Class 41 - Entrepreneurs

Society only cares about the distribution of wealth, not the accumulation.

Entrepreneurs

Factors of production = land, labor, capital

Land = explicit cost = rent

         = implicit cost = forgone opportunities

Labor = explicit cost = wages

           = implicit cost = forgone wages

Capital = explicit cost = rent (materials)

             = implicit cost = forgone rent

Profitability = rental rate + appreciation rate – interest rate

Benefits of buying assets = forgone rental payments

Annual [(rental payments) / (price)] + [(change in asset price) / (price)] – 10% = 2.5%

2.5% = how much richer you get each year by owning a car compared to renting it. Positive = buy it, negative = rent it.

Class 40 - Dead Weight

An excise tax makes sellers pay. The sellers send money to the government – legally. Putting a $1 tax on something causes the supply curve to shift out and the price rises by less than the dollar.

The cost of taxes is the value of forgone trades. The value (not money) of the products that don’t get sold due to the tax= dead weight loss.

Taxes are just transfers but they change people’s behaviors. Taxes make people substitute. They give sellers an incentive to sell other things.

Resources collect taxes inefficiently so America has a 30% dead weight loss.

Buyers pay sales tax = Taxes cause demand curves to shift by the amount of the tax.

Excise and sales tax graphs look the same. Legal incidence of taxes doesn’t matter; they’re independent of economic incidence.

Economic incidence is determine by relative elasticity of supply and demand. A steep demand curve is inelastic.

The party less sensitive to price change will bear the burden of the tax.
*More elastic = bare less burden

Economic burden is a function of the slopes!!!

ECONOMIC IMPACT OF TAX = how much worse off you are compared to beginning after taxed
buyers - how much more they pay for product
sellers - how much less they take home for product

Class 39 - Everything's Bigger in Taxes

An excise tax is where the legal liability for the tax is on the seller – they have to pay the government.

The tax may increase but the product’s price did not increase. The ultimate price increases.

Why do taxes not raise as much as they should? The make wedges between buyers and sellers.
-inefficient
-hurts the world

Taxes are bad = prevent socially beneficial transactions.

Taxes aren’t costly. The act of raising taxes is.

Fore!!!!

At Bethpage Golf Course in NYC, a public golf course, there is a shortage of tee times. As the demand of tee-times increase for avid golfers in a highly populated area, supply stays constant. The Golf Course has tried to ration off the scarce tee-times but the allocation has only resulted in the emergence of a black market. There are about 70,000 golfers trying to play the limited 35,000 rounds a year. The nygolfshuttle.com has been able to play the system and created a business of supplying tee-times to golfers for a very expensive price. This rationing system gives the tee-times to people who can afford it and not always to the persons who most value golfing. Bethpage has tried to deal with the scalping of the tee-times but the shuttle company operates under totally legal procedures. Bethpage has tried to institute rules to prevent scalping and people who go around the rules but has failed. Look I admire the shuttle company. Sure they are a horrible scalping company who is making money where they shouldn’t in a system much like rent control, but they are a good middleman and deserve to profit for being smart enough for instituting the shuttles and scalping system.

1.  Is there a better rationing mechanism for the tee-times? Can we give the tee-times to people who really value them and can’t purely just afford them?

2. Can we fix the system? Is there a way to eliminate the shuttle company and scalping system? Should we even fix it?

3. Is the shuttle system a good or bad thing? Is it ethical?

Supply cannot meet the increase in demand so a shortage emerges. Because of this a black (secondary) market develops as well.

End of the Semester....Need......Food!

So as we get closer to the end of the semester all students are facing one issue: we have very little declining left!

Look at the beginning of the semester I had $500 in my declining balance and used it without hesitation through the months. I have as of today $64 left in my declining balance. Now this is probably just enough to make it through the next 14 days I am here at school especially with my ability to use unlimited at Douglas and Danforth. However, I have noticed some things over the past week or so.

As people start losing declining and notice that their balance is getting under $100 or so they start spending less at the Pit and Starbucks. This has lessened my late night trips, study breaks, and just boredom to go get some Panda Express or coffee. And it could not have come at a worse time.

Look Danforth and Douglas are great, they have edible unlimited food, but it never changes and I'm sick of it, but the Pit has varieties and stuff from the "real world."Coffee is becoming more of an essential as finals near and I am up late writing papers or studying. So when I need my declining the most, I see I have the least available.

So people have responded. People buy less. They use declining less often. People (yes I have seen it) steal. And the Pit and Starbucks have done NOTHING! As a company, these restaurants should be ashamed. Here's what I say: We should have a system where we save about $50 for finals week when we want to use our declining the most. Also turn off the light up screens that say our balance when we check out. We can easily have a system where we check a price online if we care that much and we just get a bill at the end of a semester telling us how much we owe for our declining spent. This way people won't stop their spending in a time that spending is most encouraged and companies will prosper.

Class 38 - Minimum Wage and Rarity

The world needs no regulation...what?

Minimum wage
Companies respond to increases in minimum wage - hire less.

Rarity and Scarcity
Rarity is something we don't have a lot of (absolute concept)
Scarcity is something that is not enough to go around (relative concept)
Rare but not scarce or scarce but not rare.

Surplus and Scarcity
In a surplus, Qs > Qd. Scarcity means there are tradeoffs to get things. Surpluses describe how much supply and demand there is at a particular price.


Making things illegal:
1. Producers keep making the goods. You make a lot more when its illegal - inelastic.

Class 37 - Rent Control

There are things in our world that are unearned and we shouldn't profit from them. Unearned rent is rent that people pay to you that isn't a result of your own productive activities.

Rent control - price ceilings

Consequences of Rent Controls
1. Reduced availability and goods are harder to get - still have competition/rationing
2. Lower quality
3. Money is paid other places - black markets
4. Misallocations - people who want goods don't get them
5. Impact other markets
6. Fairness
7. Discrimination
8. Monitoring/Enforcement Costs - costs associated with regulating leads to costs
            -intrusions reduce incentives to keep apartments in the long run and the supply curve shifts/flattens
            -monitoring doesn't produces goods/services
            -raises taxes

Class 36 - A World of Prices

People economize because of prices so when rationing, only people who want goods get them.

Centralization vs decentralization
Central planner decides the producer, who gets the good, and how much to make. But no one has all the information for this.

Price Fixing
A good's price shows what is happening in the economy. Buyers hate high prices/sellers hate low prices. Price changes.

