Homo Economicus, Opportunity Cost, Thinking at the Margin

Economic Man 1) Rational: cost-benefit analysis 2) Quantifiable: assign numbers to anything How much do you love your mother? How much do you like hot dogs? 3) Statistics are useful 4) Predictable: if know costs + benefits Individual (microeconomics) and groups (macroeconomics)

Incentives Matter Pop Quiz: How Do You Stop Sea Captains From Killing Their Passengers?

Opportunity Cost The next best choice you didn’t make The thing you would have done if you hadn’t done this Vs. Trade offs (all of the alternatives available) Opp’y cost of college? Tuition? Room and board? 4 years of wages and experience from working?

Fundamental Problem Scarcity: Unlimited needs and wants, limited resources  Choice Efficiency: minimizing costs = most out for least in Can’t make anyone better off w/o making someone worse off Determined with marginal analysis (next) Efficient = “good” Danger: accept this, and lots of unintended consequences accrue E.g. efficient not “fair” efficient if I have all the money: can’t make you better off w/o making me worse off

Marginal Thinking Margin: next unit Marginal benefit: additional benefit of one more unit Marginal cost: additional cost of one more unit

How to think marginally Produce/consume until MB = MC What if MB < MC? Spending too much for what getting, should consume less Do you really want that 54th Big Mac? What if MB > MC? Could get more benefit, should consume more Yes, I really do.

The Three Economic Questions What goods and services should be produced? Guns vs. butter/capital vs. consumer How should these goods and services be produced? How combine factor resources (land, labor, capital, entrepreneurial ability) Who consumes these goods and services? US: Distribution of income: factor payments [wages, rent, interest, profit (for entrepreneurs)]

Production Possibilities Curve/Frontier - Capital goods Consumer goods Law of increasing costs

Shifts in the Curve Change in the quantity or quality of resources Achieved primarily through capital (physical or human) investment: school Adam Smith (The Wealth of Nations, 1776): capitalism a capital accumulating machine

Open Mixed Circular Flow Model The Rest Of the World Product Market Households Firms Government Factor Market

Ed Glaeser Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier

NYC vs. Danville