THINKING like an ECONOMISTEconomists use a strategy called cost-benefit analysis to evaluate their choices.

1. Build Simple Models2. Apply Cost-Benefit Analysis3. Take Small, Incremental Steps

1. Build Simple Models• An Economic Model is a simplified equation, graph, or figure

showing how something works.

• Simple models can often reduce complex situations to their most basic elements.

1. Build Simple Models• Models are based on assumptions, or things that we think are

true. The quality of a model is no better than the assumptions on which it is based. BUT, a model with simple assumptions is usually easier to understand.

• Models can be revised to make them better.

• If an economic model helps us to make a prediction that turns out to be right, the model can be used again.

• If the prediction is wrong, the model might be changed to make better predictions the next time.

2. Apply Cost-Benefit Analysis• CBA is a way of comparing the costs of an action to the

benefits received.

• Businesses make investment choices in this manner.

• Choosing to invest in project that give the highest return per dollar spent, or in other words, the best cost-benefit ratio.

3. Take Small, Incremental Steps• Taking small steps is most valuable when we are unsure of the

exact cost involved.

• If the cost turns out to be larger than we anticipated, then the resulting decision can be reversed without too much being lost.

How can we apply these ideas to Mr. Aupperle’s widget making business?

Mr. Aupperle would like to expand his business and move out of Mr. & Mrs. Aupperle’s basement.

What should he consider? What steps should he take first?

CREATE a simple (hypothetical) model that will help him with his expansion. (Using the three pieces of criteria to “think like an economist.”)