When gas prices go up it is price gouging. When prices go down, they are exploiting workers and competing. When prices are equal the companies are collaborating.
Price fixing = rent control

"Duked" Out of A Dorm Room

In Mungowitz’ blog post, he talks about how the Duke University housing lottery is unfair and a bad rationing mechanism. According to his story, Duke put the Iota Tappa Kegga (ITK) frat in a spot that the Baseball Stats Study Group (BSSG) while BSSG was in a spot that ITK wanted. The University refused to allow ITK to pay BSSG to switch dorms but would allow them to trade. Mungowitz addresses the fact that the University should not prevent this exchange because it makes the two parties better and no one worse off. But still the University says (in a vague and badly written letter that inspires contradiction) that the monetary exchange goes against the “intent and spirit” of the University and the housing committee and only a money-free trade would be allowed.

1. If the monetary exchange were to happen, what negative effects would plague Duke and the housing lottery in the future?

2. Should Duke replace the housing lottery with a better rationing mechanism? What if the system came on a first come first serve or force rationing mechanism?

3. Did the University officials do the right thing and if so what were the real reason they prevented the exchange?

This blog post article looks at how a “fair” rationing mechanism of the lottery can turn into a horrible rationing mechanism when “the assignment of a group to a space allocation has zero, zilch, bagel, nada to do with how much that group VALUES that location." In this case the lottery is a bad rationing mechanism. There is no doubt behind this.

Some people say the exchange should have money involved. When people are forced to barter, the trade will take a long time (if ever). ITK would have to go find some group who is willing to trade with no money involved. This time spent is an opportunity cost of time wasted, especially in college. With money involved in the trade, bartering is not needed and a trade can occur easily.

So why did Duke prevent a monetary exchange but allow a trade? The administrators at Duke University are smart enough to realize the law of unintended consequences. If groups are only allowed to trade dorms then there will be very little consequences, all transactions would require a majority vote for a trade. However, if the exchange was monetarily based then there would surely be unintended consequences. The first pick in the lottery would pick the most popular spot on campus or a spot they know someone wants (even though they do not want it) and force people to pay them for the switch. The housing lottery would turn into a game where the first picks in the lottery would attempt to get money. When we put money on a transaction that originally was based off of wants and a need to trade (like paying for Kidneys) there are unintended consequences that follow. Things become a market. Also, the marginal value behind the "best" house that the first pick in the lottery has is amazing and many people will want the dorm. A monetary exchange will cause students to drive up the price as they compete for the best house and the people who won the house in the lottery would gladly charge a high price that they know people are willing to pay. Look there may be many other unintended consequences but Duke still should have come up with a better reason than the exchange goes against “the intent and spirit” of the University. Come on!

Rationing Mechanisms on Black Friday

On Black Friday people line up in the middle of the night to get the best deals at stores with amazing sales. While everyone in America is starting to think about buying gifts for the holidays (and there is a fixed amount of goods in stores) the goods are rewarded to the Americans who camp outside stores on a fake holiday that comes the day after Thanksgiving.

The rationing mechanism for Black Friday is that of queues - it is first come fist serve. This mechanism is the most costly as people must pay the opportunity cost of standing in line. While people are standing in line and not dining other useful things (like sleeping), the fail of this mechanism is the fact that there is no sense of value.

Stores believe that if people truly valued a good then they would get in line but this isn't the case. Just because a rich person in front of me wants to buy one of twenty toys for their kid doesn't mean they should get it. What if the only thing my kid wants is that toy? Who values it more and who should get it? - Me. But who is in line first? - Mr Rich man.

So even prices fail to be a rationing mechanism here. Queues have taken over Black Friday and there is no sense of value that comes into play during this holiday. We have failed.

Class 35 - Decentralized Knowledge

Today we talked about the advantages of decentralized knowledge.

Centralized knowledge is an impossible dream but decentralized knowledge can work (doesn’t always) and well functioning markets and democracies help combine decentralized knowledge.

For example if on a supply curve: if it’s easy to find titanium and the price of titanium increases, then producers will dig up a lot of titanium. But if it’s hard to find titanium then the supply curve will be steeper.

Czar of titanium – needs to know everything about titanium – all the stuff he doesn’t and will never know.

The solution to the failure of the czar = prices.

Prices show that someone can make adjustments.

If you change your behavior, the price increases less and the quantity supplied doesn’t increase as much when demand is elastic.

Class 34 - Confucius Says: Be at Equilibrium

Today we looked at what happens when there are changes in supply and demand. We ask ourselves two questions: How the buyers and sellers respond to the changes and whose plans are satisfied?

These changes create either:

Surplus – quantity supplied > quantity demanded at a particular price

Shortage – quantity demanded > quantity supplied at a particular price

When these two conditions happen, forces work to reestablish equilibrium.

The high prices signify scarce goods. Prices increase to relieve a shortage.

The low prices signify non-scarce goods. Price decrease to relieve a surplus.

Scarcity talks about relative abundance – not absolute abundance.

Equilibrium is where neither buyers nor sellers have the incentive to change their behavior at a certain price.

There is market clearing equilibrium (good) where quantity demanded = quantity supplied.

Also there is non-market clearing (not good).

WWII Propaganda Posters

The first poster tells consumers to conserve materials because "waste helps the enemy." By decreasing demand for citizens on materials, the supply of the military will increase. The second poster tells consumers to use less gas by carpooling because "when you ride alone you ride with Hitler." If citizens decrease their gas supply, the military can have more gas. The third poster tells people that the world can't be half slave and half free; this poster appeals to American principles and ideals and tries to get people to enlist in the military. The fourth poster tells people to pay no more than the price of rationed goods and also to not accept free rationed goods. This is an attempt to protect America from inflation by keeping equilibrium price steady.

I can see what these posters are trying to do to people but could the people in the 1940s? Did they recognize that these posters were trying to help them? Also who made these posters? Did the government or did private businesses and companies or a mix of the two? And finally, did these posters work? Did the propaganda work and is there data to support this?

We looked at WWII propaganda posters because they show economic principles of supply and demand where we try and increase military goods while rationing civilians'.

Defying Gravity and the Law of Supply

There is probably some elasticity rule or other factor of supply curves that I haven't realized yet but I may have found something defies the law of supply.

Supply curves show that as price increases, there is more production and more quantity supplied. Supply curves slope up due to the law of diminishing returns - its harder to make more/cheaper goods after the first set of goods.

However, I had my OBOC (Off Broadway On Campus) show this weekend and we ordered shirts with a 4 colored print of "Defying Gravity" (a Wicked song). The shirts cost each person $17 and costed the producer some price to make. But here's the thing with tshirt prints. It costs MORE to make that first tshirt. After the print is made for that first shirt, the price decreases for each shirt produced - it's easier to make tshirts. This defies the law of diminishing returns.

So when the quantity supplied increases, the price actually decreases for the producer. This doesn't follow the Law Of Supply!

Again I may be missing some factor or law of elasticity, but do printed tshirts defy the law of supply and diminishing returns?

