Undressing the Dismal Science Naked Economics Undressing the Dismal Science

Why did the chicken cross the road? To maximize its utility, i.e. make itself better off Utility not always monetary Varies for each of us

Who feeds Paris? The market, i.e. individuals pursuing their own self interest Paradoxically this leads to benefit of the whole (usually)

What is GDP? Gross domestic product, i.e. monetary value of all the finished goods and services produced within a country's borders in a specific time period Why is it a good measure? Its shows how well we are addressing scarcity Why is it NOT a good measure? How are individuals affected? Measures some bad things (e.g. prisons), doesn’t measure some good things Real GDP – inflation adjusted

What is price discrimination? selling the same item to different people at different prices, e.g. airplane tickets

Do incentives matter? Yes, when we work on commission, we work harder

Perverse incentives an unintended and undesirable result which is contrary to the interests of the incentive makers e.g. car seats on airplanes led to MORE deaths "Law of unintended consequences"

Fundamental Economic Questions All economic systems must address: -What? -How? -For whom?

What is the “superstar phenomenon”? small differences in talent tend to become magnified into huge differences in pay as a market becomes very large (e.g. pop music, pro sports)

What is creative destruction? New technology “destroys” old ones, and thus jobs, e.g. VCR repairmen Who loses out most often? Unskilled workers, less educated

What is human capital? a measure of the economic value of an employee's skill set Most important investment, as you always have it

Do brands matter? Yes, they provide information about a company’s product or service, e.g. Coke given out free to expand its brand provide a sense of trust required in a complex economy

How can black rhinos be saved? Govt tried to lower price by selling confiscated horns (only partly successful) Private ownership to incentivize their protection Sawing off horns didn’t work

What are the two basic assumptions that economists make about individuals and firms? Self-interested Rational Limits of determining self interest? (lack of information)

prisoner's dilemma example of a game that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so Ac, Bc – 1 year, 1 year Ac, Bs – 0 , 2 years As, Bc – 2 years, 0 As, Bs – 3 months, 3 months (BEST alternative) C= cooperate, S=silent/don’t confess

Role of prices in the market economy? efficient distribution of resources in a market system. signal for shortages and surpluses which help firms respond to changing market conditions Raising prices can reduce demand (e.g. gas/energy prices) Firms us “dynamic pricing” to maximize profits (e.g. airlines)

Advantage of market economy? Allocative efficiency The best available model (command economies led to shortage/starvation) BUT . . . (market failures), e.g. resources not always directed to areas of greatest need (medicine, food) Resources not evenly distributed among people, nations Markets are amoral

Adverse selection When you do business with people you would be better off avoiding. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer “What you don’t know CAN hurt you”?

Informational asymmetry transactions where one party has more or better information than the other. E.g. – buying a used car, life insurance (adverse selection)

Principal-Agent problem principal–agent problem or agency dilemma concerns the difficulties in motivating one party (the "agent"), to act on behalf of another (the "principal"). E.g. corporate management (agent) and shareholders (principal), fast food employees

What is an externality? is a cost or benefit that is not transmitted through prices, and is incurred by a party who was not involved in the transaction. negative externality – pollution from a factory positive externality – fire department

What is a public good? Nonexcludability Nonrivalry E.g. fireworks display at Jones Beach or national missile defense shield

Role of Government Stability legal framework Protection of property rights Protection of contracts

What is productivity? economic measure of output per unit of input

Why are many poor countries poor? Bad government

Are foreign sweat shops bad? Not necessarily Jobs are still better than what the workers would otherwise be doing

What is the primary role of the Federal Reserve? Control the nation’s money supply Set monetary policy