so we're going to start our first unit which is core principles and I'm going to start us with a question what is economics seems like a good place to start so I want to ask you this question fill in this blank right now I would really like to have blank so think about it well what are the things that when I ask this question in my in-person classes one thing that I've noticed nobody ever has a nothing answer right our desires are Unlimited No matter how great your life is going right now there's always something you could like uh usually when I ask this question in the morning the thing the answers I get are food and sleep some people ask for things some people want a girlfriend or boyfriend some people want more free time they want to go on a trip lots and lots of answers because our desires are unlimited there's always more that you want our resources however are not right we um you can't have it all so that's what economics is this is sort of the dictionary definition if you look up economics you'll probably get something along this idea of the study of how people use their limited resources right you don't have an infinite amount of time or an infinite amount of money or infinite amount of abilities if you can't get everything you want so economic is all about how people use their limited resources to try to achieve those unlimited goals I've also seen it defined as the study of people in the ordinary business of life um and the authors of the textbook actually have this statement where they say every decision is about economic decision so this idea that both of these these statements hold is that this idea that we are constantly making economics decisions that just living your ordinary life you are constantly doing economics and the reason is we have to make choices because we have limited resources you can't have it all right if you think about the last time you had to make a choice right what'd you have for breakfast this morning you have limited resources right you have limited amount of food limited amount of money if you're buying food a limited appetite for how much you want to eat if you're deciding you know how to spend your summer you have a limited amount of time this summer you can't you know you can't do everything you want to do you know maybe there's a hundred different trips you want to take but you don't have the time or money to take 100 different trips you have to make choices and one of the interesting things that we see by that is economics is not just about money it's not even mostly about money right you make lots and lots of choices every day and many of them have nothing to do with money right where am I gonna how am I gonna spend my afternoon how much time am I going to have studying which one of my friends do I want to hang out with how often do I want to see my parents how often do I want to talk to my parents all sorts of questions and economics is about choices specifically the choices we make and how to use our limited resources because economics is about choices economic research has something to say about all sorts of different questions how can we prevent a recession should you be a stay-at-home parent how should you choose what restaurant to go to should you become a criminal how can we prevent discrimination how do we increase kidney donations should children be required to use car seats do football coaches punt too often all of these have economics Papers written about that believe it or not and so I like to show this just because a lot of people start economics class I think I'm gonna you know spend the whole time talking about money and exchange rates or the stock market or something what you see is there's actually economics touches on so many different parts of our life which is why I think it's a really exciting course and because economics is all about decisions what are we going to do in this class well we are going to learn how people and businesses make decisions and we are going to predict what decisions they will make so for example you're deciding what you want to major in and many of you are at that stage now I usually have a lot of First Years with some second years some people come in with a declared major some people think they know what they want some people are completely undecided many of you will wind up changing your mind throughout your college career and so this is a big decision you're going to have to make and so we're going to think about is what are the factors that matter to you and the what's important to you when you're picking a major might be very different from the person who you know is sitting next to you so some things that matter you're interested in their the subject right you're going to be taking classes on this for four years might as well find something you like maybe that's something you want you care about difficulty of classes right maybe you don't want to have too hard of a major you want to be able to graduate with good grades you want to be able to graduate with good friends while still having you know having fun and not having to spend all your time studying maybe on the other hand you're someone who really likes hard class and you think it's really fun to take a hard class and be challenged um earnings after graduation right for most of us the reason we're going to college so we can get a good job when we're done and so maybe you really care a lot about getting the highest possible salary when you've graduated so what will you choose to major in well now we want to do is think about how I expect you to make these decisions and maybe we're not going to get into the how you make this big decision like what to major in but we're going to start off by thinking about the smaller decisions you're going to make and we're going to look at four core principles of good decision making so these are the kind of uh the principles that we expect you to use when you're making decisions and probably you may you may have never heard the terms we're going to use