Class 33 - Kidneys! Kidneys! Getcha Kidneys Right Here!

Market economies goal = get goods to people who value them the most.

Price system
-ration by price system = people decide/ration for themselves = economize
-prices = consumers look at values and tradeoffs

Can healthcare be independent of consumer characteristics?
-equal access = coin flip chance
-illegal to sell kidneys = higher marginal value on a kidney

transactions = money changes the nature of a transaction
-batering is ineffiecient - hard to find people to barter with
-prices allocate goods - assign values to goods (lowers transaction costs)

Class 32 - Rationing Mechanisms - Not Fair

The challenge we are dealing with is scarcity. We use the price system to ration scarce goods. The costs are opportunity costs and they are what other consumers are willing to pay for a product is a cost for the producer.

Rationing Mechanisms:

1. Need - neediest gets it first. This seems very appealing but it's too vague. Who determines need levels?

2. Queues - first come first serve. This is the most costly. The length of the line = price/cost

3. Lottery - fairest. However, the people who value/need it more might not get the good. Basketball lottery isn't fair. In 2007 the Celtics were the 2nd worse team but got the 5th pick in the draft because of the lottery and didn't get Kevin Durant for this reason.

4. Equal shares - communism. Cutting up makes some things worth nothing and not all parts/time cut up aren't worth the same.

5. Force/Kicking Ass/Might Makes Right - costly. You can't plan and it's not fair - same people never win

6. Merit - good moral connotations but hard to say who earns merit


Evaluation Rationing Mechanisms:

Competition comes from scarcity.

1. What is the nature of competition?
-is it destructive or constructive?
-price system is the only one not destructive.
-when people focus on competition they don't focus on other things
      -but with the price system - competition focuses people on productive benefits

Class 31 - Supply!

Supply
Each point on the curve: the cost of producing a unit. Price increases = more production = more quantity supplied (it costs more to make more).

Supply curves slope UP!
-This is because of the law of diminishing returns - its harder to make more/cheaper to grow the first 10 acres of corn than the next 10 (more fertilizer/water)
-Other factors - other factors that have law of diminishing returns

What changes supply?
-Price of the good changes as you move along the existing supply curve. Change in supply shifts curve.

-changes in factor (input) prices
-expectations
-technology
-changes in other markets
-elasticity

Price Elasticity of Supply - How much more will I produce when the price goes up?
m = %change in quantity supplied / %change in price of good

The Theory of the Leisure Class

Giffen and Veblen Goods

Economists are convinced that nothing "breaks" the law of demand which says that when price increases, demand decreases. Their way of explaining price increase with quantity demand increase is by claims of elasticity, substitution, and complimentary goods. But there are some goods that defy the law of demand.

Giffen goods are a type of inferior good where quantity demand increases with a price increase. These goods are a legend first thought of by Sir R. Giffen, but don't exist - to what we believe. Sir Giffen showed that for example: "a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits." This in reality is just because all prices have risen and not just bread - and bread is still the cheapest.

Veblen goods seem more feasible. They are also known as goods of ostentation - basically showing that you have wealth. Why should a person desire more expensive goods? Even when the price is outrageous and income doesn't change (or may even decrease) the quantity demanded is still high because it is a symbol of social status. These aren't just normal goods - they are superior goods. It is hard to prove that these goods exist.

For both goods, it is hard to prove they exist. It is very hard to prove that Giffen goods are real, but Veblen goods seem more reasonable. When looking at things in a social class context, goods do seem to increase in price and quantity demand at the same time.

source:
http://kadicamardese.blogspot.com/2007/10/what-are-giffen-goods-what-are-veblen.html

Class 30 - Elasticity and Supply

 Income Elasticity of Demand:

%change in QD / %change in income

-how much consumption changes with income

            -income goes up, number is positive = normal good – buy more as income goes up

            -income goes up, number is negative = inferior good – buy less when income goes up

Ex. Income is $50,000 and you spend $500 on a good and M =2.

            If income increases by 20%, you spend 40% more on that good

            If change in income is $10,000, you spend $200 more on that good.

Cross Price Elasticity:

Cross price elasticity = positive = goods are substitutes

                                  = negative = goods are inferior

Pizza / burritos. Price of pizza increases = demand for burritos increases. = substitutes

SUPPLY

More money = produce more

            Cost = tied to an action (not just a thing)

                    = tied to a person

It costs more to make a bike than a table because bike resources are valued more and the people who make bikes have an easier time finding jobs. Opportunity cost of table resources are less than the bike because people bid away resources.

Quantity supplied vs law of supply:

Quantity supply = amount of good that firms are willing/able to produce at a particular price

Law of Supply = price of a good rises = sellers make more.

Class 29 – Elasticity for Campbell’s Soup = Mmmmmmm….

The law of demand says that when something is more expensive, we consume less of it

Elasticity = m - %change in QD / %change in whatever you are interested in

Here’s an example:

-Price elasticity of demand for apples:

Initial price = $1.50/lb            Initial QD = 6 lbs

Final price = $2.00/lb              Final QD = 2 lbs

m = ((2-6)/6)/ ((2.00-1.50)/1.50) = (2/3)/(1/3) = 2

The price elasticity demand for apples at that price is 2. If it was 10, you would be very sensitive and would probably stop consuming apples.

M:

If (-1 > m < 1) = inelastic = people are NOT very sensitive to price change = vertical graph (“I”)

If (-1 = m = 1) = unit elastic

If (-1 < m > 1) = elastic = people are very sensitive to price change = horizontal graph

Impacts of Elasticity:

            Time – not instantaneous

            Budget – some goods are a small portion so price change doesn’t matter

            Substitutes

More narrowly define a goods = higher number of substitues

-car, minivan, red ford minivan           red ford minivan = highest elasticity – more elasticity

Class 28 – Demand Change and Elasticity

Today we talked about what affects market demand. Comparative statics are what things impact the amount of a good we buy.

To move up and down the demand curve: price changes. (change quantity demand).

To move the demand curve (shift whole demand curve left or right):

            Changes in income – more income doesn’t mean you consume more.

            Price of other things change

            Expectations change – what the future predicts about demand impacts us today

            Tastes change – preferences change

            Number of participants

Normal goods – income increases = quantity demand increases

Inferior goods – income increases = quantity demand decreases

Substitute goods – price of good X increases – demand for good Y increases

Compliment goods – price of good X increases – price for good Y increases

Quantity demand is defined as how much of a good we consume as a function of our ability/willinness to buy it.

Elasticity:

When the law of demand seems to not apply.

Elastic - consumption is VERY responsive to change in price

Inelastic - consumption is NOT that responsive to change in price

We measure this using Own Price Elasticity of Demand:

m=%change in quantity demanded / %change in price.

