26
 By the end of this lecture, we will learn:
1) The definition of the law of demand,
2) The definition of the law of supply,
3) The graphical representation of the law of demand and
the law of supply
4) The point of equilibrium
5) Changes across the demand/supply curve
6) Shifts in demand/supply curves
The Law of Demand

 When are people more likely to demand a product?

 The Law of Demand states:
- High prices reduce the quantity sold of a product.
- There is a negative relationship between high prices
and the quantity sold: The higher the prices, the less
quantity sold.
The Law of Supply

 When would suppliers or sellers be more inclined to

supply a product?
 The Law of Supply states that:
- Higher prices make sellers think of greater revenues so
they supply more quantity.
- There is a positive relationship between high prices of
goods and the quantity supplied.
Correspondingly:

 As the prices goes up, demand decreases.

 As the demand increases, prices goes up but affects
demands in a negative way.
Price Demand Supply
1$ 200 kg 50 kg
2$ 150 kg 70 kg
3$ 120 kg 100 kg
4$ 100 kg 150 kg
5$ 50 kg 200 kg
The graphical representation of the
two laws:
 Economists usually represent supply and demand
graphically by drawing:
- a price axis
- A quantity axis
- A demand curve
- A supply curve
 Demand and supply graphically
Deman Supply
6
5
4
3
2
1
0
0 50 100 150 200 250
 The equilibrium point

 It is the point where the product is sold at a specific price

and amount. It is the point where we have a coordination
or consistency between
1) how much buyers want a product and the price they are
willing to pay for that product, and
2) what the suppliers are willing to supply based on the price
of the product.
 How is the price established?
 The supplier is willing to sell a product at a price higher
than the cost of its making and the buyer is willing to pay
at a price they accept of how they see the price should
be sold at because of how they value that product.
 Changes along the supply curve
 Higher prices bring more quantity of a product and lower
prices bring less quantity of a product

Supply

Supply
6

0
0 50 100 150 200 250
 Changes along the demand curve
 Lower prices will bring more demand; higher prices will
bring less demand ….

Deman

Deman
6

0
0 50 100 150 200 250
Correspondingly …..

 Higher prices, low prices or excess demand create

inconsistency between demand and supply.
 So when do demand and supply become consistent?
 At the equilibrium point, the choices of buyers and
sellers will be consistent and the market price and the
quantity supplied will gravitate to that point.
 Effect of market prices
 How do suppliers set the price of a product?
 At a price more than the cost of producing the product or unit.
 When do buyers accept the market’s price of the product?
 They estimate the value of the product and the price it should
receive.
 How is the potential gain for buyers and sellers is established?
 When the product’s price is at a price point that buyers accept
to pay between the minimum price (the cost of making the
product) and the maximum price (the potential increase of the
price due to changes in demand).
 What guides supplies for producing a product?
 Well … what the people need and if they are ready
to pay money because they value that product in some
sense ….
 What guides demand and supply?
 Market prices …..
 Shifts in the demand curve

 Factors such as consumer income, prices of related goods, the

expectation of a future price increase, the number of consumers,
etc. will make the entire demand curve shift its position to the right
Deman

Deman
6
4
2
0
0 50 100 150 200 250
 Shifts in the supply curve
 Factors such as lower cost of resources, new technologies, new
development, etc. will have an impact on the supply curve ….

Supply

Supply
6

0
0 50 100 150 200 250
 Lesson Seven:
Part One: Twelve Key Elements of Economics: 7. Profit
direct businesses toward productive activities that
increase the value of resources, while losses direct
them away from wasteful activities that reduce
resource value, pp: 26-29
 Objectives:
1) The underlying assumption of losing and profitable business
projects
Productive Resources and Their Opportunity
Costs

 Production needs productive resources which have

opportunity cost.
 Can you think of it?
 Producers will have to make a choice of what to do
with the resources: Bid them away from their
alternative uses, in other words.
Net profit vs economic profit

 How is the net profit of a firm calculated?

 Profit = Total Revenue – Total Cost
 Economists believe the accounting net profit
calculation overstates profit. Why is that?
 It ignores the opportunity cost of assets or resources.
 What does it actually mean to have profit?
What’s the implication of profit/loss?
 When the firm generates more revenue from the sale of its
products.
 When the company produces products that consumers value and
are willing to pay a price more than the price of actually making
the product.
 Having more revenue means that the producers’ decision to bid
resources away form their alternative uses was a successful one.
 However, the opposite occurs, we could get losses: Bidding
resources away from their alternative use was not a successful
decision.
 The resources could have been more profitable in the alternative
use.
What does a loss mean?

