Class Summary #25 for 10/31/11

Today, we learned about trade as we have been learning about in the past few weeks.

To begin, Prof. Rizzo explained to us how if you borrow money to increase productivity, it is not a problem even if the borrowing puts you into debt. Also, trade is always perfectly even.

We also learned about how when the US government spends more money than it takes in taxes, US needs to pay off its debt. A lot of countries such as China may buy off some of US debt because they will eventually get paid plus a 3-4% return rate per year. Doing this also keeps interest levels lower in the us.

Trade statistics are really not meaningful entities as well. Consider the trade deficit and surplus between NC, SC and the rest of the US. If NC and SC succeeded from the union, nothing would happen to them, which is proof of the aforementioned postulate.

Prof. Rizzo went on to show us a fascinating example of how inefficient "buying local" is. A group of college students at a Philadelphia-based college made a suit only with materials from towns/companies that were within a 100 mile radius of the school. It took 500 hours to produce the suit that really wasn't great quality and cost the equivalent of $10,000 to make. It would have cost a lot more on the open marker to sell.

Another example Prof. Rizzo shared was that of the Whirlpool Call Center. Let's say there are 1,000 people who work as call receivers at Whirlpool. But, we decide to send those jobs over to India. Each job loss will crush the employees because the job loss is worth about $100,000 per worker (when you take into account all the benefits that were associated with the job, plus any additional costs the worker incurs due to the loss of his/her job). This equates to about $100 million in savings for the company/loss for the workers who were laid off.

The only reason why Whirlpool would do such a thing is because it would reduce prices for consumers. Prof Rizzo says that by outsourcing these workers, whirlpool prices would reduced by $2 per unit. But when you consider how many products are sold, this would be worth the cutting of jobs to send over to India.

Then we learned about trade's impact on the environment. Nations with the highest environmental standards tend to attract the greatest investments.

Trade does two good things for the environment:
-It leads to more environmental consciousness
-Specialization through trade reduces congestion on land- we don't need to fill everywhere with farms. Instead, we can get certain things from different places, which reduces land congestion.

An important thing to consider: Trade gives us more money to spend on other things.


Class concluded with some final notes. They are below:

Adam Smithian notions of trade: When you specialize, there is much less time spent at job doing other things. You have more time to spend on perfecting a specific craft, which leads to more production. Also, specialization allows us to develop knowledge and capital where you otherwise wouldn't be able to. For example, Prof. Rizzo has an incentive to increase his knowledge of economics because that is what he specializes in. He doesn't have to waste his time on chemistry and other subjects. Finally, specialization allows you to expand in market and lowers costs.

Ricardian notion of trade: All has to do with comparative advantage.  Trade lowers costs when you take into account which person/group does a task with the lowest opportunity cost and does the tasks that you are most efficient at. By doing this, other people can do the same thing and then everyone in general is more efficient/better off.

-In economics, people valuing stuff at different values is important for trade to happen/for a marker to exist.

At the very end of class, Prof. Rizzo began to talk about supply/demand:

Transaction costs- the cost of negotiating contracts and agreements. Simply put, it is the cost of arranging for a trade to happen. There are three of them that an economy has to help buyers and sellers overcome:
1. Physical- the physical distance among potential traders
2. Ignorance of opportunities - in marker economies, we don't need to know all information before making a trade
3. Interference

Reading Assignment #8- Paul Krugman Articles

Article #1: Ricardo's Difficult Idea

A. 
Truth be told, I found this article to be extremely trite and boring. But, I did feel like it brought up a couple valuable point. I guess the most interesting part I got out of the article was how according to Krugman, many people in society (including economists) have strong economic ideals/values, yet they don't understand/are unable to grasp basic economic principle that is vital to understanding such economic phenomenons as comparative advantage.

Because of this, several economists and non-economists are against comparative advantage. It is not necessarily because they think it is untrue, but rather, because they don't understand the complete phenomenon.

This misunderstanding of comparative advantage causes many intellectuals to refuse to talk about comparative advantage.


B.
1. Krugman argues that people who don't understand certain economic principles disagree with comparative advantage. Are there people who do understand these economic principles but also don't accept comparative advantage?
2. If the answer to the above question is yes, why do these people disagree with comparative advantage?
3. Why or why not is comparative advantage an important economic principle?

C. 
Krugman's article basically gives reasoning for why certain economic intellectuals and non-economists reject comparative advantage. The reasoning he ultimately gives is that these people who do reject comparative advantage simply don't understand the phenomenon fully because they are lacking understanding in certain economic principles.

As Krugman explains, comparative advantage implies that trade between two nations raises the real income of both. Many people who disagree with comparative advantage also do so because they reject the idea of understanding the world in mathematical terms, which effectively is how comparative advantage looks at the world.

Specifically, Krugman also talks about people's rejection of Ricardo's idea, which in less words is that: we as a world/society will be able to produce more if everyone/every country specializes in what they are good at and abandon trying to produce what they aren't good at. This would make the world more productive with a lot of trade.

Krugman is convinced that those economists/non-economists who reject this idea and comparative advantage do so because they don't full grasp the concepts of it.

Krugman also discusses how he believes some people reject these ideas because most people aren't interested in reading/hearing about confirmation of old economic ideas, such as that of comparative advantage. People want new fresh ideas or ideas that challenge established beliefs. Thus, many people go against comparative advantage to accomplish that.

Krugman concludes his story by explaining what, in his mind, can be done to fix these issues:

1. We need to understand that even renowned economists may be lacking in the understanding of simple economic principles
2. We need to support old/accepted economic ideas because even though they have been around for a while, they are accurate in many instances
3. We must explain our economic reasoning and can't assume people understand our economic ideas and modeling even if they are learned in the economics field

___________

Article #2: In Praise of Cheap Labor

A.

I found Krugman's piece to be much more interesting than the previous article. The one thing I found most interesting was his outlook on low wages. I have always wondered how it is fair that people in third world countries get paid so little to make us Westerners items we covet. But, I found the article Krugman makes in favor of low wages fascinating- and truthfully, very logical.

Krugman argues that if we as "wealthy" Westerners refuse to buy from cheap labor companies in Third World Countries, we are ultimately ridding these poor people of the best opportunity they have for progress, simply because our values say that it isn't right for low wage workers to make our luxuries for us.

I also found it very interesting how Krugman argues that if we do refuse to buy these products, we will be hurting the Third World Countries even more. Without these means of income, many poor people in these countries will have no jobs at all and will have to live in "garbage dumps", i.e. Smokey Mountain, to make ends meet.

And if we do decide to pay them more with higher wages, that would be harmful as well because it would create distinct social classes where a few people are wealthy, while the majority of people who don't have jobs would be extremely poor. Not to mention, it would be difficult for companies to be able to hire such workers so it is possible than an increase in wages would cost more people their jobs.

B.

1. Is there a psychological reason for why people feel so against receiving items from third world countries where wages are so low? If so, what is it?

2. Has anyone ever tried increasing their wages to see the effect it would have on their economy? If so, what did happen?

3. As a westerner, is it really in the third world countries' best interest for us to continue to buy from them even if the wages continue to stay low?

C.

Krugman's article begins with him explaining how some people in third world countries live/work on a garbage dump known as Smokey Mountain looking for scraps they can sell for money. He goes on to show how the biggest beneficiaries of globalization are Third World Workers.

Very interestingly, Krugman goes on to show how low labor wages in third world countries have led to  progress in those countries. For reason's we can't fully grasp, these labor forces reduced the disadvantages of production in developing countries to that of first world and western countries. 

