Find your role and sit at the indicated seat. Do not open the bag at your seat until you are told to do so.

Laws of Economics Everything is scarce. Is there anything you consume that is not scarce? What does it mean to “consume” something? Every choice includes an opportunity cost (tradeoff). What do you give up in order to get something else? Mom-Pop shops v. Big Box Retailers Pollution v. No Pollution

Laws of Economics The cosmos is a non-linear place. Opposing consumption forces: consumption & variety Opposing production forces: specialization & congestion People respond to incentives. Airplanes and car seats Entrepreneurship and taxes Russians and dead light bulbs

Laws of Economics Everything is scarce. Every choice includes an opportunity cost (tradeoff). The cosmos is a non-linear place. People respond to incentives. You want it. What are you going to do about it? You can’t have it.

The Players and the Goals In this experiment, there are WORKERS and FIRMS. WORKERS sell labor to the FIRMS. FIRMS make stuff and sell stuff to the WORKERS.

The Players and the Goals Two types of worker Red workers (know how to make Red stuff) Blue workers (know how to make Blue stuff) Each worker’s goal: Maximize happiness Three things make you happy: Red Stuff, Blue Stuff, and Leisure

The Players and the Goals Two types of firm Red firms make and sell Red stuff Blue firms make and sell Blue stuff Each firm’s goal: Maximize profit Profit = Ending $ – Starting $

Labor Market = 1 hour of Blue labor = 1 hour of Red labor = 1 dollar Labor $

Labor Market Red workers sell some of their labor to Red firms for $. Blue workers sell some of their labor to Blue firms for $. Labor $ $

Leisure Red workers turn in their unsold labor for leisure. Unsold Labor

Leisure Blue workers turn in their unsold labor for leisure. Unsold Labor

Evening comes and morning follows... The second day.

Labor is Transformed into Stuff! Labor Stuff

Goods Market = 1 unit of Blue stuff = 1 unit of Red stuff = 1 dollar Stuff $

Goods Market Red workers buy Red stuff and Blue stuff. Stuff $

Goods Market Blue workers buy Red stuff and Blue stuff. Stuff $

How Happy Are the Consumers? Happiness = (Red Stuff + 1) (Blue Stuff + 1) ( Leisure + 1)...and there was much rejoicing!

How Profitable Are the Producers? Profit = Ending $ – Starting $

Trading FirmsWorkers $5.00

Trading FirmsWorkers

Trading FirmsWorkers $5.00

Trading FirmsWorkers

Trading FirmsWorkers

Ready to begin…

Labor Market Red workers sell some of your labor to Red firms for $. Blue workers sell some of your labor to Blue firms for $. = Labor Happiness = (Red Stuff + 1) (Blue Stuff + 1) ( Leisure + 1)

Leisure 1. Red workers return unsold labor for Leisure. 2. Report your Leisure to moderator. 3. Write down how much Leisure you have. 1. Blue workers return unsold labor for Leisure. 2. Report your Leisure to moderator. 3. Write down how much Leisure you have.

LaborStuff Production 1. Red firms report hired labor to moderator. 2. Report remaining money to moderator. 1. Blue firms report hired labor to moderator. 2. Report remaining money to moderator. LaborStuff

Goods Market Red workers buy Red stuff and Blue stuff. Blue workers buy Red stuff and Blue stuff. = Stuff Happiness = (Red Stuff + 1) (Blue Stuff + 1) ( Leisure + 1)

Report 1. Red workers report red and blue stuff purchased. 2. Blue workers report red and blue stuff purchased. 3. Red firms report money and unsold red stuff. 4. Blue firms report money and unsold blue stuff.

New Rules The discovery of the nature of redness enables Red Firms to produce the same amount of Red Stuff using the one-third the amount of Red Labor. Labor Stuff

Questions What will be the effect (if any) on the price of red stuff? What will be the effect (if any) on the price of blue stuff? What will be the effect (if any) on the red wage rate? What will be the effect (if any) on the blue wage rate? What will be the effect (if any) on red worker employment? What will be the effect (if any) on blue worker employment? What will be the effect (if any) on red firm profits? What will be the effect (if any) on blue firm profits? Will the red workers be better or worse off? Will the blue workers be better or worse off?