1) less revenue …
2) a reduction of value of the resources used to make a
product: the producers could have used the
resources in different ways,
3) The consumer found the product not valuable even
after transforming the productive resources....
How do failures and losses redirect
businesses?
 They redirect the use of the resources into making
more valuable products.
 They release resources toward wealth-creating
projects.
In the end

 Successful investments increase the value of the

resources used in making products or services
 Unsuccessful investments decrease the value of the
resources used in making products or services
 Unsuccessful investments or businesses will redirect
resources away from wasteful or losing entrepreneurial
enterprises
Lesson Eight:
Part One: Twelve Key Elements of Economics:
8. People earn income by providing others with
things they value, pp: 30-31
 Objectives:
1) Studying how providing people with services can help in
having more income.
How do people’s preferences, abilities,
skills, attitudes and willingness affect their
income?
 They affect the value of the goods and services that
individuals are willing to provide.
 People earn high income because they provide
people with services they value more.
 The relation between helping others and income gives
us an incentive to acquire skills, develop talents and
cultivate habits that help us provide others with those
services.
Lesson Nine:
Part One: Twelve Key Elements of Economics:
9. Production of goods and services people
value, not just jobs, provides the source of high
living standards, pp: 32-34
 Objectives:
1) Products and goods that people value enhance
economic progress and help in building wealth
Why do producers produce goods or
services?
 Consumption is the objective of all production.
 Income and living standards cannot increase without
an increase in the production of goods that people
value
 Do you think destroying goods or services
that people value will enhance society?
 The answer is no …. And it could lead to many bad effects on the
economy
 Still some political programs or legislation has adapted the
destruction of goods or services that people value.
 The Agricultural Adjustment Act in 1933 which aimed at reducing
agricultural supply to prevent agricultural products from falling.
 The act was declared unconstitutional but not before depriving
the populace from many valuable agricultural products.
 Another example, “Cash for Clunkers”
Does creating more jobs enhance the
economy of society?
 The dam example.
Lesson Ten:
Review and group work

 Competition rules:
 Two groups or more answer the same questions
 You have both 35 minutes
 You can use books but not ask the lecturer
 Each answer is worth one point
 The group with the highest points wins the competition
Q1/ What is it?

 The technical term for all the obstacles trade could be

hindered by TRANSACTION COST
 The entities, people or organizations that ease trading
or doing transactions. MIDDLEMEN
 It states that higher prices bring less demand. LAW OF
DEMAND
 It states that low prices bring more demand. LAW OF
DEMAND
Q2/ Illustrate the following using a
supply & demand graph.
 Price: Maximum at 5$ / Lowest at 1$
 Quantity: Lowest at 5 thousand kilograms / highest at
25 thousand kilogram
 A demand curve
 A supply curve
 A point of equilibrium
To the whiteboard
Q3/ What is the difference between
changes along the demand/supply curves
and shifts in supply/demand curves?
 Changes along demand/supply curve vs. Shifts in
demand/supply curves
Changes along the demand or supply curves indicate
having different amounts of supply or prices along either
the two curves; shifts in the demand/supply curve
indicate having a total change in the position of one of
the two curves to a new one.
Q4/ Name three factors that can
trigger a shift in the supply curve.
 Shifts in the supply curve: Lower costs of resources,
increase in the demand population, new technologies
in production
Q5/ Name three factors that can trigger a
shift in the demand curve.

 Shifts in the demand curve: higher income, prices of

related goods, expectation of future prices.
Q6/ What is the difference between the net
profit and the economic profit?

 The accounting profit works according to the

following formula:
 Profit = Total Revenue – Total Cost
The economic profit states that the accounting profit
overstates profit because it ignores the opportunity costs
of the resources.
Q7/ Name three assumptions of losses.

1) less revenue …
2) a reduction of value of the resources used to make a
product: the producers could have used the
resources in different ways,
3) The consumer found the product not valuable even
after transforming the productive resources....
Q8/ Name three assumptions of profit.

 When the firm generates more revenue from the sale

of its products.
 When the company produces products that
consumers value and are willing to pay a price more
than the price of actually making the product.
 Having more revenue means that the producers’
decision to bid resources away form their alternative
uses was a successful one.
Q9/ Explain the following: “Losses release
resources towards wealth-making project”.

 Because they redirect the resources in a way that

enables them to be transformed into valuable
products in a different enterprise
Q10/How does helping others affect income?

