1. Undressing the Dismal Science
Naked Economics
Undressing the Dismal Science

2. 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

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

4. 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

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

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

7. 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"

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

9. 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)

10. 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

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

12. 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

13. 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

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

15. 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

16. 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)

17. 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

18. 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”?

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

20. 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

21. 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

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

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

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

25. Why are many poor countries poor?
Bad government

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

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