Simply put, low wage labor allowed developing countries to break into world markets, which has led to the improvement in the lives of ordinary people.

The main reason why these low wage labor forces has led to relative progress in many of these developing countries is because they created competition among companies to get the most productive/efficient workers. While this hasn't happened in all instances, this progress has allowed many people to get off garbage dumps and "Smokey Mountain" and move from abject poverty to living conditions that are still bad, but are much, much better.

Finally, Krugman goes on to argue why low wage labor is actually a good thing for the countries who have it, despite many people in the western world believing it is an unethical behavior. (to see the reasons why Krugman argues it is not actually unethical to have low labor forces, see part A of this entry).
_______________________________
Article #3: A Raspberry for Free Trade

A.
I found it interesting how Krugman argues how people will fight against low wage labor, but few will ever stop to realize how a country actually thrives on low wage labor. Without it, some countries would have very few means of income.

This begs the question whether or not people are against low wage labor because it is unethical or because it takes away jobs in America. According to Krugman, he says it actually creates different jobs and more competition, which is good. Low wages maybe aren't so unethical since some countries rely on it to thrive as a society.

B.
1. Why do people find it so wrong that there is low wage labor?
2. Has anyone ever went over to countries to analyze how third world countries are run with low wage labor? If so, what have these people found?
3. Are conditions really that bad in third world countries due to low wage labor or is the low wage labor helping those countries prosper?

C.
Krugman tells a story of imported raspberries and uses it to illustrate a point about globalization. He begins by talking about how Clinton asked for legislation that would allow him to ban the importation of raspberries from countries that don't have adequate health regulations. Opponents of globalization then came out and said why is it ok for the government to prevent trade of raspberries that hurt us, but not trade itself that hurts our economy/jobs.

According to Krugman, however, it is NOT the same thing. He asks how opponents of globalization would've reacted if the story was a bit different.

He points out how people's arguments against low wage labor might come about because their industry in America is faltering due to the sale and consumption of these low wage products. In reality though, the nation (Freedonia) might actually be booming, just people might go against it because they want to save their own industry.

In short, the point of the story is to argue against how complainers who are against the third world trade industry mix up protecting people from tainted products from third world countries and protecting workers from competing products. In reality, the competition is good.

Class Summary #24 for 10/28/11

Today in class, we learned about a variety of different economics topic.

To start, Prof. Rizzo began class touching on a topic he went over frequently last class: If you are concerned with trade costing jobs, then you must be concerned with everything else that costs jobs as well. This includes technology. But as Prof. Rizzo points out, he doesn't see anyone doing that so why do people do that with trade?

What is it that decides whether a job gets shipped over season? Two notions:

• Absolute advantage
• Comparative advantage

Then we learned a formula: How much more stuff I can produce with one more hour of work. Thus, the following formula allows us to calculate an opportunity cost of how much I am giving up by not doing an extra hour of work:

Wages

______________________ = (this is an example)---> 

Marginal product of labor

China:

$8 hr

_____________ = $2/unit

4 units per hr 

US:

$30 hr

______________ = $1.50/unit

20 units per hour

Thus, US is more efficient because one's productivity is what matters. It is not just how much a wage is. It is also about what is a person's ability to produce  with a certain wage. One needs to know the wage amount and productivity among all sectors to determine who is more productive.

In short, productivity reduces manufacturing and jobs (in technology, it takes over jobs because technology is more productive than the person working).

Here are other important notes from class:

• Trade surplus does not necessarily create job
• Today, we are capable of growing triple the amount of food we did in the past on a smaller scale of land. This is a reason why agricultural employment has been reducing
• Trade deficits also don't create and/or destroy jobs
• You pay for imports with exports
• When you specialize, you get richer. This is known as the "income effect". 
• Because of specialization, trade will allow us to consume more more in turn creates more jobs
• A good example of trade deficit can be seen by Rizzo's relationship with Wegmans. Rizzo buys food from them, so he is getting food, yet he is not exporting to them. Therefore, there is an infinite trade surplus for Rizzo. Also a trade surplus for Rizzo with UR, because they pay him but he buys no merchandise from them.
• There is also a relationship between all of this: He exports knowledge to us, we pay him, and with that money he goes to buy food.
• Rizzo firmly supports trade- raw data shows trade creates jobs

Rizzo concluded class with a very important concept:

What happens when I buy $10 of toys from China? According to Rizzo, this is not a problem at all because the money has to come back to me in one form or another. If it doesn't come back to me, however, that is even better.

So lets say I buy $10 of toys from China, which is a merchandize trade deficit for me. With this $10, lets say a Chinese student pays $5 for education in America. Well than the other $5 could do three things that show it will come back to us:

1. Buy more American goods
2. Buy an American asset (mutual funds, etc.)
3. Buy a product from another country and that country uses the money on American asset at one point or another.

Prof. Rizzo also pointed out that if we rip up money, we are making every American richer because the US loses money in circulation, so the rest of the money in circulation is worth more and raises the value of American currency by however much we rip up.

EWOT Goggles #8

I intern at a sports talk radio station, WHTK, in the city three days a week, and today I walked into work to exactly what we learned in class today: loss of jobs, unemployment, etc.

I walked into the studio to find my host looking a bit sad. I asked him what was wrong.

He told me that the longtime producer of his show had been laid off from work. For his privacy, I will call him "Joe".

I felt horrible for Joe, as I had become close to him during my time working at WHTK. But apparently, Joe wasn't the only one laid off- a number of other people were laid off as well.

This made me think right back to class today. Although I feel horrible for Joe, I concluded that him being laid off may not be such a bad thing for the economy all because of what we learned in class today.

Today in class, Prof. Rizzo discussed how when technology/machinery takes away peoples' jobs, we as a society become wealthier because those people who lose jobs can go work in other areas and create new tools/items that will benefit us.

Now, assume that Joe was laid off because there was not a need for his services anymore (Joe was a very well-liked a respected producer, so the only reason explaining his layoff was that technology/mechanization could do the job he had previously been doing.) Of course, part of this technology/mechanization that is now able to do his job came from trade and exchange with other countries.

Joe's job as a producer was part-time. He also worked part-time at a clothing store. My show host told me that the clothing store had been wanting Joe to work full-time, but he couldn't because of his obligation to the radio show.

But now that mechanization and technology has gotten to the point where Joe's job is not needed, he can now focus more on his job at the clothing store and perhaps work full-time. This could make us wealthier as a society in a couple of ways:

1. Because Joe can now focus all of his energies at the clothing store, perhaps he will be able to innovate by making new products/developing new ideas that will appeal to the public. This would help our economy become wealthier because people would continue to and increasingly buy products at the clothing store, which puts more money into the economy.
2. Joe having his job taken away at the radio station could also reduce prices for prospective advertisers to advertise on the radio show. Not having to pay Joe (and other laid-off employees) a salary, the radio show may be able to sell advertisements at lower prices. Thus, these companies who buy the advertisements might be able to lower their prices for products as advertisements will not cost as much and they won't have to make as much money to pay off for the advertisements.
1. Thus, with the reduction in prices, people will have more money to spend elsewhere, which helps our economy because the more money we have to spend among different areas of the economy, the better off we are.

This is all a perfect example of how trade, exchange, and in this instance, unemployment, can make us wealthier. And it also shows how trade (which leads to an influx in technology and mechanization) does not destroy jobs, but rather, it creates different and in most instances, more beneficial ones to our society.

