Class Summary #14 for 10/3/11

Today in class, we learned about the bulk of what economics is about.

First, Prof. Rizzo posted a diagram on the board that depicted economics.

Basic Economic Principles:

1. How people make decisions
2. How people interact
3. How "aggregates" work (i.e. the economy)

Then, Prof. Rizzo put a list of five things that we are going to learn about this semester. They are:

1. People face tradeoff (tanstaafl=there ain't no such thing as a free lunch (a person/society can't get something for nothing) )
1. What is a cost?
2. Opportunity costs
1. Application: Breaking Windows
3. "Marginal" Analysis
1. Application: Subjectivism
4. Sunk Costs
5. People respond to incentives

Important note: We live in a world of scarcity and there is not enough stuff to go around. A good example of this: If there were 10 ice cream cones for 30 people to share.

We then went on to learn about two of the first five topics above.

1. People face tradeoff

• When resources are scarce, it is required/inevitable that we trade off one thing for another.
• For example, if I spend an extra hour with my friends, the trade off is that I have 1 less hour to spend on my economics studying.
• Tradeoffs can also involve money. For example: If I spend $10 on a burrito, the trade off is that I have $10 less to spend on other items. This shows that I value a $10 burrito more than spending $10 on anything else.
• Thus, trade-ff reveals a lot about our values.
• Prof. Rizzo gave us another example of a tradeoff. Prof. Rizzo used to be a banker and had a $1 million income with a $250,000 tax. Now he makes $50,000 with a tax of $15,000 teaching. His job change hurts the economy because since he has less money to spend, there is less money being spent in the market and thus, his change in jobs hurts the economy. But for him, the tradeoff was worth the job change. Yes, he makes a lot less money teaching, but he traded off making more money for the satisfaction/happiness he gets teaching students. Thus, he values helping students learn economics more than he values making $1,000,000.

After this, we began to learn about what exactly a cost is and how nothing in this world is actually free. Prof. Rizzo supplied us with another example:

• The library is free right? No- people pay taxes that goes to the library, one has to drive to the library to get books (this cost is the cost of time to drive over and wasting gas), and the $12 million dollars that were spent on the library costed the community having something else- such as a new school, police station, etc. The use of paper for all the books cost us trees as well. 
• Thus everything in this world has a cost in one way or another.
• Is there anything that is free? No, there is no such thing as free. In fact, there is even a cost when one has "too much" of a good thing. If you have too much of a good thing, you lose other good things. For example, lets say we increase the amount of student who go to college. A result of this might be that roads on the street get destroyed more from more students having to drive to school. Thus having too much of a good thing (more students), could lead to the loss of another good thing (well-built roads).
• The cost of spending too much time to accomplish/get something good can also cause a serious cost. Consider this: If I spend too much time getting an A, I would be giving up time that I need to eat, go to school, and exercise. Thus, you are paying a cost if you give up your time to do something.
• Another example of something that may seem to be free that really is not: the FDA. There is two problems with the FDA keeping us safe.
1. Drug lab: It takes many years to test a drug before it gets to the market. The longer it takes to get to the market, the higher the cost. Lets say a medication is being tested, a medication that might save many people from a deadly disease. During that testing time, people are dying because a drug is not yet out to save them. Thus the cost is the peoples' lives.
2. Drug loss: Drug testing by the FDA is very expensive. The FDA spends $50 billion a year on testing new drugs, and yet only 20 new drugs come out per year. That is $2.5 million per drug for testing. Because of the high costs for mandatory testing of drugs, this might prevent other drugs from being created that can be life-saving because of the fact that all drugs can't be tested since it is too costly.
• VERY IMPORTANT: TRADEOFF=COST AND COST=ANYTHING THAT CONSUMES RESOURCES

Next we learned about opportunity costs, which are simply when we make choices, we must understand what we give up for that choice.

***Opportunity Costs= the net benefit/value/please one would have gotten from the next best opportunity***


An example of an opportunity cost: Coming to class cost me my extra sleep. It may not necessarily be a monetary cost, but there is a cost in coming to class. Thus, I lost my sleep.


A VERY IMPORTANT EXAMPLE PROF. RIZZO SHARED WITH US TODAY:


Lets say you win Bruce Springstein Tickets. There is also a Barry Manilow concert that same night that costs $40, but your WTP (willing to pay) for the Manilow concert is $50- Which do you go to? Assume you cannot resell the Springstein tickets. Here are your options using opportunity costs:

1. Barry Manilow costs $40, but WTP=$50. Thus, 50-40=10. If you go to Manilow, you are making $10 based on value (or saving $10 depending on how you look at it).
2. Thus, the cost of seeing Springstein is $10 because if you go to Springstein, you are giving up the $10 you would have saved if you went to Manilow. So, for you to actually go to Springstein, you need to find $10 worth of value of the Springstein concert, which would then make sense to choose Springstein over Manilow. 
3. If you just go to the Springstein concert because the tickets were "free" and not because you find value in going, then you are actually losing $10 because that is how much value you are giving up by going to Springstein.
4. Thus, if you are doing something that you do not value over doing something else, you are paying a cost besides actual costs like paying for transportation, etc.

Finally, Prof. Rizzo explained the Broken Window Fallacy:

• Some people claim that causing a problem such as destroying a person's roof is good for the economy because if we do this, he has to pay $1,000 which creates more work. But this isn't the case, because if his roof didn't blow off, he'd have $1,000 to spend on other things, such as a new driveway, which would also pay money into our economy. Thus, blowing Rizzo's roof off doesn't stimulate the economy one bit. It is just an example of job displacement. One net, there is no change in economy because same amount of money is being spent that would've been spent other wise.
• For Rizzo, there is a big cost. Before this happened, he had a roof and $1000. After, he had a roof that is fixed and a loss of $1000. Thus, he had to pay a cost of $1000 because it is something he wouldn't have had to pay for otherwise. He valued a driveway more, but couldn't buy that because he had to deal with paying for new roof. So really, it doesn't stimulate economy at all.