The Economic Way of Thinking

Lesson Purpose:

This lesson defines the study of economics by describing both what economics is and what it is not.  It introduces the perspective that economic reasoning skills are valuable critical thinking tools and demonstrates how this perspective enhances users’ ability to analyze and understand human behavior, the focus of social science inquiry.  Finally, this lesson begins to demonstrate how economics education provides a powerful tool for learning in a variety of disciplines and contexts.

Key Terms:

incentives cost/benefit analysis economics institutions

Content Standards:

Standard 4: Students will understand that People respond predictably to positive and negative incentives.
grade 8:

  • Responses to incentives are predictable because people usually pursue their self-interest.
  • Changes in incentives cause people to change their behavior in predictable ways.
  • Incentives can be monetary or non-monetary.

grade 12:

  • Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them.

Standard 1: Students will understand that. . . [people] must choose some things and give up others.  Students will be able to use this knowledge to: Identify what they gain and what they give up when they make choices.
grade 8:

  • The choices people make have both present and future consequences.

grade 12:

  • Choices made by individuals, firms, or government officials often have long-run unintended consequences . . . .

Session Objectives:

  • Define Economics as the Science of Choice
  • Introduce incentives and the role of incentives in decision making, as one of the key tools of economic reasoning.
  • Describe and practice economic reasoning, emphasizing the importance of:
  • identifying incentives
  • decision-makers’ perceptions of costs and benefits
  • Describe and practice economic reasoning using the “Economic Reasoning Quiz” and the “Economic Reasoning Principles” handout.
  • Demonstrate how spending time on economic reasoning builds a solid foundation for all economics education


Key Content:

  • Economics is a social science that focuses on the choices people make.
  • Economic reasoning is everywhere appropriate and always useful; it can be used by any age group or culture, in any situation or context.  The insights it provides are powerful and can help even very young students make sense of the sometimes confusing world around them.
    • Ironically, although many of the primary issues in young people’s lives link directly to economics and economic reasoning, the economic perspective is often left out of the core K-12 curriculum.
  • Economics asserts that people make choices based on their perceptions of what is best for them.  The tools of economic reasoning help us understand what shapes peoples’ perceptions of the alternatives they face.
  • People’s choices among considered alternatives reflect their perceptions of the costs and benefits – to them – of the alternatives they face.
  • The key to understanding human behavior lies in identifying incentives.
    • Incentives are rewards or punishments that influence people’s actions.
    • When incentives change, people’s behavior changes in predictable ways.



    • Economics is all about institutions and mathematical models
    • Economics is all about money
    • Seeking self-satisfaction is selfish
    • Bad choices have costs but good choices do not
    • Sometimes people just have no choice
    • It is a good idea to have all the relevant information before deciding

Frequently Asked Questions:

    • How can it be that economics is not all about money?  We work for money and without it people cannot participate in the marketplace.
    • A basic principle of economic reasoning is satisfaction maximization.  Isn’t that saying it is O.K. to be greedy?
    • Isn’t it important to seek all of the information about a possible choice before making it?
    • Isn’t using incentives to influence behavior just a bribe?
    • How can expected cost and expected benefit analysis work when it is impossible to quantify either of these categories in many situations?
    • Why can’t I be sure about the outcome of my choice?


Classroom Activity Options

    • Distribute 3 x 5 cards and have the participants write complete definitions of economics on the card.  Ask several people to read their definitions.  Share the definitions and insights of Smith, Keynes, Heyne, and Reinke as a point of comparison.  Ask the students to revise their definitions as the course continues.
    • Distribute the list of “mysteries” that economic reasoning can be solved with economic reasoning. Discuss a few.  Challenge students to keep the remaining mysteries in mind as they accumulate economic reasoning tools.
    • Distribute “Things Are the Way They Are for a Reason,” to demonstrate that the power of economic reasoning is not limited to the discipline of economics.
    • Distribute the “Economic Reasoning Principles” handout.  Discuss each principle and include a current event, headline, or mystery as an example.  Ask students to generate or collect their own examples.
    • Distribute and ask each student to take the Economic Reasoning Quiz.  Discuss the answers, emphasizing how economic reasoning was used.
    • Distribute and discuss the handout, “Identifying an Economically Literate Person.”  Assign students’ the task of reading the complete description as homework and determining whether they are currently “economically literate.”
    • Assign individual students or small student groups to use economic reasoning to identify and solve a “real life” mystery.

Handouts and Supplemental Materials

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