Class Summary #23 for 10/26/11

Class began today with Prof. Rizzo reiterating the message to us that as long as we specialize in what we are good at and we aren't giving up a significant amount of other things (low cost), we all get much richer.

Then we went on to learn about unemployment and trade. Here are some of the key notes we learned:

1. In the US, the jobs we see going away are the ones that are easily mechanized.
2. People losing jobs is not necessarily a bad thing. It may even make us richer. Consider this:
1. If people at the UR registrar lose jobs, we are richer because there is more money in our pocket, as machines will be doing their jobs. Then, they will be forced to acquire new skills to get new jobs, which will benefit us because they could then go on to create new things.
3. The most important concept of class is that self-sufficiency is the road to poverty
4. Peoples' wages are higher when their jobs are close to being outsourced. Rizzo's wage is high because he could easily be replaced by another person/machine.
5. Trade doesn't cost jobs, it just changes the jobs in an economy
6. Technology is the greatest job destroyer in history.
1. Interesting question posed by Rizzo: If we are concerned about job loss, why is it that we worry our selves with the impact trade has on job loss and not technology. Technology takes our jobs away as new machines are made, yet we as a society welcome new technologies all the time but say trading with other countries is bad.

Trade Deficit= the amount more we buy from another country than we export (the difference)

Trade Surplus= the opposite of above

Since 1976, we have bought more abroad than other countries have bought from us. 10 trillion more goods have been bought by us since 1976 than they have bought from us. Yet, US total employment since the beginning of trade deficits since 1939 employment has increased overall.

People claim that unemployment today can be attributed to trade deficit, but this is not true. Trade simply creates/affects the types of jobs we are present in an economy, it doesn't cause unemployment.

Today, because of influx of machinery, manufacturing jobs have been decreasing since 2000. Just 9.1% of American workers today are manufacturers.

Despite this, we are manufacturing more than ever which is much due to machinery- we are manufacturing by 5.1% more than in 1931 and we have increased production despite having less workers (more machinery).

IMPORTANT: When jobs are lost by machinery/technology, it gives people incentives to go back to school/learn/develop new skills and help our society in another way. Having this new technology saves us money and helps us grow wealthier because new jobs are being created that give us new tools. Technology has saved us a load of money because less people need to be paid for work, which has helped our economy because we have more money to spend on other things. Thus, all of this makes more jobs and gives us more wealth as a society.

Class Summary #22 for 10/24/11

Today, Prof. Rizzo basically continued the discussion he was having on Friday.

He began class by making two graphs that showed how many cameras and bottles of wine the University of Rochester (UR) and Cornell could make if they spent all of its time working on those two endeavors. Here were what the PPF graphs showed:

                              UR                                       Cornell
Cameras              5                                               4


Wine                    10                                              3


Based on this data, we can conclude that UR has an absolute advantage in making wine and cameras over Cornell. Because of this, we can say that the reason for this must be that something allows UR to be able to do this better than Cornell, which might that UR has more resources.

Then, we ask ourselves: Which school is more efficient? It's important to note that the ABILITY TO MAKE MORE DOES NOT EQUAL EFFICIENCY. Rather, efficiency in economic terms has to do with opportunity cost. Basically, when we say efficiency, we are asking ourselves:

Who incurs a smaller trade off to produce each item? In other words, who has a smaller opportunity cost by making the given product.


To figure out who's more efficient, we must make another table like above.

                              UR                                                                       Cornell

Cameras              5 cameras cost 10 wines                                      4 cameras cost 3 wines

                             1 camera= 2 wines                                               1 camera costs 3/4 wine

                             PC= 2 wines                                                         PC= 3/4 wine

Wine                    10 wines cost 5 cameras                                     PC= 4/3 camera

                             1 wine = 1/2 camera

                             PW= 1/2 camera

In summary, take wine for example. By making wine, UR is giving up the opportunity to make 1/2 a camera. This is the price/tradeoff of making the wine. This is what needs to be considered when thinking about efficiency.

So, let's ask: Who produces wine at a lower cost? In other words, who is more efficient? We need to compare tradeoffs. UR students are more efficient at making wines because there is less of a price. UR is only giving up 1/2 camera and Cornell is giving up 4/3 cameras.

Therefore, we can say that UR has a "comparative advantage" in making wine over Cornell.

A comparative advantage= the ability to produce something with less of a sacrifice than someone else incurs. In other words, it is a measure of how good you are at producing one thing in comparison to what you lose by producing it. No producer can have a comparative advantage in producing everything.

Then, we need to ask the question: Would it make sense for UR to work with Cornell to produce? Suppose UR decides to just make wine and Cornell decides to just make cameras.

                              UR                                                                       Cornell

Initially             10 wines, 0 cameras                                                0 wines, 4 cameras

Final                7 wines, 3 cameras                                                   3 wines, 1 camera

                             

The trade, therefore, is UR trades 3 wines for 3 cameras from Cornell.

The lesson from this is that when you specialize, you stumble upon resources that didn't previously exist. This is a perfect example of economic sustainability: For the same amount of work, we develop more resources.

Some final key notes from class:

1. You ALWAYS pay for your imports with exports
2. Specializing and engaging in trade leads to more success than does being self-sufficient
1. Self-sufficiency is the road to poverty
2. What countries/people end up producing is determined by whatever you are better at (more efficient)
3. Policies that restrict trade between parties makes people poorer (i.e. tariffs make countries poorer).
1. Thus, increasing productivity is key to getting wealthy. Free ability to trade helps people or countries or states improve wealth

                             

Class Summary #21 for 10/21/11

Prof. Rizzo began class today by explaining that trade creates wealth for people.

Although the actual act of trade may not create anything new materially, it does create something: more wealth for people.

A perfect example of this can be gleaned from last class, when Prof. Rizzo explained his baseball card trade when he was a kid. By adding his Kirby Puckett card, more wealth was created because Rizzo obtained a card that gave him a full set (which increased the value of his cards a humongous amount) and the person he traded with received a very valuable card in Kirby Puckett, a card that made him more wealthy materially and monetarily.

This can be connected to the general world. Simply put, trade is the basis that allows the world to get richer/wealthier.

As Prof. Rizzo explained, trade occurs because people don't value certain items as much as other people do. We then talked a little bit about efficiency, which Prof. Rizzo explained in the form of a graph:

Task	Mike	Rich
Weeding	80 mins	120 mins
Mowing	40 mins	120 mins
Total	120 mins	240 mins

In terms of time efficiency, it is clear that Mike is much more efficient than Rich. But, does that mean that Rich can be of help to Mike? Not necessarily. Here is the trade that Prof. Rizzo outlined:

If Rich offers to weed 3/4 of Mike's lawn in exchange for Mike mowing Rich's lawn, then Mike will be mowing for 40 minutes plus 1/4(80) = 40 + 20 = 60 minutes, instead of 120 minutes. Rich will be working 120 mins mowing and 3/4 (120) = 90 minutes, so he  will be working for 210 minutes as opposed to 240 minutes.

Thus, both parties became wealthier by making a trade- wealthier in terms of available time to work on other chores.