If m =2, and price increases by 10% then you consume 20% less.

POW

Planes, Trains, and Alarm Clocks

This weekend I found that demand plays a huge part in my life. I have a very large demand for a flight to Boston. I also have a very large demand for a new alarm clock.

On Saturday I kinda sorta slept in. Usually this isn't a problem, but it was when I had a flight that left 2 and half hours before I woke up.

I realized that I had a huge demand for a plane ticket and was willing and able to pay for it up to a certain price while I sacrifice some cash. I had a lengthy phone call with my parents. At first my parents said don't bother because you would be paying for a ticket on top of the other ticket I wasted. I explained that I already had a sunken cost of the first plane ticket and that should be ignored and that the benefits of me coming home outweighed the cost of the money of the second ticket. I was on standby and magically got home.

I really wanted to go home and I had a huge demand to go home. However, other people in Rochester didn't have such a demand - proving demand is subjective - and I was able to get that last minute seat.

I also found that I have a huge demand (more of a necessity) for a new alarm clock. I went online (Amazon - my favorite middleman) and bought an alarm clock that shakes my bed. I was willing to sacrifice the cost of it because the benefits of me waking up for class, tests, more planes, will forever be worth it. My demand is really high up to a particular outrageous price. I lacked this alarm clock for so long because I never really had a reason to get it - now I had a reason. There was the transaction cost of me formerly not needing the earthquake alarm clock and that I don't have a car as a freshman in college. But because of the middleman of Amazon, the transaction costs were lowered and the trade occurred and both parties benefited - company gets $, I wake up.

Lessons - Don't sleep in and miss flights home. But if you do, make sure you live in Rochester because there is very little demand for flights compared to say JFK airport.

Class 27 - We Demand Burritos, Occupy Chipotle

Demand schedule = plan

Rachel’s Demand Schedule of Burritos.

Price. $$$                    Quantity of Burritos

      0                                         12

    0.75                                      10

    1.50                                       8

    2.25                                       6

      3                                          4

    3.75                                       2

    4.50                                       0

Quantity demanded and values are subjective – different for all people and different under circumstances.

When price is low - the tradeoffs for the use of that good is low.

When price is high - the tradeoffs for the use of that good is high.

(i.e. burrito baseball.)

There’s no right way to consume things. When prices increase – you give up uses of a burrito that are least pleasurable first.

Demand Curves

Show relationships of demand schedule.

Price is independent variable - on y-axis.

People buy less because when prices increase, you are poorer, and you consume less.

Wealth effects
ex. oil prices increase and widens range of substitutes available - look for them and consume less.
ex. my income is $50 (corn is $1). My income is 50 corn so if corn price doubles, my income is halved. If I spend $10 on corn and $40 on other things, then I have less to spend on other things. Also if  corn price increases I will look for substitutes. I buy less corn.

Demand Curve
  - marginal values ($3 = 4 burritos) - The price of the 4th burrito is $3.
  - total expenditures ($3 x 4 burritos = $12 spent)
  - total values - area under curve = $14.25
  - buyer's net gains = consumer surplus $14.25 - total expenditures $12.00 = $2.25 buyer's net gain
  - total value = $14.25 vs marginal value = $3

We behave this way - demand curve slopes down because 1. wealth effects, 2. substitution availability, 3. **diminishing marginal utility**

Diminishing marginal utility = each unit you purchase as a good gives less satisfaction than the previous good (pizza example). Even when price is low, I am not willing as much to pay for more.

Class 26 - Transaction Costs and Demand

Transaction costs = stop beneficial transactions. Middlemen have the comparative advantage to lower transaction costs – able to bring consumers/producers together. Supermarkets are middlemen. Price is higher but consumers don’t have to travel all the way to factories or farms. Middlemen exchange property rights. They bridge barriers between transaction costs and get rich.

Demand

Demand is a relationship between the amount of something you wish to get and the sacrifices needed to get it.

We moderate this when circumstances change.

This is not an all or nothing concept. It is not a marginal concept.

People specialize and don’t resort to self-sufficiency because we live in a large, impersonal world. Exchange can occur in small communities.

Problems in a huge world = information problems and transaction costs.

The price is information – signals to buyers/sellers about costs and values. The knowledge and resources allow order to emerge.

Quantity demand is a number. It’s the amount of a good that buyers are willing and able to consume at a particular price.

Law of Demand = other things equal. The quantity demanded good falls when price rises. We buy less when things get expensive.

Markets are any group of buyers and sellers. It is any unorganized, decentralized interaction between buyers and sellers. This causes 1 of 2 things to emerge: money prices or non-money prices (education/healthcare/etc). Markets blend the 2 and get order.

Buyers = demanders. In goods markets, the demanders are households and in factor markets the demanders are firms.

Sellers = suppliers. In a goods market, the suppliers are the firms and in goods markets they are the households.

Class 25 - Outsourcing is Good?

Today we talked about how trade is always balanced and political borders have no real purpose in deciding the benefits of trade. Rizzo talked about a suit that cost $10,000 because it took 500 man-hours at $20/hr to make the suit with materials within 100 miles.

If there were 1,000 jobs outsourced to India, the workers would lose their $100,000 pay (wages, pensions, health care) so the company saves (the people lose) $100 million dollars. But the company only outsourced to minimize prices for consumers. So now the products in India are $2 cheaper. Therefore, the consumers gain $120 million and lose $100 million.

Cope rations don’t flee to pollution havens because of environmental conditions AND infrastructure and political stability

Things that trade does to be beneficial:

1.     Smithian Notions = You specialize because of trade, allocate time to learn one thing, and gain knowledge to get capital. Specializing = extend the market (economics of scale).

2.     Racardian Notions = Comparative advantage.

People value things differently = needed for trade.

Transaction costs = cost of negotiating contracts and agreements

            -physical barriers, ignorance of opportunities, interference

American - The Land of Lambs, Cheese, and Icemen

The Mike Rowe video looked at the problems in society with castrating lambs. Peta and the Humane society say this should be done by rubber bands (don't ask) but farmers still use knives/teeth. The farmers know what is better through experience. The rubber band lamb sat down and won't walk for a few days but the knifed lamb was off frolicking in the field. Rowe says society has a "War on Work." We have sacrificed infrastructure and trade schools. He says innovation without imitation is pointless.

The Roquefort video looked at a cheese shop that sells Roquefort French cheese. In recent years tariffs have caused this price to increase. The government imposed tariffs in response to France not buying American beef. The cheese shop owner realized that soon enough people will not have the choice in consuming. She has waged a protest on the tariffs through a publicity stunt "Long Life Roquefort." She says that soon Americans won't even have the option of buying cheese. Our choices will be made for us. This was a very interesting look at how tariffs and trade restrictions affect businesses and society.