but when I start saying oh this is what this principle is the hopefully that'll sound familiar like oh yeah that is kind of something that's going on in the back of my mind when I decide what I want to major in or how much you know whether I want to buy a cup of coffee this morning so here is our first principle it's called the cost benefit principle so a little heads up when you see um I put you have these little rectangles on the screen with kind of the Shadow background thing and text um within them that's usually what we're going to see a definition so here we're going to see is a definition or what exactly the Corp cost benefit principle is all about evaluate the full set of benefits and costs for any choice you face and you want to pursue that choice if the benefits are at least as large as the costs and again what we're going to see is you know maybe you've never really you know thought about when you were deciding what you wanted for breakfast the costs and benefits of which kind of cereal to have but we're going to see that this is the kind of of what's going on in your mind often when you're making decisions so let's suppose you walk into a coffee shop and are deciding whether to order coffee so maybe you were headed to work or headed to school yesterday and you were with a friend and your friend was like hey let me duck into Starbucks I want to grab something and you are deciding whether you want to get anything we will say the coffee costs three dollars and so the cost if we think about the cost and benefit of coffee we're going to say well the cost of the coffee is pretty straightforward it's right on the menu it's three bucks the benefits of the cup of coffee are more difficult to quantify right so how much enjoyment are you getting from it well maybe you um enjoy the taste of the coffee right you could coffee you know you get it just how you want it with the amount of sugar and cream that you like you think it tastes great alertness from the caffeine right you're getting ready to go to school don't want to fall asleep getting ready to go to work don't want the boss to see you dozing off so that's something you get some value from benefits others you know maybe you just like having something in your hand as you're walking around it gives you a chance to you know you and your friend compare your orders and say what you like you know hey I really like got this kind of coffee because I like it something like that again all sorts of benefits that maybe we can't quantify at least not easily so let's think about how we can quantify these benefits even though it seems like a funny idea of how much I like coffee well how much are you willing to pay for a cup of coffee maybe you're willing to pay zero dollars you don't you don't like the taste of coffee you think it tastes gross if you if someone gives you a cup of coffee you're not going to drink it so maybe your willingness to pay a zero right I'm not going to pay anything for this coffee that I won't even drink maybe it's three dollars maybe it's five dollars maybe you really like coffee or you're really really sleepy and know you're going to fall asleep at your job and get fired if you don't get a cup of coffee and maybe you're willingness to pay is very high that amount this dollar amount is what we call your willingness to pay and the cool part about this is this quantifies the benefits you get from that cup of coffee right so maybe this idea of how many you know how many dollars do I place on the taste of a nice cup of coffee that's nice and hot it has just the right amount of cream in it well how do we quantify that that's what the point of the willingness to pay is it says all right well if you're willing to pay three dollars for it that essentially means that you must enjoy it three dollars worth right that's the benefit you're getting from it because that's how much you're willing to pay and so you should buy the cup of coffee if the benefit you get from the coffee is greater than or equal to the cost well we already know uh one part of this equation right or is this inequality we know that the cost is three dollars and now we know that means that you should buy the cup of coffee if your willingness to pay is at least three dollars now one of the things uh that I want to get clear and this is some of the big misconceptions that people have about economics that you sometimes get when you first start taking introductory classes one thing I want to say is that the cost benefit principles does not imply that people always act selfishly right we it's very there's a way to kind of look at this sort of cynically right uh when I'm making a decision all I care about are my benefits how much enjoyment I get out of the coffee how much alertness I get and I have a very selfish decisions and all I care about is my own benefits well one of the things that the authors of the textbook say is they say the cost benefit principle it's only selfish if you are what that means is if all of your benefits when you're thinking about benefits if you only care about yourself then yes the cost benefit principle will show you to be selfish however most of us will think about other people other than ourselves when you're calculating the benefits right um what I mean by that is you know maybe you are thinking about you have some of your friends over and you're thinking about whether or not you should buy a pizza and probably when you do that you're not just thinking about the benefit that I personally will get from eating three slices of pizza right part of the benefits are you know I like my friends that if they're getting some good pizza I'm going to benefit from that maybe you think I benefit from my friends you know appreciating that I did something nice for them so the cost benefit principle does not apply to people always act selfishly because ah because often the kind of things that you consider be benefits the things you care about are helping out other people the cost benefit principle also