Tying It Together

OK, that’s it. The economic method, boiled down to four core principles. Think I’m kidding? I’m not. Really. Thinking like an economist is simply a matter of applying the core principles to the world around you. And that’s why it is so important that you understand these core principles. As you read the rest of this book, don’t be afraid to come back to this chapter for a refresher.

Using the Core Principles in Practice

It’s time to ’fess up: I presented the four core principles of economics in the order that is easiest to learn. But when you confront a problem, you need to think through the principles in a different order. Here’s the four-step process you should work through:

• Step one: First, use the marginal principle by breaking “how many” choices down into simpler marginal choices. Ask yourself whether you would be better off doing a bit more of something, or a bit less.
• Step two: Then apply the cost-benefit principle by assessing the relevant costs and benefits. Since you’re analyzing a marginal question, this says you need to assess whether the marginal benefit exceeds the marginal cost.
• Step three: To evaluate all the relevant costs and benefits, you’ll need to apply the opportunity cost principle and ask, “Or what?” This ensures that you take full account of what you give up when you make a choice. You should focus on the relevant opportunity costs, not just financial out-of-pocket costs.
• Step four: The interdependence principle helps you identify how changes in other factors—in your own choices, other people, other markets, and expectations about the future—might lead you to make a different decision.

Want to remember this order? Just think “MCOI,” which stands for Marginal, then Cost-benefit, Opportunity cost, and Interdependence. It’s a recipe worth remembering, because you’ll see it again and again throughout this book, so it is best to learn it now. The rest of your study of economics is really about applying this recipe to a range of interesting social and economic contexts. As you proceed through each chapter in this book, we’ll study the decisions that you’ll make in your various roles as an economic actor—as a buyer, a seller, a worker, a boss, an entrepreneur, an investor, an importer, or an exporter. The value of our systematic approach is that in each chapter the method will be the same, and it will quickly become familiar: I’ll ask you to put yourself in the shoes of that economic actor and apply the core principles of economics so that you can figure out how to make the best decisions possible. With some practice, you’ll be able to use the core principles to ensure that you make good decisions in every sphere of your life.

To predict what others will do, put yourself in their shoes.

Imagine walking in someone else’s shoes.

-

The core principles of economics that we’ve outlined in this chapter aren’t just useful for helping you make good decisions. They can also be used for the equally important task of understanding and even predicting the decisions of others: your customers, competitors, employees, suppliers, and even friends and family.

The key to forecasting how they’ll respond is the someone else’s shoes technique. The idea behind putting yourself in someone else’s shoes is to allow yourself to have an empathetic understanding of how someone else views the world. In movies like Freaky Friday, mother and daughter have to switch bodies to learn to understand each other, but you can do it by mentally putting yourself in someone else’s shoes.

someone else’s shoes technique

By mentally “trading places” with someone so that you understand their objectives and constraints, you can forecast the decisions they will make.

That’s the essence of the someone else’s shoes technique. If you want to forecast the decisions that someone else will make, then you should mentally put yourself in their shoes, and try to figure out what decision you would make, if you face their incentives. Putting yourself in someone else’s shoes is all about empathy, and it’s important to account for that person’s preferences and the constraints that they face. It’s likely that they are trying to make good decisions. And so these four core principles can help you better understand and predict the decisions that they will make.

Principles in short.

Now that you’re at the end of your first chapter, let me give you a study tip that you can use throughout this book. If you’ve only got ten minutes and want to review the key ideas from a chapter, go back, quickly flip through it, and you’ll discover that the bold headings that look like this are a built-in study guide. If you re-read only those headings, you’ll get all the key points. Or if you want my “cheat sheet,” turn the page.

And finally, a memory trick. If you find it hard to remember all the detail that you’ve read in this chapter, relax. It all boils down to asking four questions that are so simple you need just a few words. Always ask:

• One more? (The marginal principle)
• Benefit beat cost? (The cost-benefit principle)
• Or what? (The opportunity cost principle)
• What else? (The interdependence principle)