Thinking Like an Economist Everet Rummel, M.A.

Why study economics? “Fun” questions: What is the optimum OKCupid message length? Controversial questions: Why were Jews expelled from 15th/16th c. European towns? Did Roe v. Wade lead to lower crime rates? Are African Americans and women discriminated against in the labor market? Big important questions: How can poor countries become rich? Can we end recessions with government policy?

People with more education earn more. Does school actually teach them valuable skills, or is a degree just a way for smart people to tell employers they’re smarter than the average applicant? “Smart” = “Ability” = upbringing, home environment, personality, support network, peer group, IQ, etc. Recommended: Is education signaling or skill building?

Rent Control Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact on the amount and quality of affordable rental housing in cities that have used them. I.e., limits on rent increases will lead to more affordable and higher quality apartments.

CEO Pay The typical chief executive officer of a publicly traded corporation in the U.S. is paid more than his or her contribution to the firm's value. I.e., CEOs are overpaid.

Freer trade is overall “good” for the economy. Free Trade Freer trade is overall “good” for the economy. Good how?

Trade with China has made most Americans worse off.

I.e., Buy American creates more manufacturing jobs. Federal mandates that government purchases should be “buy American” have a positive impact on U.S. manufacturing employment. I.e., Buy American creates more manufacturing jobs.

Gas Prices Obama had nothing to do with gas prices lowering dramatically in recent years.

Stock Market Investors can get rich off the stock market by accurately predicting individual stock prices. I.e., investors can predict stock prices accurately, AND doing so can make them rich.

Bank Bailouts & Stimulus Bailing out the banks in 2008 and “Obama’s” economic stimulus bill of 2009 made the 2010 unemployment rate lower than it would have been without any stimulus. I.e., the bailouts and stimulus were good for the economy. They prevented many job losses.

Taxing large sugary drinks would lower obesity rates. Soda Tax Taxing large sugary drinks would lower obesity rates.

Immigration The average U.S. citizen would be better off if the U.S. allowed a larger number of highly educated foreign workers to immigrate to the U.S. each year. The average U.S. citizen would be better off if the U.S. allowed a larger number of low-skilled foreign workers to immigrate to the U.S. each year.

Minimum Wage A Federal minimum wage of $15 per hour would lead to substantial employment losses.

Surge pricing benefits consumers. Uber/Lyft Allowing Uber and Lyft to compete with taxi companies benefits consumers. Surge pricing benefits consumers.

Leaving the EU will hurt the UK economy. Brexit Leaving the EU will hurt the UK economy.

Rent control CEO pay Buy American Free trade Stock market Bank bailout Stimulus Gas prices China Soda tax Immigration, Low Min wage Uber/Lyft, surge Brexit

Tools Recall the Economic Problem: Scarcity -> Tradeoffs Individual choice: Budget constraint Marginal analysis Opportunity cost (relative price) Social choice: Production possibilities frontier (PPF), efficiency Law of diminishing returns Comparative advantage, gains from trade

Definitions Opportunity set - all combos of goods a consumer can afford. Budget line/constraint - all combinations of goods a consumer can afford by spending all of her budget. Marginal analysis - Comparing costs & benefits of choosing a little more or a little less of a good. Opportunity cost - what must be given up to get something else; relative price - ratio of the prices of 2 goods; slope of the budget line.

Definitions PPF - model of the tradeoffs a society faces when choosing which goods to produce. Law of diminishing returns - common pattern whereby devoting more resources to produce one good leads to smaller amounts of that good being produced, and larger amounts of the other good being given up.

Definitions Productive efficiency - when society produces a combination of goods such that producing more of one good would require giving up some of the other good. Productive inefficiency - when we could produce more of one good without having to give up any of the other good; this means machines or workers are idle and not being utilized fully.

Definitions Allocative effieiency - when society is producing the combination of goods that it most desires; “desirability” can be defined different ways. For now, the most socially desirable combo is the one that ensures every consumer gets as much as they can afford.

Definitions Autarky - an economy that does not engage in trade with others. Absolute advantage - when a country can produce more of a good than another country. Comparative advantage - when a country can produce a good for a lower opportunity cost than another country. Gains from trade - by specializing in what they can produce at a comparative advantage, both countries increase total production and can trade to get what they need to survive and then some.

Comparative and Absolute Advantage A country can have an absolute advantage in one good but a comparative advantage in the other good. So even if they can produce more rice, they should still specialize in fish and trade with the other country for rice. Comparative Advantage and the Tragedy of Tasmania Are We Better Off if We Buy Local?