Then we learned about Production Possibilities Frontier (PPF), which can be shown on a graph. Here are some facts about it:

1. Absolute Advantage= who can make more.
2. The points on the PPF represent productively efficient data. For the outcome to be efficient, it must represent production of what people want.
3.  On the graph, slope represents the tradeoffs. In other words, it shows how much you need to give up to get something.
4. The change in slope represents the "Law of Diminishing Returns". In other words, when you take away one thing to improve something, you reduce the quality of the other thing.
5. Economic Growth comes from:
1. When more resources are created/found
2. Technology improves to allow us to find/use better and more efficient resources
3. Trade

Reading Assignment #7: Individualism vs. Altruism

A.
Truthfully, I did not find the document to be overwhelmingly interesting, as most of it was just a bunch of notes. But I did find a couple examples that were provided to be interesting to think about.

One example of altruism that really stood out to me is the one about saving a stranger child who is drowning over your own (see part C below for the example I am talking about).

Like the document discusses, a truly altruistic person would elect to save another child over one's own. I'd be hard-pressed to believe that any single person in the world would prefer to save a child who is a stranger over one's own child. This just is not a pragmatic concept. I found this example to be very interesting and it made me think that the document is completely right: no one in this world can be completely altruistic.

One final thing I found interesting was how individualism is actually beneficial to our society. The document does a beautiful job explaining how thinking in one's self-interest actually benefits all because it spurs more production and exchange. This idea made me think that when people do something I consider "greedy", maybe it is not greedy at all. If a person does not want to donate money to a charity, maybe it is not greedy on his/her part because he/she might spend that money elsewhere to spur economic growth that could help more people than the charity could.

This made me think that when I call someone greedy, maybe it is actually me who is the greedy one since I am not looking out for others well-being, but rather, the people's well-being who I believe are more important.


B.
1. What would our world look like if everybody truly was altruistic? Would we have a productive economy with technological growth or would the world be stagnate as it once was prior to the Industrial Revolution?
2. Were/Are there ever any completely altruistic societies, and if so, how did/are they fare/faring?
3. Can a personal actually be considered selfish/greedy even if he/she is taking his/her self-interests "too far?" This document shows how acting in one's self-interest is actually good for society in many ways, so, are the people who claim that self-indulged people are greedy actually the selfish ones?

C.

This compilation of a book excerpt/notes included an excerpt from Hayak's book, in which he discusses the meaning of Extender Order as well as the idea of individualism vs. altruism.

The document begins with discussing how the morals of the market economy cause us to benefit others, but this isn't the case because we intend to do so.

In short, we benefit others because the market makes us act in a manner that allows that effect take place. According to Hayak, the Extended Order is to thank for this. The extended order is simply what happens when a system embraces specialization and trade and thus constitutes an information gathering process that no governmental/high authority or any one individual could know how to attain.

The document later goes on to discuss how our moral obligations extend ONLY to our own values. For example, if I provide financial charity to a mohair farmer, I am not doing it as an altruistic action. Rather, I am doing it because of my values. Maybe I value human life, and therefore, it is in my best interest to donate to this farmer.

Another great example this is provided in the document is one about attaining wealth. Let's say I want to become wealthier for my own personal well-being. But to do this I must, as the article puts it, "enter society and become a social being."

This simply means that I have to trade and produce to attain wealth, which are actions that benefit everyone else in the economy. This shows perfectly how when one tries to act in his/her own self-interest, he/she is being altruistic even though he/she may not have necessarily meant to have been.

The individualism segment of the document concludes with the idea that individualism is the basis of the institution of private property- altruism rejects private property, and I have learned throughout this course, property rights are vital because it gives people incentives to work harder/produce more/exchange more.

After this segment, the article discusses altruism. Here are some notes from that section that were important:

1. Altruism: one's devotion to the interests of others more than one's own interests
2. There is nothing wrong with having the best interests of others in mind, but the bottom line is that an individual will almost always be more likely to be motivated by his/her own values than others value.
3. The morality of altruism is simply: sacrifice
4. A couple great examples of why altruism is not as realistic as it may seem:
1. If a friend is in financial trouble, you may give him money. While this may seem like altruism, it is not. Clearly, by giving your friend money, you are showing that the satisfaction you receive by giving your friend money is of greater value than the money and the material goods the money represents.
2. Many people consider themselves altruistic, but think about this: if two kids are drowning and one is yours and another kid you don't know. You can only save one kid. Which one would you save? Almost definitely your own child. If you were a pure altruist, you would pick the stranger because you'd be thinking in the best interest of others above your own interests.

Class Summary #20 for 10/19/11

Today in class, we learned about many things. First, we discussed Feedback Loops:

1. Feedback loops exist to ensure performance. If Fed Ex fails to serve someone appropriately, word will get around by word of mouth that they aren't a good company. 
2. They try to keep their reputation intact because they know that customers who have a bad experience or don't have their packages delivered will tarnish Fed Ex reputation. 
3. Competition is a part of this, as companies don't want to give other companies an edge to get business over them.
4. Feedback loops only work well when people feed guilty about doing a bad job. In short, people need to actually give a hoot.
5. Places we enjoy the most have feedback loops because people are pressured to keep up work to make money and beat out the competition. There is a lack of it in places where we have issues, such as politics, public education, health care, etc. If we have more feedback loops in these areas, it is possible we'd complain less about them.

Trade and Exchange:

Three questions of basic economics-

1. What should be produced?
2. How do we decided what to produce?
3. Allocation System--> how do we get items from producers to consumers?

Then we learned about the production process. Prof. Rizzo outlined it the following way:

Inputs----> Black Box----> "Stuff"

Inputs= stuff that lying has been lying around on the Earth. They are resources. The black box is simply the production process where we mold things together. Finally, stuff is what the end result is.

Factors of Production

1. Factors of Production=inputs
2. Land= natural resources. Anything that was pre-existant before we came to Earth. An economic resource differs from a general resourse. Until we find out some valuable way with which to make stuff, it is a land resource.
3. Labor= bodies and people on Earth
4. Capital means two things:
1. Physical Capital- something produced to produce something else, such as a crow bar. It is created to take off tires of a car. So we produce the crow bar to produce something else for us.
2. Human Capital-all the things we do to help us become more productive/talented. It's whatever we do to make our abilities better. In other words, it is any addition to the stock of skill. Therefore, all the time we spend doing this is an investment of sorts.

Later on, Prof. Rizzo explained some very important characteristics of the study of economics, such as:

1. Doing work by yourself reduces economic activity. For example, if Prof. Rizzo makes a pizza in his house, it might only cost him three dollars. If he buys a pizza, it might cost him fifteen dollars. Thus, doing this reduces GDP in our country by $12 (in this instance).
2. Why do people produce? 
1. Simple answer = to acquire wealth.
2. What is wealth?
1. Wealth is all subjective. To an economist, wealth is whatever it is that people value. To me, I value baseball cards. If I have a lot of good cards, then I can be considered wealthy, even though baseball cards might not be a source of wealth to other people.
3. Economic growth happens when society has more of the things it wants. Things aren't necessarily material, either.
4. Trade is never an exchange of equal values. Exchange only does occur when people's values differ. In short, people exchange for different reasons- to benefit from what they are getting.

EWOT Goggles #7

Last night, I attended a Varsity Student Athlete Advisory Committee (A.K.A VSAAC, which is a committee made up of varsity athletes at the school who do things to promote U of R varsity athletics and the like).

At the meeting, VSAAC's advisor, women's basketball coach Jim Scheible, made the announcement that he needed four representatives to attend the U of R's Athletic Hall of Fame Induction banquet on this coming Friday night.

Having trouble finding volunteers, Coach Sheible tried to present some incentives for people to go, such as that it is a yearly tradition of VSAAC to have representatives attend this dinner, and thus, if no one goes, it will not be a good reflection of the organization.