The NPR articles and audios of the Jobs of Yesteryear: Obsolete Occupations looked how advancements in technology had replaced a lot of jobs like the iceman, switch board operators, and the telegraph operator. The audio clips gave a nice insight into how the jobs were replaced and obsolete. But some people like iceman said that they were happy with the replacements. "Thank God for refrigerators."

I still have questions. 1. What does Rowe mean by innovation without imitation is pointless? Shouldn't people try to improve and advance technologies and not just imitate or does he mean something different? 2. The government knows the effects of harsh trade restrictions and tariffs on the consumers and producers but still does it. Why do they continue to harm society just so they can play a political game? 3. The people who lost their jobs seemed happy - they seemed to show that although technology is a job killer it is a good thing. What happened to all these obsolete workers? Did technology simply make more jobs?

These videos gave different looks at economics in society. The Rowe video looked at society problems, the Roquefort video looked at political problems, and NPR looked at technological problems.

Cheating is Wrong. Collaboration is Economics.

Comparative advantage seems like a very hazy subject. Who is really going to mow people's lawns or trade wine and cameras? It didn't seem that this had real world applications. But it does!

A bunch of my friends were sitting around today watching College Football. Someone started ranting about how they had to do their bio homework and math webwork over the weekend. They had already finished the bio but not the math. Another person, who was in the same classes, said they had done the math but not the bio.

They're eyes lit up. They realized that the should help each other finish the work. While a third person said they should just give each other the work that was done and copy it - these two unknowingly economists knew that cheating was wrong, but collaboration wasn't.

Person 1 said the math took them 20 minutes and the bio would probably take them an hour. Person 2 said the bio took them 30 minutes and the math would take 45 minutes. Person 1 has the comparative advantage in bio as their bio work takes 1/3 math (while Person 2's bio is 3/2 math). Person 2 has the comparative advantage in math as their math takes 2/3 bio (person 1's math takes 3 bios).

So the two people decide to collaborate and help each other finish the work. Now Person 1 did their bio in 30 minutes and Person 2 did their math at 20 minutes by the help of their friends. The world just gained 55 minutes back through this collaboration. Time for more football!!!!!

Class 24 - Trade Defecits are our Friends

Today we talked about what determines is jobs are shipped overseas. The answer is absolute and comparative advantage.

For example. If China produces at $2/unit and USA produces at $1.5/unit then USA has an absolute advantage. This shows wages/MPL (marginal produce of labor)-(how much stuff you get if you work another hour). But we need to find comparative advantage.

So does trade surpluses = jobs? Agriculture shows no. A trade deficit doesn't create or hurt jobs.

Trade deficit = amount export less than import

It doesn't hurt jobs because people pay for imports with exports. Specialization = wealth increase (use fewer resources). And with more money - people consume more and create more jobs. Employment increases on net.

We then discussed what the US Current Account Balance (what Americans sell compared to buy) and
the US Capital Account Balance (American assets - treasuries/bonds) were.

Class 23 - The Robots are Coming - they Have our Jobs.

Today we defended trade and showed how trade does not cost jobs - it just changes the jobs.

The sources of job loss from trade are outsourcing/technology replacing people.

Technology is the real job killer.

Foreign competition also causes manufacturing job loss.

Let's run a trade deficit. If we buy more from China than we sell - we get a service surplus and a goods deficit. The deficits don't hurt jobs - they just change what kinds of jobs we have/need.

Some say Americans don't make things anymore - NOT TRUE. Manufacturing output increasing steadily since the 1940s.

Class 22 - Wine and Cameras. Sounds Like a Good Class.

Today we talked more about PPF-production possibility frontier.

We looked at comparative advantage. Absolute advantage is just the ability to produce something. Comparative advantage is how much more efficient you are at producing something than someone else.

Efficiency = less tradeoffs

Comparative advantage shows that self-sufficiency is the road to poverty.

For example: There are only cameras and wine produced by Rochester and Cornell.

Rochester can make 5 cameras and 10 bottles of wine. Cornell with the same resources only makes 4 cameras and 3 bottles of wine. Rochester has the absolute advantage compared to Cornell.
So who has a lower opportunity cost? Who does it cost less for? Who has to make less tradeoffs?
So for Rochester, 1 camera = 2 wine and 1 wine = 1/2 a camera. For Cornell,  1 camera = 3/4 wine and wine = 4/3 camera.

Rochester has a comparative advantage in making wine compared to Cornell. But Cornell has a comparative advantage in making cameras compared to Rochester.
Rochester has a lower opportunity cost so it has a comparative advantage over Cornell.

Nobody can have a comparative advantage in everything!

Now let's say that Rochester had 10 wines and 0 cameras and Cornell has 0 wines and 4 cameras. Rochester gives 3 wines and Cornell gives 3 cameras. The price of exchange was 1wine/camera. Now Rochester has 7 wines and 3 cameras while Cornell has 3 wines and 1 camera. Both schools now operate outside the PPF (look at notes) so trade is sustainable and profitable.

Restricting trade is costly.

The world is richer.

Property Rights

In reading the 43 pages of Rizzo's notes on property rights, I saw how rights create justice, wealth, and peace, but there are still some problems. Property rights come from changes in the way of producing, changes in values, or changes in hopes. They are the human rights we have in regards to property. In order to protect these property rights, we have institutions that allow heterogeneity and scarcity in society.

I found all the notes interesting, full of historical examples and contradictions. I found the discussion on my decisions affecting society interesting as I don't really think about it that often. While people don't care about my personal decisions in wasting my property, they might disagree with my decisions as they sabotage society's goals.

I found the objections very interesting as counterarguments usually are. First, was that private property relies on selfishness. This argument is wrong because people want different things and do different things with their property and because it poses "false alternatives: love, trade, force."The second objection on the misallocation of resources (one man starving while other people starve) is true but is hard to regulate. I guess governments would like to think that the rich would feed the poor but the rich to waste food. But in reality when your mom says "don't waste the food, there are people in Africa starving!", are you going to ship them the leftovers? The third objection is very interesting especially today as it deals with the fact that men aren't really free. There is the threat of socialism and communism and Americans fear this impending doom under the new health care bill. The forth objection dealt with the origin of property rights and looked at Hobbes (saying rights come from the government) and Locke (rights are natural rights). This argument still is alive today. The fifth objection dealt with how property rights are truly just human rights in regards to property.

There was then a quick history lesson showing the feudal system and how monarchs would give property. Then through evolution property rights occurred spontaneously as individuals seek their own plans and properties.

The problems of property rights presented at the end were very interesting. First the government protects our rights but steals our property. Second, there is the fragmenting of rights shown in communist Russia. Then there are the problems of universality not always being possible, equity making it difficult to allocate property rights, an information problem,and markets making mistakes.

