Class Summary #3 for 9/7/11

Today's class was filled with a ton of information regarding a number of topics.

Class began with Professor Rizzo explaining the importance of scarcity in the study of conomics.

He explained that the only reason why we act with a purpose in life is because we can't always get what we want all the time. This really made a lot of sense to me because when I look at my own life, I realize that I do indeed make certain decisions in my life to give myself the best opportunity to get what I want. I wouldn't have to make decisions with purpose if I could get what I wanted at all times.

The main reason why we can't get what we want at all times is because of scarcity, which is when there is not enough stuff to go around.

Scarcity does not necessarily mean that there is a lack of an abundance of something, it just means that there is not enough of a resource to meet the demand. For example, there is indeed an abundance of oil in the world, but we want more of it than we have. Therefore, oil would be considered scarce because while there is a lot of it, we still want more.

There is a large amount of oil in the world, but there is still a
scarcity of oil because of the fact that we still want more of it.

A very fascinating point that Prof. Rizzo made was that an important aspect of economics is determining how to best make decisions under scarcity and that ultimately there would be no use for economics if our world was a utopia in which scarcity did not exist.

A very clear-cut example that Prof. Rizzo used to clarify the phenomenon that economics could not exist in a utopia is one in which he talked about how economics couldn't exist in heave or hell: it wouldn't exist in heaven because there are no problems in heaven, and a major aspect of economics is finding solutions to problems, and it also wouldn't exist in hell because in hell, there is no opportunity for growth in any way, and growing and improving is another major aspect of economics.

Prof. Rizzo then went on to explain what the verb form of economics- economize- means.

1. Economize- the way we react in the presence of scarcity.

Then came the big question: how exactly do we economize?

We as humans economize in one of two ways:

• Values---> Making comparisons and looking at the choices you face between things and considering the expected benefits of making each choice, so as to make the most profitable choice.
• Cost---> Comparing the expected costs for making a certain decision, both short-term and long-term costs

These comparisons/decision making  is based on rationality, which in economics means consistently making decisions and choices based on what you think is going to give you the greatest benefit. It is also important to consider that one person's benefits/costs may be another person's costs/benefits.

The cost (and benefit) of skydiving differs depending on
the type of person who is jumping out of the air plane.

For example, a person who is a "daredevil" might pay money to go skydiving. Another person who is scared of heights might never pay money to go skydiving, and would only go skydiving if someone paid him/her. This illustrates how people's costs/benefits could differ. The cost for the daredevil to go skydiving would be they money he/she paid and the benefit he/she would receive is the thrill of going skydiving. The "scaredy-cat" on the other hand would reap the benefit of being paid to go skydiving, but have to pay the price of feeling unsafe and insecure while free-falling.

Later on in class, Prof. Rizzo changed the topic of discussion to incentives, which is something we talked about in both of the previous classes. He explained a very interesting example of how incorrectly offering incentives can lead to issues.

Back in 1787, criminals in Britain we're shipped over to Australia to be held. The ships they we're being sent on had horrible living conditions.

But after many trips over to Australia, it became apparent that only 30% of the criminals we're making it to Australia alive. The reason why this was happening was of course because the living conditions we're so poor on the ship. The living conditions we're so poor because the captain of the ship was being paid prior to the trip to Australia and therefore, the ship captain had no incentive to take care of the criminals because he already made his money.

So the British government began paying him after he arrived in Australia with the criminals. Instantly, the survival rate of the criminals improved from 30% to greater than 75%, and the main reason why this was the case was because the captain of the ship knew that if he didn't improve the living conditions on the ship and bring more criminals alive to Australia, he wouldn't be paid his money by Britain.

This example shows the impact altering one's incentives can have on a person successfully performing his/her job. Because there was no incentive for the captain to keep the ship clean, he left it dirty, which resulted in him doing his job poorly. Had he been paid following the trip to Australia from the start, the captain would have had an incentive to keep the ship clean- to be paid following the trip- and more than likely, much more criminals would have survived the trip.

Prof. Rizzo concluded class by clarifying the difference between micro and macro economics, and by explaining his personal definition of economics.

Economics- the study of the emergence of order and wealth creation and the consequences of the choices made as part of the extended order of human cooperation.

• Mico-economics: Price theory- price distribution among people (the amount of money wealthy people have vs. the amount of money middle class people have vs. the amount of money poor people have is a result of micro)
• Macro-economics: Disequilibrium theory, or in other words, the study of the effects of your choices on not just on you, but also everybody else around you