He also mentioned that by going, the four volunteers would receive a "free dinner" at the banquet.

Now, I already knew I could not attend the banquet as I am going to be away for the weekend and won't be on campus on Friday night.

But even if I could attend, the incentive that Coach Sheible presented would definitely not have convinced me to go. The second he mentioned that a "free dinner" was up for grabs, I thought of economics and cringed at his comment.

As we have learned in class, NOTHING is free. There is always some sort of cost in everything, whether it be a monetary, non-monetary, or opportunity cost.

In this case, the dinner may indeed be free in terms of money, but by no means is it actually free. Let's say I was around campus for the dinner. If I decided to go, I'd be giving up a few hours of my time to attend the event. Therefore, the cost of attending the dinner would be the time I am giving up by going.

Lately, I've had tons of homework to do and a number of exams to study for. When I am away this weekend, I am going to be doing a lot of homework and studying.

Thus, if I were available to go to the dinner and I did end up going, the cost for me would be a loss of time to put towards my studies.

Because I VALUE being prepared for my classes so as to have the best opportunity to get good grades, there would actually be a steep cost for me to attend the dinner if I was not going away for the weekend.

As much as I hate to say it for the well-being of VSAAC, I value being prepared for my studies much more than attending the dinner and getting a "free" dinner ("free" referring to not having to pay any money for the food.) Therefore, I definitely wouldn't have volunteered to attend the dinner even if I could because I'd be incurring such a significant cost by doing so.

For some people. the incentive of receiving a free monetary dinner might be an extremely attractive option, but for me, I value getting my school work done much more than getting a "free" meal, which explains why the "free" meal is not so "free" after all.

Class Summary #19 for 10/17/11

Today in class, we learned about the Golden Rule (do to others what you want people to do to you) and its place in economics.

Prof. Rizzo started off class explaining that many people think it would be nice if the world worked based on the Golden Rule. According to Prof. Rizzo, the Golden Rule works in certain conditions, but in a commercial society (buying/selling), or in other words a very impersonal interaction, this rule doesn't work. It's great when you're dealing with people you know, but the bottom line is that there are countless examples that prove the Golden Rule fails in commercial systems.

It fails not because of selfishness on that part of others, but rather, because we are not omniscient (do not have complete/unlimited knowledge).

Here are a couple examples Prof. Rizzo taught us in class:

1. From 1958-1963, China mandated that farmers work to feed people in society, rather than to make profit. What happened? Millions of people died.
2. Every single time in history when we've tried to produce for people as opposed to profit, we've starved people.
3. Imagine Prof. Rizzo is a school boy trying to catch a bus in NYC. Rizzo is late, and the bus is about to leave. If the bus driver follows the Golden Rule and stops for him, this is what may potentially happen, which outlines how following the Golden Rule can be harmful in a market system:
1. Other people on the bus may be late because the bus driver stops. Let's say 55 people are on the bus and all of them are late. Maybe they miss their transfer and can't get on to the subsequent bus they need to catch.
2. How does the bus driver even know that Rizzo is worth of being picked up? Maybe Rizzo is a criminal trying to commit a crime, thus by picking him up, the bus driver will be causing more harm than help.
3. Finally, the bus driver probably doesn't consider this, but Rizzo points out that he probably should: If all of the people are on the bus are late to work because the bus driver waits for Rizzo, let's say the people on the bus are all 5 minutes late to work. If the bus driver does something like for 1 month out of the year, people are losing 5 min X 31 (days of work) = 155 minutes worth of work time which could definitely cause less production.
4. In short, one could claim that by stopping for Rizzo, the bus driver is actually arrogant to pick up Rizzo. How can people plan for when to get on the bus when the bus driver is doing things like this? To catch the next bus, people might need to get on the earlier bus to make up time for this to happen.

Thus, Prof. Rizzo explains, a commercial society operates on the Silver Rule. 

• Definition: Do not do unto others what you would consider unfair if they did it to you. It's important to only use this rule when working with strangers, not against family/close acquaintances. 

Prof. Rizzo also discussed how people have a skewed vision of self-interest and greed. Economics define self-interested motivation as: we're encouraged to do things that benefit our own self.

Some of these things include going back to college to get a degree, exercising to lose weight, quitting smoking. 

It is very weird how it is applauded to do this as a person when people look down upon self-interested people. That is the irony in all of this. Self-intersted actions are applauded when benefits are felt by the person, but not applauded when other people are involved. I.e.- Jogging is applauded by people, but selling sneakers at high price is not. It's the same thing- both actions are looking out for self-interest.

Finally, we learned about Reciprocal Altruism.

Tony: receives a kidney to save life

Tina: Her mortgage is under water. She receives $20,000 donation from church and gets house fixed

Same type of behavior but looked differently upon. Or consider the Coupon Show on TLC- people are applauded for great savings in stores. For example, one guy bought $300 worth of food for $18 all due to coupons. He was applauded for this. But why? This was self-interested on his aprt. Why isn't he considered greedy? Why are certain self-interest actions applauded while others aren't? The man basically took a lot of money away from the business. Isn't this the same as the business trying to over charge us for an item and take away money from us?

Class Summary #18 for 10/14/11

Prof. Rizzo began class with talking about the wage system in our economy. He talked about how generally, workers should be paid as much value as they produce. For example, Prof. Rizzo's salary, let's say, is $150,000. If he is being paid that much, it should reflect how much value he is producing for the company.

If he is paid less, he is being exploited and thus, offers a chance for another business to pick up his services to make profit off his contributions.

Then, Prof. Rizzo went on to discuss the problems in the market.

1. Markets often don't work well due to:
1. Lack of existence
2. Institutions

Lack of Existence: this means something that prevents a transaction from happening. A perfect example of this is when you are on the sidewalk and people in front of you are walking slow but you are in a rush. Despite this, you neglect to confront the people in front of you. This could be compared to a transaction, because for whatever reason, there is basically an unwritten code that prevents you from being able to get in front.

We also learned how entrepreneurs loves market opportunities- without problems in our society, there would be no reason to have entrepreneurs exist to fix our problems.

Goals of Economic Policy:

1. Policies and outcome are "efficient"
1. Developing what people want
2. Doing so at lowest "possible" cost

When we say institutions, we mean all the formal and un-formal mechanisms we stumble upon that allow us to live peacefully with one another. 

Then, Prof. gave us some examples of institutional failures:

1. Markets epic fail in Russia because no property rights
2. Markets can't work without the rule of law. Societies that understand the law and are treated fairly tend to be better societies. Ways to have this type of society are:
1. Laws can't be arbitrary- in other words, people can't be unsure what the rule is (i.e. unsure when you will get a ticket).
2. Everyone must be treated equally
3. Good laws must be general, not specific
3. Some poor country's norm is to prohibit customs that are necessary for markets to work well.
4. Inflation- definition: the general increase in all prices in the economy (all prices of goods and services we buy)
1. Cause of inflation= when there is too much money around---> like in Mercantilist times

These notes ended our formal lessons about the basic principles of economics. Prof. Rizzo concluded class with the following notes;

• Free societies work best when people are honest
• People find acting in self-interest is inferior to one who presents other's self-interests over their own. In a market, to be successful, it is vital to look out for one's own self-interest, while also considering other people's interest as well, but as a secondary concern.

EWOT Goggles #6

Earlier today, I was at the gym working out. My roommate, Steve, also happened to be at the gym but he was doing a separate workout.

We both arrived at the gym at around the same time, so we were ultimately on the same schedule. I finished about ten minutes before him, however.

