Freakonomics Ch. 3: Why Do Drug Dealers Still Live with Their Moms? Economic Concepts Essential Question: What economic concepts will be discussed in the chapter 3 of Freakonomics?

Fixed and Variable Costs of Production All the costs faced by companies can be broken into two main categories Fixed costs = costs that are independent of output Variable costs = costs that vary with output Generally variable costs increase at a constant rate relative to labor and capital

A “winner take all” labor market “Winner Take All” Labor Market = Many laborers compete for a position in the market, but few actually succeed in finding employment. Those few who do are paid extraordinarily large salaries. The authors refers to this as a tournament -> refers to a situation in which many players compete against each other and, one by one, are eliminated. Finally, a victor emerges who takes home the prize.

Supply and Demand In this chapter we will be looking at the… Price of labor Whenever there are a lot of people willing and able to perform a job, that job doesn’t pay well. In a capitalist society, intense competition will drive prices down. Price of Product due to Technological Change A technological change made a product cheaper, thus increasing the supply, thus increasing the demand

Incentives Matter Why are people willing to do a job for little pay and many risks? Answer = those who succeed in this tournament labor market are handsomely rewarded, and each believes he can succeed. Incentives between Owners and Workers Owners = seek to maximize profits Workers = seek to maximize pay or influence

Review 1.What the two main categories of costs incurred by a company? 2.What is an example of “winner take all” labor market? 3. What is responsible for driving prices down? 4.How are incentives different for owners and workers?