Ready to begin…

Labor Market Red workers sell some of your labor to Red firms for $. Blue workers sell some of your labor to Blue firms for $. = Labor Happiness = (Red Stuff + 1) (Blue Stuff + 1) ( Leisure + 1)

Leisure 1. Red workers return unsold labor for Leisure. 2. Report your Leisure to moderator. 3. Write down how much Leisure you have. 1. Blue workers return unsold labor for Leisure. 2. Report your Leisure to moderator. 3. Write down how much Leisure you have.

Labor Production 1. Red firms report hired labor to moderator. 2. Report remaining money to moderator. 3. Triple your quantity of red stuff. 1. Blue firms report hired labor to moderator. 2. Report remaining money to moderator. Stuff LaborStuff

Goods Market Red workers buy Red stuff and Blue stuff. Blue workers buy Red stuff and Blue stuff. = Stuff Happiness = (Red Stuff + 1) (Blue Stuff + 1) ( Leisure + 1)

Report 1. Red workers report red and blue stuff purchased. 2. Blue workers report red and blue stuff purchased. 3. Red firms report money and unsold red stuff. 4. Blue firms report money and unsold blue stuff.

Results…

Information and Intuition When it comes to economics, human intuition sometimes fails because the human mind has evolved to wring maximal use out of limited information.  Good for making snap decisions.  Bad for making thoughtful decisions.

Left half of room: Put your heads down. Right half of room: Write what you read.

The average person in Albania earns an annual income of $600 (in U.S. dollars).

Right half of room: Put your heads down. Left half of room: Write what you read.

The average person in the U.S. earns an annual income of $32,000.

The average person on planet Earth earns what annual income (in U.S. dollars)?

Anchoring When we see a piece of information, we evaluate subsequent information in light of the first piece of information. Information News interview of a single mother working three jobs to support her family. Policy Question Do we need welfare reform? Problem How common is this example?

Left half of room: Put your heads down. Right half of room: Read and answer.

Should we require school districts to pay to install seat belts on school buses? Definitely not!Absolutely!

Right half of room: Put your heads down. Left half of room: Read and answer.

Every year in the U.S., 17,000 children are treated in emergency rooms for injuries sustained in school buses accidents. Most of these injuries could have been avoided had the children been wearing seat belts. Should we require school districts to pay to install seat belts on school buses? Definitely not!Absolutely!

Availability It’s easier to see what’s in front of us that it is to see what isn’t. Information News report showing the benefit of school bus seat belts. Policy Question Should we require seat belts in school buses? Problem What is the expected benefit and what are the tradeoffs?

So what? People will make poor decisions due to anchoring and availability. The question is not whether the government or the market should provide solutions. The question is which mechanism will more quickly identify and correct errors.

Solutions and Error Correction How are solutions provided? GovernmentDesign (requires omniscience and omnipotence) Market Spontaneous order (requires freedom) How are errors identified and corrected? GovernmentDesign (requires omniscience, omnipotence, and altruism) MarketSelf-interest and natural selection (requires freedom)

What are the tradeoffs in requiring seatbelts?

But, we’re talking about saving children’s lives. You can’t put a price on that! If it saves just one life, no price is too much! Bring it on!

Spending $2.75 million on bus seat belts will save 1 life. Spending $2.75 million on malaria prevention will save 275,000 lives. Cost of 1 life saved via seat belts is 275,000 lives lost via malaria. Everything is scarce. Every choice includes a tradeoff.

Laws of Economics Given that everything is scarce, every choice will involve a tradeoff.  Who decides what tradeoffs are acceptable? Deciding by vote allows everyone an equal say.  Should everyone have equal say? Should we weight each vote based on how strongly the voter feels about the tradeoff?  How do we know how strongly the voter feels?  Voter has incentive to lie!

Laws of Economics Prices are much more than “how much something costs.” Prices signal how strongly the community feels about things. All other things equal… The more people want something, the higher the price. The greater the opportunity cost of bringing something to market, the higher the price.

Economic Models

Economic Models

Economic Models

Economic Models Criticism: Ignoring factors that impact model results Is the driver cautious? Does the driver have good reaction time? Criticism: Issues that invalidate the model The car isn’t moving. The car has no mass.

Economic Models The point of the economic model is to strip away: Irrelevant information (e.g., the color of the car), Relevant but individual specific information (e.g., the reaction time of the driver), and Relevant but negligible information (e.g., the mass of the driver).