Despite the extensive notes, I had questions.
1. Playing off Hobbes and Locke, what is the origin of property rights? Government given or God given or a mix?

2. If people have the rights to delegate trade by property rights, what is the basis for governments to make laws preventing this trade?  Ignoring mercantilism, why are there laws preventing property rights of scalping tickets or selling illegal things? The 5th amendment of the US constitution states  that people shouldn't "be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation." When does the issue of government taking our property rights away become an issue under this amendment?

3. At what point does my "selfishness" that is purely me wasting my property on what I feel like harm society? It seems that almost all people are selfish and harming society under the definition of wasting property on whatever they want. So why isn't our society and economy horrible?

We read these notes because property rights tell individuals how to use our property in the market. The notes also explored the problems with property rights that have affected society. Also the notes dealt with trade under property rights.

Rule of Law in Mel Weekend

This weekend was Meliora Weekend at Rochester, a weekend full of fun and excitement for parents and alum. However, there was a huge controversy over tickets to see the keynote speaker, former President Bill Clinton.

The controversy was that the tickets were limited and the alum and "big donors" got first dibs on the tickets. The rest of the university had to go online while the registration crashed and were unable to get tickets. There was then a lottery for some students to get tickets, but most students scalped these tickets.

The University of Rochester violated the Rule of Law. This says that there should be no special privilege given by a governing body to certain people. The University did just this as they gave the alum and donors the tickets to see Bill Clinton (indirectly because they had early registration) and had everyone else get what was left over.

Some students were in uproar and articles in the school newspaper showed how upset some students were at the Universities unfairness. They thought there should be no favoritism and if there was then it should be to the students who go to the University - the alum had their turn here.

Every group is going to say they should have the special privilege but no one should. If anyone should get the privilege, I can see why they would give it to the alum as they are the ones donating to this new $1.2 billion plan.

But there was no equity in the ticket distribution. There was no horizontal equity that treated everyone as equal people. Instead they favored one certain group, violating the Rule of Law.

Class 21 - Making the World Richer and PPF/PPC

Today we talked about comparative advantage.

One example is Rizzo has a huge collection of baseball cards worth $8000 but is missing one card so it is really just $1000. He has an extra card worth $200 and trades it for the needed card worth $0.02. Rizzo turned something worth $200 into $7000 while his friend turned the $0.02 card into $200. Rizzo had $1200 and his friend had $0.02. After the trade Rizzo had $8000 and his friend had $200. $1200.02 was turned into $8200 and now the world is $6999.98 richer.

Another example is in yard work. Rizzo and Rich have the same size yard. Rizzo weeds his lawn in 80 minutes and mows it in 40 minutes. His neighbor Rich weeds in 120 minutes and mows in 120 minutes. Initially Rizzo does 120 minutes of work and Rich does 240 hours or work. Rich comes up with the idea that he will weed 3/4 of Rizzo's yard if Rizzo mows Rich's lawn. Now Rich does 120+90 = 210 minutes of work while Rizzo does 20+40+40 =100 minutes of work. Both benefit and the total work is cut by 90 minutes. Rich saves more time (30 min vs 20 min) but Rizzo's time is cut by a bigger fraction (1:6 vs 1:8).

We then talked about Production Possibilities Frontier (PPF) and the Production Possibilities Curve (PPC). These operate under the ideas that all points on the line are feasible and the ones outside the line are not. It shows the absolute advantage. The PPC shows productive efficiency. The slop shows that we must make tradeoffs between goods. You can see the law of diminishing returns from the lines. And economic growth comes from increasing resources, discovery/technology, and trade.

Class 20 - Mysterious Black Box

Today we talked more about the Bus Driver example under the rule of law. We shouldn't wait for anyone because it would be special privilege, but we have a knowledge problem. Social costs are impotent.

We then talked about feedback loops. If FedEx fails, we would use UPS. However, FedEx cares when it loses a package and it is their interest to hire trustworthy people.

We looked at trade and specialization. The point of economic activity is because things are scarce and we want things. The challenge is to figuring out what gets produced, how we do it, and how to distribute it. The factors of production are land (place to do stuff), labor (people), and capital (stuff needed to produce stuff - physical and human ability to increase ability (i.e. education))

Production process: Inputs --> black box --> stuff. Black box is where cool things happen (production).

We do this by being self-sufficient, specialization and exchange (PSST - patterns of sustainable specialization and trade), and discovery.

Economics is a matching problem as self-sufficiency causes less economic activity. We need to match technology, skills, and consumer presences.

Class 19 - The Silver Rule

Today we talked about the Golden Rule and how it fails economically. If we "do unto others as we want them to do unto me"then our motivation for trade would be for the benefit of others. However, this only works in small societies and not in large markets. This fails in big societies like Stalin's Holomodor in Ukrain in the 1930's and Mao's Great Leap Forward because of a knowledge problem.

We operate under the idea that production for profit causes production for the people. But this is frowned upon. We celebrate self-interest in everything but the market (going to the gym/not smoking is good for only me and celebrated). So apparently the person who jogs is good but the person who makes the jogging shoes is evil.

We then looked at reciprocal altruism and the ethics of paying for organs. Say Tony needs a kidney and Tina gives him one. Ten years later, Tina runs a fundraiser and Tony gives her $20,000. These two events are very altruistic, but shrink the time span and the proximity of the people and the actions are horrific.

We looked at the definition of self-interest as people pursuing actions that interest them. Under this definition, Gandhi and Mother Theresa are self-interested, but not selfish.

We then talked about the Bus driver example in terms of the Rule of Law. If Rizzo is late for his buss, what is the effects. There is a knowledge problem for the bus driver to know the cost of being late. In Ecuador, lateness has caused the GDP to drop by 4%. There is a knowledge problem.

We then talked about the Silver rule. This says that "do not do to others what is unfair/unjust if they did it to you." This is better than the Golden Rule in a large population where we have a knowledge problem.

Unintended Consequences in the Real World

This week I read George Stigler's An Academic Episode and Joshua Gans' The Most Unusual Day. Both readings explored the Law of Unintended Consequences. Stigler explored the unintended consequences of rules made in a university. Gans looked at the effects of a new birth law in Australia.

Stigler looked at a university in South america run by a man named Seguira. The new rules made it so grad students, associate professors, professors, and assistants could challenge each other to a test and switch jobs and salaries. This caused professors to retire, teach wrong information, and stop research. There was intense competition and rivalry and a mad rush to the library. The rules were repeatedly changed but always had negative consequences. Graduate studies almost stopped entirely. The rules were then obliterated.