Before leaving, I went up to Steve to say bye, but he told me I should wait 10 minutes for him to be done his full body workout and then, I could do a forearm workout with him.

I agreed to stay and wait for him to be done so I could do Steve's forearm workout.

I waited about 10 or so minutes and Steve was not yet done. He said he would be soon. But I didn't have that much time to spare because I had to go finish homework and take advantage of some free time I had in my schedule.

At this point, I started asking myself what I should do: stay or leave. My mind initially told me to stay and continue to wait- I had already waited 10 minutes, so I might as well continue to wait because if I leave without doing the forearm workout, then I effectively wasted my time.

But then I thought back to something we learned in economics class last week:

• Sunk Costs: resources that are not recoverable at all when I make my decision

I thought back to the story Prof. Rizzo shared in class about having a girlfriend for 5 years. He talked about how if a guy wants to break up with his girlfriend of five years, he should do so. Part of his thought process shouldn't be that he should stay with his girlfriend because if he breaks up with her, he would have wasted the last five years of his life.

In both instances, the time lost is a Sunk Cost. I, nor the guy with the girlfriend, could get the time (resources) back that I lost.

Because of this, I realized that it would actually be in my best interest to leave the gym while I was ahead. Sure, I had wasted 10 of my minutes, but if I stayed, I would be wasting more of the time that I needed to do my homework. My time lost was a Sunk Cost and I could never get it back.

I weighed the cost/benefits of staying after waiting 10 minutes and going back to my room to do work. In the end, I chose to go back. This decision was honestly completely made because of that story Prof. Rizzo taught in class about Sunk Costs. 

In the past, I probably would have stayed to do the workout because I would've had the mindset that I would have wasted my time if I didn't do the forearm workout I had been waiting for. But from what I have learned in Econ, I now understand that none of that matters because the time in this instance is a Sunk Cost, and I cannot/couldn't ever get that back.

Reading Assignment #6- "The Most Unusual Day" and "An Academic Episode"

"The Most Unusual Day"

A.


Overall, I found the article to be extremely interesting. We have been learning in class about the "Law of Unintended Consquences" and this article can absolutely be applied to the law because of the fact that there were consequences the government wasn't necessarily expecting: that people would alter their births to get the bonus, which in turn, increased the amount of people delaying their births and made the hospital very crowded in July. I found it very interesting how a policy can indeed have inverse effects, and this article was proof in the pudding.

I also found it interesting how Gans pointed out how usually, governments try to avoid giving citizens an incentive for fraud on medical decisions. The government in Australia, in Gans words, did this to save $100 million. It is interesting because clearly the Australian government weighed the costs/benefits of its policy, and in the end, came to the conclusion that the benefit in ultimately promoting medical fraud outweighed the cost they would endure.


B.


1. What was the ultimate goal of the Australian government to pass this policy? What, besides saving money, did they think they would get out of the policy?
2. This is more of a question that would require research, but I am interested to know the answer nonetheless: Did this policy cause any babies to pass away from parents trying to prevent a birth to take place later than expected?
3. Why is it that people value money so much, they are willing to risk the health of their baby to gain extra money? Why is having a healthy baby not an incentive enough to give birth?


C.


Josh Gan's article starts off discussing how there are several unusual days in the world. According to Gans, however, none is more unusual than July 1, 2004- the day the Australian government began paying $3,000 for every baby born.

The Australian government was doing this to save money, but their reasoning was to offset the costs that mothers incur when having a new/not being able to work because of maternity leave.

This policy passed by the Australian government is called "The Maternity Payment" or the "Baby Bonus" and it was set to rise to a $5,000 bonus by July 2008.

Gans, who was expecting his third baby, talked to his wife about having his baby in July to get the bonus. The author believe that he was not the only one thinking this way- he was expecting that ultimately no births would occur on June 30 because people would want to get extra bonus.

The data about child births since that policy was passed is now officially out. The results show that over 1,000 births across the country were shifted as a result of the new policy. He knows that this was the case because "normal" delivery statistics remained unaffected, but all the inducement and cesarian statistics went up. Also, June was a low month for births while July was unusually high. In fact, 25% of all births were shifted by more than 2 weeks.

A result of all of this? When Gans went in to have his baby born, the hospital was completely overwhelmed. This shows an unintended consequence- perhaps the Austrialian government didn't expect people to create fraud. Next time, Gans pointed out, he hoped that the hospitals would be better prepared/staffed.

The end lesson Gans pointed out was that the Australian government shouldn't introduce policies this was so as not to create such an incentive for people to produce fraud- and alter birth dates.
________________________________

"An Academic Episode"

A.


I found Stigler's article to be quite interesting in one particular way: how he tried to show the results/effects of unintended consequences. In class earlier today and last week, we talked a lot about the effects of unintended consequences. This article perfectly illustrates them.

Throughout the article, Seguira continues to make new policies that he thinks will fix the problems that are going on in his university. While the policies do indeed fix the problems in one regard, other problems are born from these new policies. This is the perfect description of unintended consequences, because Seguira did not in any way expect these issues to arise when he enacted his new policies.


Thus, I found the clever way that Stigler was able to weave the concept of unintended consequences into a story the most interesting part of the article.

B.


1. Why is it that Seguira did not comprehend that by continuing to make new policies, more issues were caused? Why did he feel the need to change something that already ran somewhat smoothly?
2. How much do unintended consequences play into policy maker's decisions to enact a policy? Do policy makers even try to consider what unintended consequences might come about from enacting a certain policy?
3. In the end, did Seguira honestly think everything was better than it was before he enacted his policy? What does the end result of all of his policies say about trying to change the landscape of the labor force?


C.


George Stigler starts off his article mentioning how he believes we run our universities backward and then progresses into a story about a president (Seguira) of a university in South America.

In June of each year, any member of the faculty (including graduate students) could challenge the person who had the position immediately above him to a competitive examination. Impartial judges would judge the competition and whomever won would get the higher position/salary.

This new policy at the school led to many unintended consequences, something we have been learning about in class a lot.

Some results of the new policy included:

1. Libraries had an unprecedented rush- the older professors who had higher positions started working harder and studying more.
2. People began to hoard their knowledge, worrying that sharing any knowledge could lead to someone getting an upper hand in the competition
1. A result of this was that the graduate students started to receive less sufficient education

Seguira was understandably concerned about the lack of teaching that was taking place after his new policy was put into effect, so he began granting 5 points per teacher whose students won a challenge. The points would go towards a teacher's point total in the competition, and Seguira believed all of this would promote teachers to teach again. But then this led to a paradox in one instance:

• One professor was challenged by seven of his grad students, they all did better than him on the exam, but his 35 points he received helped him win the victory.

The ensuing fall, less grad students enrolled because all who could afford to do so went to study in the US. People then realized that the grad students were doing this to study the examinations in another country. This proved to be a smart idea for the grad students: Of the 61 students who spent the year in the US, 46 won their challenge the following spring.

To prevent this from happening again, Seguira presented more policies which led to unintended consequences:

1. The exam would be given by professors chosen at random from the US, England, France, Sweden and German. Now, if a grad student went out of the country to study, 4 times out of 5 he'd guess the wrong country.

In the 3rd year, it became apparent that research almost stopped completely because all the professors were putting their time towards preparing for the challenge. Thus, Seguira made a new policy, giving the professors more of an incentive to publish work: 2 points for every article and 7 points for each book published. 

1. More unintended consequences: research did revive a bit, but the research was not nearly as good since the professors were rushed to get it completed before the following year's challenge.