does not imply that people never make mistakes right there's this idea that every time you make a decision you do this math of benefits you do this math of costs and so you're always going to be making a wise decision and if you don't make a wise decision well then you didn't follow the cost benefit principle and so economics has nothing to say to you that is very much not true in fact economics has lots to say about why people start smoking make poor financial decisions and commit crimes right these are probably if you could think about people making purely rational cost benefit decisions you know it's very hard to explain why someone would start smoking right think of how expensive it is think of how much how um it it health and it would make but economics actually has lots to say about why people start smoking and why it is that you might be following the cost benefit principle and really think you're doing the right thing when you start smoking and you're 15 years old but actually um you know it turns out to be a probably a decision you regret but it is still possible you filed the cost benefit principle so again cost benefit principle does not imply that everyone is selfish it does not imply that nobody makes mistakes so let's look at an example suppose an economist observes an individual doing something that seems to violate the cost benefit principle for example giving money to charity so she has two options right he's The Economist she she sees this person getting to charity and if they want you know if her first thought is well if we do the cost benefit principle the cost is however much money you gave to the charity the benefit is zero right that's sort of the simplest way to look at it right if all you did was send a check to this charity the charity didn't send you anything back maybe we just say your benefit is zero your cost just however much you sent benefit is zero why would you do this um and so there's there's two options you could throw her hands in the air say people are irrational they make choices they make no sense we can't predict their behavior economics doesn't make any sense for this person she clearly isn't the the person who's donating to charity is not following any economic principles any principles of core decision making well we don't want to be there right that that doesn't let us gain very very many insights into people instead what I think is more interesting is let's investigate why this individual is giving to charity what are the benefits that people get from giving to Charities right they must be something because people give to charity um so a couple of the sort of the more cynical um the reasoning that you might say is that you enjoy talking to your friends about how generous you are right listen I I gave you this charity not because I care a lot about this charity because I'm an especially nice person but I want to be able to tell people that I'm very generous you know maybe I did one of those things where like you uh they have the list of the donors and you wanted to be like a gold level donor or something so everyone sees how generous you are um another one is you feel good about yourself when you give there's actually an economics term for this called Warm Glow this idea that you know I gave this money to the charity and tonight when I go home I'm gonna sit down open up a book turn on the TV and just get to feel good about what a great person I am and maybe that is you know again maybe not the most uh positive Viewpoint of a person who's only doing it because they get to feel good about themselves but that's another option uh maybe you believe your gift will make a difference for a cause you care about right so maybe you're someone who cares a lot about the environment and you think that by giving your money you're gonna make the world just a little bit of a cleaner place to live in and that's something you can enjoyment out of so all of these are ways that someone could be giving to charity and it very much following the cost benefits let's think a little more about this cost benefit principle and how I could see we're going to see that something that seems a little uh counterintuitive or a problem that's going to be hard for us to answer right now and so we'll think about in the next lecture cost benefit principle says you should choose to go to college if the benefits of college are greater than the cost of going to college well there are probably multiple colleges that would have given you benefits that exceeded the total financial and time cost of attending so if you're thinking about the cost of college right so you're here in college we'll say a lot of you are probably planning to be in college for four years and then graduate what are the costs well there's a financial cost right almost everyone is paying some amount in tuition rudiment board the other cost is this time cost and we'll talk a lot more about this idea of the cost of your time later but when you spend four years at Michigan State that's four years you're not spending doing something else right it's you're not probably not working full-time for four years right you're probably so if you haven't gone just College you got to think about if I weren't here I would be four years into my career and so that's another thing you're giving up you're paying tuition you're also giving up a lot of your time so what we want to think about next time is we want to learn why MSU is actually the only college that benefits greater than costs right because most of you are only enrolled in Michigan State right now because even though it seems at first like oh well maybe there's lots of places where benefits have exceeded cost cost benefit principles says I should do something of benefits are greater than cost maybe I should be enrolled at 15 colleges right now well next class again we're going to learn why that isn't actually the case that MSU actually was the only college that had been awesome first class out of the way thanks everybody