Gans looked at a law made in Australia in 2004 that said any baby born after July 1st would get a $3000 bonus. The announcement was made a few months in advanced. This announcement caused birth certificates to be changed and caused all induced labor and caesareans to be virtually stopped. There was a giant overflow in the hospitals. Births were shifted. Was it worth it?

These two examples explained the Law of Unintended Consequences. Unintended things - usually bad - happened as a result of new laws.

Questions remain.
If the Australian government decided to make the announcement on July 1st and not in advance, would there still have been unintended consequences? Is this an example of when there would be no unintended consequences? I also wonder in in 2008 when the baby bonus was changed to $5000 if the unintended consequences happened again.
Also, did Seguira not realize how the new rules could not possibly end well. Did he think people would just work harder with no selfishness? Also what happened when the rules were wiped away? Was there a backlash or more unintended consequences?
Finally, is there an example of a law of unintended consequences where the consequences are good - or outweigh the negatives? We seem to look at a lot of examples of negative unintended consequences.

My First Economics Midterm

Lat Friday I took my first economics midterm - the first midterm I have ever taken in college.

Here is the basic rundown of my schedule. I studied for the test that week. On Thursday we had the TA review session and I did not leave early and was one of twenty kids still there at the end. During this session we went over a practice test that I thought we did not have the answers to. I then went to the library until I got kicked out and then I went to bed. I took the test in an hour and then went on my fall break. I just got the results of my test yesterday.

This whole process showed several economic principles, mostly of opportunity cost. I went to the review session because I thought we didn't have the answers to the review test. I found out later in the library that we did on an audio recording and I listened to the whole thing and got all the answers. This causes me to be up later. In my opinion, I could have gotten to bed earlier had I not gone to the review session and just listened to the recording - I got the same information. The cost of going to the review session was me not studying on my own with people, me not listening to the recording until later and me going to bed late.

Now the problem with opportunity cost is that we'll never know what would have happened if I took the other option. Maybe I would have done worse on the test without the review session. Maybe I would have slept and I would have done better.

There is a point every night before a test where there is a question of opportunity cost. When does the cost of studying outweigh the cost of sleeping? The problem is, we will never know. If I chose to sleep more maybe I would do better or maybe I would do worse. If I studied more maybe I would know more, or maybe I would pass out during the test. But I will never know the outcome of taking the other choice.

Class 18 - When Markets Fail...and Rizzo Sits on Students

Today we talked about the market.

We said that market transactions caused positive sum outcomes. But markets are often wrong and sometimes trade doesn't happen.

This happens when there is a lack of markets or a problem in the institutions.

When we have a lack of markets, there are usually externalities (like social norms preventing transactions), market powers (monopolies), or information problems. Rizzo proved this by politely sitting on a student and asking him to pay him to get up. Both parties would benefit from the transaction, but there was no trade - social norms prevented this.

We have problems in institutions usually with the Rule of Law. This is when legislation applies equally to everyone, the law is not arbitrary/arbitrarily enforced, and it is a general law (see titanium czar lecture). Rizzo talked about getting pulled over for speeding and when speeding is acceptable. The law can't be arbitrarily enforced.

We then talked about efficiency as producing what people want and at the lowest cost. We don't want to wast resources.

We ended the class with inflation. This is when there is a general rise in all prices. Basically there's too much money. There is the same amount of goods, but there's just more money so prices increase. There is always that famous complaining Grandpa story - "when I was a kid, candy cost 2¢." Well you know what Grandpa? You also made less in wages.

Class 17 - Making a Deal with the Devil

Today we talked more on the Law of Unintended Consequences. This is when unintended things, usually bad, happen as a result of a law or something that was supposed to be good for society. Last post I talked about the seat belt example. Today we talked about the Endangered Species Act and how landowners who were paying the cost of the act just cleared their lands and now more animals are endangered.

Unintended consequences happen when we use simple rules to try and regulate complex systems.. We have limited information, little feedback, misleading incentives, and short time horizons.

We also talked about how when regulations push against incentives, incentives push back. For example, the Disability Act caused less disabled people to be hired because it would cost the company more.

"Sometimes the devil you know may be preferable to the devil you don't."

We ended the lecture by talking about how trade is NOT zero-sum. There is the pie fallacy - there is a fixed amount of wealth in the world.

Theaters and Fine Arts Worth Subsidizing?

In Section 4 of his essay What is Seen and What is Not Seen, Theaters and Fine Arts, Bastiat and Lamartine argue over whether it is good or bad to subsidize the arts. Bastiat says no while Lamartine says yes.

Lamartine argues that the arts "broaden, elevate and poetize the soul of a nation" and defends that countries like France would lack their soul without the arts. He believes that without taxes and regulation, an institution is doomed to fail. He also claims that with subsidies, the arts can support wages of 80,000 workers. After all, the work of artists is just as useful as any other profession.

Bastiat takes the contrary position. At first he just talks about how theaters that support themselves have better profits and that the choice to support an institution should come from the people and not from legislation. He wants to protect the free development of activities "without keeping someone on the payroll at another's expense."

Finally, Bastiat looks at the debate by what we can and can't see. The subsidies and taxes come from somewhere. And if we take 1 franc from each taxpayer to pay for the arts, then that is 1 less franc people can use on other things. Since work of artisans is just as useful as others, why are we hurting the carpenters and blacksmiths who won't have that 1 franc spent on their goods? There is the mistake of public spending replacing private spending. This just reallocates wages.

I found Bastiat's arguments very intuitive and persuasive. People don't realize the hidden costs and where the money comes from. He definitely won the debate.

I am a theater kid so I am biased, but I will try to stay non-opinionated. We cannot afford the destruction of the arts; it is the soul of countries. But today, we saw failing Broadway musicals and other problems in the recession. People today just don't support the arts like they used to so shouldn't we subsidize the arts when people don't attend plays or museums? At a point like this don't we need public spending when there is NO private spending? Also, I know I shouldn't be following the money but look: if the we let the arts fail by not subsidizing, then they will have no money to spend at the tailor. This could cause a trickle effect. Isn't it better to take 1 franc away from the tailor (and everyone else) to support the arts and thereby not destroy an institution and let the money come back to the tailor by the artist. I feel like Bastiat doesn't even touch on this. Finally, the arts are tricky. This seems like one of the only industries where there is no trade and even looks mercantilistic. Is there a way that we can make the arts more of a trade? We need more over seas showcases and shows. We need Miss Saigon in Saigon! Then competition comes and then we stop or mercantilistic ways.

We read this too elaborate on the effects of what is seen and not seen. Through the Broken Window Fallacy we saw a little about this. In class we have learned not to follow the money but to look at the resources instead. This essay looks at yet another aspect of hidden costs.

Destruction is NEVER good. It hurts singers and Duffman!

