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Joke Of The Day
An economist and an accountant are walking along a large pond and see a frog jumping on the mud.
The economist says: "If you eat the frog I'll give you $20,000!"
The accountant checks his budget and figures out he's better off eating it, so he does and collects money.
Continuing along they see another frog. The accountant says: "Now, if you eat this frog I'll give you $20,000."
After evaluating the proposal the economist eats the frog and gets the money.
Joke Of The Day
They go on. The accountant starts thinking:
"Listen, we both have the same amount of money we had before, but we both ate frogs. I don't see us being better off."
The economist says:
Joke Of The Day
"Well, that's true, but you overlooked the fact that we've just been involved in $40,000 of trade."
Economics for Leaders
Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes.
Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.
Economics for Leaders
Economic Reasoning Principle # 2: Choices impose costs; people receive benefits and incur costs when they make decisions.
The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.
What did you give up to be here?
Should you go to college?
Economics for Leaders
choices → TRADE-OFFS → forgone alternatives
OPPORTUNITY COST!
choosing is REFUSING!the cost of something is what you give up.
OPPORTUNITY COST!
Economics for Leaders
Economic Reasoning Principle # 3: People respond to incentives in predictable ways.
Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.
People do what makes them better off.
Marginal Cost, Marginal Benefit
Economics for Leaders
Drive or drive & ride the ferry?
What matters for this choice?
People do what makes them better off.
Marginal Cost, Marginal Benefit
Eau Claire to MuskegonSummer 2009
The Cost of Something Is What You Give Up to Get It
Should Tiger Woods do his own yard work?Should Roger Federer do his own house-work?What else could they do? …
The Cost of Something Is What You Give Up to Get It
Should Kobe Bryant, Lebron James and Dwight Howard have gone to college?
What about you?What else could they/you do? …
Economics for Leaders
More ExamplesWhy attend college right after high school?Getting bumped from a flight?Another Rolo, a second washing machineMore oranges, more automobiles and buildings
auto industry bailout?financial industry bailout?health care reform?Afghanistan/Iraq wars?BP oil spill?Bush era tax cuts?Free Dave Matthews concert?
Economics for Leaders
Should We Ration?
Given that we MUST ration, what is the best mechanism?
Let’s do an activity!
Economics for Leaders
Rationing Scarce Goods
How much do you like it?
Rank how much you value the item.
1 to 10
10 = TOTALLY AWESOME :>)
1 = PATHETIC :<(
Economics for Leaders
Rationing Scarce Goods
How much do you like it?
Rank how much you value the item.
1 to 10
10 = TOTALLY AWESOME :>)
1 = PATHETIC :<(
Rationing Scarce Goods
How much do you like it?
Rank how much you value the item.
1 to 10
10 = TOTALLY AWESOME :>)
1 = PATHETIC :<(
Rationing Scarce Goods
How much do you like it?
Rank how much you value the item.
1 to 10
10 = TOTALLY AWESOME :>)
1 = PATHETIC :<(
Economics for Leaders
Methods of Allocation
Given the method of allocation just used to ration the STUFF…
How could we improve this outcome?
Economics for Leaders
Methods of AllocationAllow Trade Set up a market
Voluntary Trade Creates Wealth!
Economics for Leaders
Methods of AllocationLotteryContestArbitrary criteriaForceShare equallyFirst-come, first serveNeedMerit
Market Transactions (exchange/prices)
Economics for Leaders
Markets Typically Do A Good Job Of Rationing
Goods go to those with the highest value.
Goods are produced by those with the lowest opportunity cost.
Voluntary trade increases well-being.– It makes people better off!
What do markets look like?
What is a Market?
Buyers Sellers
specific productinformationproperty rights
competitionvoluntary tradeswell-being
Economics for Leaders
Markets: Circular Flow
Households
Develop resources to their fullest potential and offer them for sale in factor markets.
Earn income from sale of resources and purchase goods & services to maximize well-being (utility).
Firms
Employ resources in their most useful capacity to produce goods and services.
Sell goods and services to maximize well-being (profit).
Economics for Leaders
How Do Markets Work?
Buyers and sellers each perform cost/benefit analysis.
Price is a measure of relative scarcity.
Price represents opportunity cost.
Price sends signals/incentives to players.
Buyers
Sellers
Economics for Leaders
Markets: Supply & Demand
D = MB = WTP (value)Diminishing marginal benefitRolos, washing machine
S = MC = WTS (opportunity cost)Rising marginal costwheat/oranges
Economics for Leaders
Big Ideas
choices → TRADE-OFFS → forgone alternatives
OPPORTUNITY COST!
choosing is REFUSING!the cost of something is what you give up.
OPPORTUNITY COST!
Economics for Leaders
Big Ideas
People do things that make them better off.
People respond to incentives in predictable ways.
The rules of the game shape how decisions are made.
Decisions determine outcomes.
Economics for Leaders
Big Ideas
Voluntary trade creates well-being.
Markets do a good job of allocating scarce resources to meet society’s many and often competing wants/desires.