 It helps in the sense that people provide services to

other people and the more people value the service
the more income the person receives.
Lesson Eleven

Element 10: Economic progress comes

through trade, investment, better ways
of doing things, and sound economic
institutions.
Group work. In group of three or four,
discuss the following questions.
 Do you think that the economic growth is better
nowadays than the way it used to be in the past?
Why? Why not?
 If you believe that it is better, what factors contributed
in making it so? Or What are the elements of
economic growth?
Contributing factors to economic
growth: Investment.
 Do you believe that investment plays a role in
economic growth? Why is that?
 Physical capital: any opinions?
 Human capital: any opinions?
Contributing factors to economic
growth: Technology.
 How does technology affect economic growth?
 Contributing factors to economic
growth: Economic Organization.
 If a country’s legal system for ownership states that a foreigner
cannot own anything unless they register the property under the
name of a local person. How does that make you feel about
investing in this country?
 A country states that if a foreign company was to start business in
that country, the company is entitled to pay the hosting country an
investment tax, a land tax, electricity taxes, a rental payment, a
pledge to have 75% of its workforce form the local workforce, and
a share of 65% of profit to that country. How does that make you
feel about investing in this country?
 Economic organization stands for how the business is carried out,
protected or guarantee legally.
Contributing factors to economic
growth: Competition.
 Any ideas of the role of competition in economic
growth?
 Competition must be present to hold entrepreneurs
and their investors accountable for the efficient
allocation of their resources: their ideas must face the
reality check of their consumers.
Lesson Twelve

Part One: Element 11: The invisible

hand of market prices directs buyers
and sellers toward activities that
promote the general welfare.
 The invisible hand of market prices

 Group work. Think about the following: Even if you own a

business, you still do not control it or authorize as you
completely want.
 Self-interest is a power motivator i.e. all people undertake
business projects to gain profit.
 Yet all individuals are affected by the invisible hand of
market prices. How?
 Prices coordinate supply and demand.
 This leads to having individuals who intend their “own goal”
to promote the goals of others [in terms of supply or
demand] which leads to greater prosperity.
 The uncentralized fashion of economic
behavior
 Will consumers buy something they value because someone else
told them to do so?
 Will producers not employ new technologies that help in having
lower cost of production?
 Incentives vary and profit is the main motivator.
 There is a natural tendency to believe that orderly outcomes can
be achieve when someone is following a centralized authority.
 However, pursuing one’s advantage creates an orderly society
where demand and supply are satisfied without a centralized
autthority.
The “marvel” of the market system

 The market system is dubbed as the “marvel” by the

Nobel laurite Friedrich Hayek because the market
price of a commodity carries so much information for
both buyers and sellers.
 Market’s prices contain all the information needed:
What the people want, how much they want, when
do they want that product, how to calibrate the price,
how to manage distribution, methods of production to
be used, production of goods that are needed, etc.
Lesson Thirteenth

Part One: Element 12: Too often long-term

consequences, or the secondary effects, of
an action are ignored.
Henry Hazlitt’s 1964 book “Economics in One
Lesson”: The story of the boy who broke the
window of a shopkeeper

 Was breaking the window a good or a bad thing?

 Good as it created a job for someone.
 Bad as it used resources or funds that could have been
used elsewhere.
 If it had not been broken, the community could have used
the resources or funds in better ways.
 The view that destructive acts create employment and are
good for the economy is known as the “broken window
fallacy”.
What effects can you think of regarding
each of the following cases:

 Making cars more fuel efficient to reduce gasoline

consumption:
1) More economic (the immediate effect)
2) Lighter vehicles (the secondary effect)
3) More accidents (the territory effect)
4) People drive more (long-term effect)
5) More traffic congestion (long-term effect)
 Hazlitt contents that a person:

 ….. must trace not merely the immediate results but

the results in the long run, not merely the primary
consequences but the secondary consequences, and
not merely the effects on some special group but the
effects on everyone.
 The secondary effects of trade restrictions:
Tariffs and important quotes.
 Tariffs: a tax or duty to be paid on a particular class of imports or
exports.
 Import quotes: physical limitation of the quantities of different
products to be imported from foreign countries.
 How could tariffs or quotes on sugar affect sugar-dependent
firms?
 Restricting the sale of foreign-produced sugar:
1) It saved jobs and created employment because the
US started depending on locally grown sugar.
2) US firms started to see that it is more expensive for
them now to produce candy and other products that
use a lot of sugar.
3) Many companies or firms went to other countries
where sugar is cheaper.