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

Class Summary #2 for 9/2/11

In today's class, Professor Rizzo taught a very interesting lesson that revolved around the natural resource of oil.

He began class by explaining that back in the year 1970, there were 531 billion barrels of oil in the ground. Back then, humans we're consuming, on average, 16.5 billion barrels of oil per year.

At that rate of oil usage, many economists believes that humans would run out of oil 32 years later- in the year 2002. They calculated this year by dividing 531 billion by 16.5 billion.

Then, Prof. Rizzo went on to explain that today, in the year 2011, we have not even come close to running out of oil despite the belief that we should have run out by 2002. In fact, we have even more oil than ever before today, at 1.349 trillion barrels, with an annual usage of 30.5 billion barrels per year.

By doing the same calculation that economists did in 1970 (1.349 trillion divided by 30.5 billion), oil resources should theoretically run out in 44 years, or by 2055.

Oil barrel consumption/production
proves an underlying belief of many
economists: we will never run out of
natural resources as long as we live.

But Prof. Rizzo explains how by using economic theory, we can conclude that we will never run out of oil, or any other natural resource for that matter. The reason behind this is that in the case of oil, prices skyrocketed during the past decade.

Due to this, there was much more opportunity for oil producers to make profit off of oil barrels. So, what these producers did was search for more barrels of oil, barrels that they previously had not searched for because the cost of searching for such barrels outweighed the profit that could be made by selling the barrels.

With the increase in oil barrel prices came a boom to the job economy, as more and more people we're hired to conduct oil searches. Other people had the opportunity to develop inventions to find oil barrels, which allowed them to make money off of selling their inventions to production companies.

In class, Prof. Rizzo explained that the aforementioned example is the main reason why many economists believe that natural resources will never run out. When a resource appears to be in low quantities, prices skyrocket for the resource, which prompts producers to search harder for more of the resource so they can make significant profits.

The bottom line is that this chain of events spurs economic growth in a number of ways.

Prof. Rizzo also used the above example to refute many peoples' belief that our dependence on each other is decreasing in today's world. Economically speaking, it is pretty evident that we all rely on one another for natural resources because of the fact that when a resource seems to be dwindling, producers generate more of the resource and consumers continue to consume.

Pistachio nuts we're a major topic of discussion in class.

We also learned in class how nothing in this world is free, although it may initially seem to be. Prof. Rizzo used the example of pistachio nuts to prove his point.

He told us to pretend that he gave three students a huge bag of pistachio nuts that could fill up an entire classroom. For days on end, the three students went to eat pistachio nuts, throwing the empty shells back in the room.

After many days of eating pistachios, it became very difficult for the students to find any pistachios shells that held nuts because of the many empty shells laying all over the room.

Two of the students then suggested that the trio go to a local bar to get a cup of pistachio nuts to fulfill their pistachio nut addiction. The other student responded by saying that going to a bar and paying for pistachios was a dumb idea, considering the pistachios in the classroom we're given to them for free.

But the moral of the story is that the pistachios actually weren't free, because of the fact that a significant amount of time would have to be spent to search through all of the used shells to find a filled pistachio shell. Therefore, the time wasted searching for pistachio nuts would have been a hefty cost considering the time could have been better used in a number of ways.

The cost of paying for a cup of pistachios at a local bar may actually be worth it when considering the amount of time that would be wasted by searching through an empty-pistachio-nut-shell filled classroom for unused pistachio nuts.

Finally, Prof. Rizzo concluded the class by explaining a number of important themes that are imperative to understand in the study of Econ, such as:
-Econ is built upon the idea that man acts with a purpose. When man does something, he does it for a reason.
-One definition of economics is the study about how we all rely on each other to live.
-Another key definition is that economics is simply the study of scarcity.

Class Summary #1 for 8/31/11

Today's class was the very first time I have been exposed to the phenomenon of economics. I have never previously taken any type of economics course before, and at this point in time, I know very little about economics.

Nonetheless, I found today's lecture to be quite interesting in a number of ways. Here is a little bit about what I gleaned from Professor Rizzo.

Class started off when Prof. Rizzo threw money around the room towards students. The "throw-down" began with a penny, followed by a nickel, quarter, 2 quarters, a dollar bill, and finally, a five dollar bill.

Of course, few students went after the lower amounts of money that Prof. Rizzo offered, but when a dollar bill and a five dollar bill were at stake, several students began begging for the money. Upon Prof. Rizzo's release of the money, several students even charged after the cash in hopes of getting to the money first.

While the game may have seemed like just an entertaining and innovative way for Prof. Rizzo to introduce himself to the class, it had a lot more meaning than just that.

Prof. Rizzo, as he stated a number of times in class, was trying to demonstrate a very important principle of economics: the fact that people are willing to do more things/work when greater incentives are at stake. Prof. Rizzo's exercise perfectly exemplified that postulate perfectly, as people ran after/begged more frequently for the money as the cash value increased.

This led Prof. Rizzo to discuss how a major fact of human nature is how it is instinct for people to respond to incentives. But incentives don't just have to be monetary. One example Prof. Rizzo shared in class was how an incentive of showering is that a person may feel more awake.

The bottom line is that every decision has an incentive in some way and, in short, people in this world make decisions hoping to attain some sort of incentive.

One other thing to note is Prof. Rizzo's emphasis in class on one of the meanings of economics. He described economics in one regard as "The ways people behave and the ways people react to those behaviors."