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.