This week we looked at the Broken Window Fallacy: that destruction is never good and that while a broken object may increase the economy of the industry that has to replace the object, it hurts another industry where other objects were never bought.

Rizzo always brought up natural disasters and wars as examples. He would then ask "if it's soooo profitable, then why don't we destroy things ourselves?" Well, here are some examples.

I was watching the Simpsons, and there is an episode where Bart wants a new bike so he throws his old one in front of a car (Dr. Hibbert's). Dr. Hibbert buys him a new bike. I immediately thought of class and the whole idea that now the world was now poorer thanks to Bart. (I am making everything up from here on. This did not happen in the episode). Yes Bart has a new bike, and yes the bike company profited, but the world didn't. Dr. Hibbert had money and Bart had a bike. Now Bart has a bike and the doctor has no money. Not only does the world lose the resources for making bikes, the metal and rubber, the world looses out on the Duff Beer that Dr. Hibbert was about to go buy. The Duff company then doesn't get as much money and is forced to fire Duffman. Bart's selfishness to get a new bike has caused the world to be poorer and cost a man his job. ¡AY CARAMBA!

Here's another example.

When Rizzo talked about Lander Auditorium and the horrible-ness of the classroom for a test/lecture/whatever, a student behind me decided we should just burn it down and make a new one. I looked at the future arsonist with two puzzled looks. First off, Lander Auditorium is where Men's Glee Club rehearses and the acoustics are amazing in that room. (No one knows this benefit!) And yes we shouldn't put classes in that hall because it is a horrible classroom. If we were forced to build a new Lander Auditorium, my rehearsals would have to be moved, and that would be annoying. Perhaps we would go to Harkness during all office hours for practice. The second puzzled look was because of what we had just been learning in class. If the room magically burned down (without the rest of Hutchinson burning down) the world would suffer. Rochester had money and an auditorium. After reconstruction it only has the auditorium. Rochester would have to go get more wood, cement, lights, etc for the new auditorium. The world would then not have these resources. Then Rochester would also have less money and would increase the tuition and donations of the students and alumni. Then we don't have the money to go spend on other things in the world and the chain continues. Also, we are building a lovely new academic building whose construction site is next to our economics class. Now because of the construction, we don't have the materials or money to finish the project. But we admit the students for 2012 assuming it would be finished and now we have an overpopulated university. And we get to keep the eyesore on the quad.

Destruction is NEVER good. Whether or not it "helps" the companies that get to replace the broken things or people get newer things (bikes and auditoriums), the world suffers by destruction. We lose the money and the resources and there will be a trickle effect of hidden costs.

Class 16 - Is the Titanic a Sunken Cost?

Today we talked about the margin. The margin is a little bit more or less.

The phrase "Cassie is unselfish" means nothing. It causes the listener to compare it too what we believe is an unselfish person. Someone who knows a saint might believe that Cassie is basically God while someone from a bad neighborhood might believe that Cassie is just someone who won't mug them.

Bruce doesn't release an album every day and men don't say I love you because when they do, the value is so great at the margin. (marginal value).

For example: teachers (water) vs athletes (diamonds).
The skills for athletes are more scarce so at the margin we value athletes more. If 200 of each group disappeared, the athlete group would be more affected (maybe lockouts would happen....) But if there's none of each group, the teachers matter more. Or if there's one of each - we want that teacher more. The total value of the teachers out ways the athletes.
This is why we pay the worker making drugs more than the worker making a bouncy ball even though they might be doing the same work. The skills for the drug guy are more scarce so we value him at the margin.

Then we talked about how oil isn't a resource, but its function is. Like how people pay money for water when it's "free". We pay for the function of having water on the go.

Then we talked about sunken costs - the opposite of marginal costs. No matter how we change our decisions, these costs don't change. They are costs from the past - they are sunk. For example: if Rochester ended the football program, the mortgage on the stadium is a sunken cost - it's already spent, in the past. But scholarships and tickets would be a marginal cost.

Then there's the law of unintended consequences. Seen through seat belts in cars, yes we do save lives but what has happened? People speed more, the cost of driving badly has decreased. The accidents have increased but they are now safer accidents. But who suffers? The pedestrians.

Class 15 - Don't Throw Rocks at Windows. Especially if You Live in A Glass House - or if you value the world....

Today we talked about the Broken Window Fallacy. If Rizzo's window breaks it is bad. Destruction is bad.

1. Rizzo did not want the new window. The destruction did not happen at the same moment Rizzo decided that the window needed to be replaced because it was foggy.

2. Rizzo had money and a window. Now he spent the money and only has a window. Also he has no new driveway since he spent the money. Now the driveway people have less money. We shouldn't look at the money - only the resources.

3. Even if the window makers are unemployed and in a recession, it is bad. Creating jobs and taxing people today will only hurt us in the future.

Wars are costly - if we wanted to build a new road in Japan why did we need to bomb Hiroshima? - cheap demolition? No, wars are not worth the death or the waste of resources. WWII did NOT get us out of the Great Depression.

4. Costs are subjective. Costs that influence behavior aren't recognized because we will never know the benefits/costs of doing something else.

5. Marginal Thinking is the reference point that tells values. For example a cup of water vs a cup of diamonds. The water has high value and low cost but the diamonds have low value but high cost. If each was the last of its kind - last water/diamond, what would I want? I would want the water - proving it has higher value.

Marginal cost is the change in cost when making a decision. If I get on a plane that has one seat left - it costs the plane nothing to fly me so why not charge me less to make some profit - the plane's going to fly anyway. But if the plane is full, the plane should charge me the cost of flying a whole plane for me to fly. The cost changes based on the situation.

Class 14 - The Cost of Hearing Copacabana Over Born To Run = My Ears!

Today we talked about the axiom of scarcity and how people make choices.

We talked about how people are forced to make tradeoffs by scarcity and how these choices show our values. We talked about equity vs efficiency. Equity is making things more equal for everyone, like taxing people that do the same work, and efficiency is defined economically as producing things that people want at a low cost.

A cost is anything that consumes resources.

We then talked about opportunity costs and an in depth discussion on an example involving Bruce Springsteen tickets. Opportunity costs are what you must give up to get things - the net value of the next best option. (Benefits - costs). In class we talked about a free Bruce ticket vs a Barry Manilow ticket that I value at $50 but I can buy for $40. If I valued Bruce for nothing, the opportunity cost of seeing Bruce is $10 (the saved $10 of seeing Barry).

However, everybody values Bruce! So what is the minimum that I have to value Bruce at to see him? Well if I valued Bruce at $11 then I am saving $11 over the $10 of Barry so I should go to Bruce. But I could also value Bruce at $1 million and then I would definitely go to Bruce. I may or may not value Bruce more (I do.) But the value of Bruce must be at least $11.