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Transcript of Chapter 1
or Ultimatum Game??
Incentive on splitting check at
Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.
As a result, prices guide individuals to reach outcomes that tend to maximize the welfare of society as a whole.
20th Century Economics Laboratory
Market vs. Planned Economies
George has spent $600 purchasing, patching and painting an
old fishing boat, which he expects to sell for $900. George discovers a problem with the engine and he needs to make an additional repair which will cost another $400 in order to make the boat usable and worth $900. He can sell the boat now as is (without repairing the engine) for $400. Should he repair the boat engine?
Principle 3: Rational People Think at the
Margin. If benefits > costs, do it!
Gregory Mankiw comments:
I was raised in a middle-class family; neither of my parents were college graduates. My own children are being raised by parents with both more money and more education. Yet I do not see my children as having significantly better opportunities than I had at their age.
The same logic of social insurance that justifies income redistribution similarly justifies government-mandated kidney donation.
Who earned more as President?
John Kennedy 1962 $100,000
Barack Obama 2012 $400,000
Weight of prices in 1962 was 30.2
Weight of prices in 2012 was 229.6
What is the Opportunity Cost of the Following Decisions?
Buying a gift for a friend.
Working at a job in the afternoon.
Waiting on-line for an hour to buy a new cell phone
Playing on an X-Box for 2 hours after dinner
Did your group have the same answers? Why?
Principle Agent Problem
Rationality Assumption Redefined
by Behavioral Economics
But sometimes markets
don't deliver what we want:
- they don't deliver at all
- we're not happy with
what is delivered
Sometimes Government Can Make a Situation
Worse with a Government Policy or Program
-When benefits concentrated and costs
shared widely, special interests push government ("rent seeking")