This all probably would have continued on forever but Seguira received a new presidential position at a very good South American university. He accepted, but before he left, he made one final amendment: A man could receive a permanent number of points the department chairman deemed fit when an offer was received from another university.

This allowed Seguira to move up to a higher position.

Class Summary #17 for 10/12/11

Today in class, we learned a lot more about unintended consequences, and how the "Law of Unintended Consequences" can wreak havoc on policy makers.

Here are some examples of unintended consequences that Prof. Rizzo shared in class today:

1. In the country Bavaria, there was a law that mandated couples couldn't have children unless they were considered financially stable by the Bavarian government. If a couple wasn't financially stable, they couldn't get married in the country and have kids. The policy was created to make sure children are sufficiently taken care of. By the end of the policy, however, there were actually more issues with childcare then there were prior. The reason behind this was because 50% of kids' parents were divorced because people weren't getting married anymore, they just had kids.
2. 1914- US bans drugs. The ban on drugs led to an increase in hypodermic needle usage. Needle usage has been linked to the spreading of AIDS. Perhaps if there was not the 1914 drug ban, AIDs would never have spread like it has today.
3. 1992- Americans with Disabilities Act- government threatens that bad things will happen to companies if they discriminate in payments/labor opportunities for people with disabilities. What resulted from this? There was a sharp decrease in the amount of disabled people who were hired for jobs because employers didn't want to risk getting in trouble with the government. Anytime a company had the need to fire a disabled person, the disabled person would be able to claim they were being discriminated against. Thus, there was more of a potential cost for companies to hire disabled people because of the ramifications that could happen if they had to fire a disabled person for whatever reason.

So, what exactly is this law? It is basically occurs when people try to fix a complex process with a simple process. The Law of Unintended Consequences may take place due to:

1. Limited Information
2. Little feedback
3. Incentives get mixed up

Unintended consequences change incentives in many instances, and thus, usually increases costs to do something in at least one regard.

Then, we went over some more basic principles of economics.

1. Trade is not zero sum---> we are all better off when we trade.
1. "Pie Fallacy"- the idea that wealth is fixed (similar to mercantilist thought). It's the idea that if one person gets the bigger slice of pie, someone must be losing out. We have come to learn today that this is untrue.
2. Exploitation= when one person gets the better deal than the other person. Exploitation doesn't in any way raise living standards.
3. Consequences of Exploitation: 
1. Slows down economic growth because policies are than made to penalize work/innovation, which is vital to economic growth
4. Wealth vs. Income is different
1. Wealth= "stock"- value of stream of income one has produced through his/her life
2. Income= "flow"
5. Bill Gates/Tiger Woods/Paul McCartney (all billionaires)- their billion dollars (which is income) is only a small indicator of how much value they are to society. Take Woods for example. He might have a billion dollars, but think how much more value he brings to society- because of him, golf clubs, clothing, shoes, shaving cream, etc. is sold because of his endorsements of certain products. Also, must take into account how much value people get when watching him play golf. It might cost $3 to go see him play live, but people probably get more value than just $3 watching him. People who watch on TV also value watching him. If they value watching him at $1, think about how much money/value/worth he is generating for all of the millions of fans who watch him.
1. Thus, one could make the argument that none of these billionaires are actually being paid ENOUGH!

Reading Assignment #5-Theaters and Fine Arts

A. 
I thought that Bastiat provided a couple interesting viewpoints pertaining to subsidizing certain professions, specifically art. Overall, I found the article be quite interesting.

One of the most interesting parts of the article was how Bastiat talks about how subsidizing one profession lowers the wages for other professions- I never really thought about the act of subsidizing by the government in this matter.

If one profession is subsidized, it comes at the expense of other profession's wages unless taxes are increased. Because increasing taxes to subsidize artists is not really a pragmatic idea in many instances, it is just not feasible to easily subsidize artists as Bastiat argues against.

I thought that this point by Bastiat really points out how in economics, there is always a cause and effect- one economic decision effects economic outcomes in many ways.

I also found it very interesting how Bastiat argues how subsidizing artists would not be a great idea because regulating that industry could come at the expense of creativity. He points out that by regulating the art industry, there would be less freewill to make certain art because maybe the government would refuse to compensate certain artists for certain types of paintings (if let's say, the paintings were considered inappropriate by governmental standards).

In short, I really do agree with Bastiat's point- not subsidizing art allows for more freedom among artists. Artists can create whatever they want based on their feelings and receive compensation from people who buy their work. By not having governmental regulation, artists do not have to worry about whether or not their paintings will be "accepted" or subsidized by the government.

B.
1. Why is it that some people believe that economists want art to be abolished when economists claim that art should not be subsidized by the government?
2. What would be the economic result of subsidizing artists? As in, would doing so hurt or help our economy?
3. Do artists actually need to be subsidized for their work? Would doing so promote more or less artistic innovation/creation?

C. 
This article covers whether or not the government should support- and subsidize- the arts. The author, Bastiat, believes that the desire to make art should not come from the government subsidizing artists, but rather, from "below", or in other terms, from the desire within artists to create. He doesn't believe that artists should be motivated by state compensation- he feels that they should be motivated by the artists themselves.

Bastiat goes on to claim that many people consider economists who argue against the state subsidizing artists to be against art altogether. But Bastiat argues that economists who think this way don't want art to be abolished at all.

In fact, Bastiat wants no governmental subsidation because he wants the state to protect the free development of those types of human activity, so that artists can create whenever, and about whatever, they want.

Bastiat then goes on to how how people who are against Bastiat's economic thinking believe that if an activity is not subsidized, it will eventually be abolished. In the case of art, Bastiat argues, this is not the case at all.

The final argument Bastiat goes on to make is that by taking tax money to subsidize artists, there will be lower wages of other jobs such as plowmen, road construction workers, etc. Thus, more money would be given to artists than these other workers. And who is to say that these other workers are less important than artists?

Class Summary #16 for 10/7/11

Today, we went over a couple important topics, topics that will pertain to today's exam.

First, we went over subjectiveness. Almost everything in this world is subjective. If Prof. Rizzo says he is selfish, that only means something when we have something to compare it to- the margin. Selfish is different to everyone, so by saying that, we don't really know what selfish means unless we know about the margin.

Margin- the influence of the next thing.

A good example of the margin is Bruce Springsteen. In 1972 and 1973, he produced albums in back to back years. But then, he waited to release his next album in 1975. He understood that by waiting an extra year to release a new album, his album would have a great margin because of its added scarcity, and thus, would make him more money.

The same could be said with Puxatony Phil and Santa Claus- if they appeared every day, as opposed to once a year, they wouldn't be valued nearly as much as they are today.

Another great example is when some people make the argument that teachers deserve to be paid more money than professional athletes.

The bottom line: The skills necessary to be a teacher are far more abundant than the skills necessary to be a great baseball player. Not many people can throw the ball 90 MPH. Very many people can acquire the skills to be a teacher. Simply but, baseball skills are far more scarce than teaching skills. This explains why baseball players are valued so much higher at the margin.

What I mean by margin- the next baseball player is valued at the average MLB salary, which is about $3 million. The next teacher is valued at the average teacher salary- lets say $40,000. Therefore, the next MLB player is valued much more at the margin.

But, the total value of teachers is far more- if you add up all the salaries of teachers and compare to all the salaries of baseball players, we will value the teachers as a whole more.

Therefore, if all baseball players and teachers became extinct, we would pay much more for the very first teacher than the first baseball player.

The margin is also subjective, as the values at the margin differ for different people depending on how much something matters to us.

Another key concept: Why do we pay for water bottles when we can get it basically free from tap? It is because we are paying for the convenience of having it in a bottle so we don't have to carry around tap water sources, such as a sink or river, etc.

Then we went over what a sunk cost is.

Sunk cost: resources that are not recoverable at all when I make my decision.

A good example of this is a buffet. You pay $12 for a buffet, and go in to eat. There is not point in trying to stuff your face to get $12 worth of food because you already paid that amount. Any overeating you do just for the sake of getting $12 worth of food would just come at a greater cost, because you could get fat/sick from eating too much.

Good economists never pay attention to sunk costs- they just look forward and see how they can make the best decisions going forward.

Finally, Prof. Rizzo concluded class with going over some important notes:

1. Humans act with a purpose. We tend to behave in a way that relieves burdens in our lives.
2. People respond to incentives. Behavior will change when benefits/costs to you change.
3. Law of Unintended Consequences- Because people respond to cost/price/benefit changes, it is impossible for economists to accurately predict exactly how people will respond to certain things. People have an idea of what might happen generally, but not specifically. 
1. Perfect example of Law of Unintended Consequences: Seat belt law. While seat belts have saved many lives, there are actually more deaths due to car related incidents since wearing a seat belt became law. One is much more likely to survive accident, but much more people are driving carelessly or even drunk because they think having a seat belt will always protect them. Therefore, more accidents are occurring as people are also driving faster, and more people on sidewalks, pedestrians, etc. are getting killed by cars as a result.
2. This wasn't an expected consequence of the new seat belt law, which explains the Law of Unintended Consequences.
3. Also, just because there was the opposite effect of what policy makers planned doesn't mean seatbelts are bad, but it is all part of this phenomenon.

EWOT Goggles #5

My EWOT goggle entry for this week is about something that happened last week in recitation during the Ultimatum Game.


During the ultimatum game, there was one student who constantly rejected offers that were as high as 4-6, which in my opinion is a tremendous offer. As my TA Alex taught us following the game, one should pretty much accept every single offer presented to him/her because it is better to get something than to get nothing.


But this one student (I will call him Joe) rejected several offers that Alex advocated against doing. Joe's argument for doing this was because he felt like he was being taken advantage of, and didn't want to give other people a better deal.


But as we have learned in economics throughout the semester, it is important as an economist to focus on one's self-interest over one's feelings.


Adam Smith, the great economic philosopher, advocated the belief that looking out for one's self-interest is the key to accumulating wealth/success. Prof. Rizzo explained in class that Smith believed that the way to get rich and increase production is by making rational decisions that benefit one's self-interests.


And if you think about it, this makes a lot of sense. But Joe did not do this in class. He let his emotions get in the way of his decision making. I suppose some people would argue that Joe's was smart by the rejections he made, but according to Smith's theories, he was completely wrong.


This is because Joe had an opportunity to better himself (get extra-credit), but he let his emotions get in the way of his decision making. Thus, he wasn't acting in his best interest. It didn't matter how many points the presenter offered- the bottom line is that by rejecting the 6-4 deal, Joe was accepting 0 extra-credit points instead of 4, which hurts him because now he ends up with nothing.


It is interesting to point out that if Joe actually values his feelings more than becoming wealthier in terms of extra-credit, he may have actually made the right decision. But as Alex pointed out in our recitation, it is very important in the business world to not let emotions take over decisions. 


The bottom line is that in today's world, it is imperative to act in your best interest, and that pretty much always means trying to get SOMETHING as opposed to NOTHING.

Class Summary #15 for 10/5/11

Prof. Rizzo began class today explaining the Broken Window Fallacy.

Three problems with the "it's stimulating" notion:

1. I didn't choose the roof to begin with, and therefore, I lose the opportunity of preference. Consumers didn't choose the roof, and thus, society is poorer by the pleasure I would've gotten by getting something else. In short, there is a steep opportunity cost here. I lost out on the opportunity to get something I really wanted because I had to pay for a new roof.
2. We also lose the value of the resource that was used to repair the roof. We are losing resources that could've been used by other people, resources in our world that weren't necessary to be used had there not been a natural disaster.
3. Then, the final question is: what if the roofer was unemployed? Answer(s): What isn't seen is the other person who isn't getting a job now because you had to spend the $1,000 on a new roof. If you didn't spend the money on the roof, maybe you would've spent it on a new driveway. Thus, it is job displacement- no job is gained, just a different one is made. 

• Ignore the $. What is relevant is that I need wood for the roof, and now I am forced to use wood for my house that could've been used other ways. Thus, someone who has a better need for wood can no longer get it. By employing roofer, I also just raised the price of wood and other roofers- b/c the more exchange (money for wood) I make, the higher the cost of wood goes. If I stick a roofer on my roof, I just raised wages for wood and such. Resources get used up and prices go up, so really, not a great thing for the economy.

Here is a good diagram to consider:

Before Storm, I have:

$1,000 and a roof

After Storm, I have:

$0 and a roof

Thus, as you can see, I am actually poorer from having to buy a new roof because there is no net change in what I received, and I now have no money in my pocket.

Increasing taxes can also be looked at in the same light: The government takes more $ from people and there are then less expenditure by people which in turn causes there to be less jobs created because people have less money to hire. Causes job losses somewhere else.

A VERY IMPORTANT NOTE: THIS BROKEN WINDOW FALLACY ONLY APPLIES WHEN THERE IS AN EXCESS OF UNEMPLOYED RESOURCES/WORKERS OR IF A SOCIETY IS IN THE MIDST OF RECESSION (BECAUSE THE WHOLE IDEA IS TRYING TO CREATE MORE JOBS).

Later on in class, Prof. Rizzo discussed how jobs are not a benefit, but rather a cost. The benefit of a job is to get income and use on necessities/luxuries. People are paid to work a job, therefore it is a cost. It is also a cost to the person working because he/she gives up the time to do other things in his/her life to work. If the worker would prefer to work than do anything else in the world, then it is not as much of a cost, but it is still a little bit of a cost because the worker is giving up the time to eat, drink, and do other necessities.

Another example Prof. Rizzo discussed was the belief of some people that war is good because it creates jobs. Prof. Rizzo argues, however, that it would be better if the government just paid people money and not fight a war to not incur the cost of deaths. War does help spur immediate economic progress by giving people jobs, but why not just not fight a war and give money to people. Same result.

Important to note that if the government gave money away for free, it would reduce the incentive for people to work. But this might be acceptable in times of crisis, Prof. Rizzo argues.

Finally, Prof. Rizzo concluded class with going over some of the key economic principles we are learning in class:

4. Cost is subjective---> values are subjective (opinionated).

• Example: The cost I spend my paying attention in class differs for different people. For me, the cost is that I am giving up time to space out and not focus. For others, it might be giving up the chance to sleep.

5. Marginal Analysis---> Should I do more of x or less of y? (Should I pay attention for more than 2 miniutes, for example).

• Water-Diamond Paradox: 
1.  Something high in usage has a low exchange value (water)
2. Something low in usage has a high exchange value (a diamond)
• This has to do with value and scarcity. Diamonds more scarce, so valued at a higher amount. But important to note that if all diamonds/water became extinct, people would pay more for the first cup of water than the first diamond.

MARGINAL COST/BENEFIT: THE CHANGE IN YOUR COST/BENEFIT FROM TAKING A CERTAIN ACTION