Econ Quiz 2
Opportunity cost question: "Suppose you are considering whether to go to your class. If you do not go to class you can either sleep an extra hour, which you value at $10, or you can go to the gym, which you value at $7. You opportunity cost of going to the class is:"
$10 (opportunity cost of an action if the value you place on the next best alternative)
explicit costs
(what we normally think of) those that require cash payment
game theory
-provides tools that are used to model strategic interdependencies -make a prediction about what outcome will be
Pitfall #1: failure to think at the margin
-sometimes humans might be influenced by costs they should ignore -other times they compare the wrong costs and benefits ***Econs always use marginal costs/ benefits so ALWAYS COMPARE MARGINAL COSTS/BENEFITS
Cost-Benefit Principle and how it can be used
1. "normative" economic principle -provides guidance about how people/societies SHOULD behave *value judgment 2. "positive" economic principle -predict how people WILL behave *not making value judgment -Incentive Principle
changes that lead to shifts in supply
1. Changes in the price of inputs 2. Changes in technology 3. Changes in productivity 4. Increase in number of sellers 5. Expectations of lower prices in the future
changes that lead to shifts in demand
1. Price of related goods (substitute goods and complement goods) 2. Income (normal goods and inferior goods) 3. Preferences or tastes (new info) 4. Population of buyers 5. Expectation of higher prices in the future
human pitfalls
1. failure to think at the margin 2. measuring costs and benefits as proportion rather than absolute dollars 3. ignoring implicit costs
a game has 3 basic elements
1. players 2. list of possible actions (strategies) 3. payoffs for each possible combination of strategies
Incentive Principle
A person is more likely to take an action if its benefit rises, and less likely to take it if its cost rises
The Scarcity Principle (No-Free-Lunch Principle)
Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another -2 conditions= unlimited wants and limited resources -scarcity is a fundamental fact of life for everyone *there is always a cost associated with everything= all actions have a cost (whether its explicit or implicit)... opportunity cost is a way to think about this
Example question: should you walk downtown to save $10 on a $2,020 computer?
Econ perspective= you would walk downtown if the cost was less than $10 *doesnt matter what the price of the good is Human perspective= people would be more likely to save $10 on a cheaper good than on a more expensive goof
True or false example questions
Friendship is scarce: True! You can't have an unlimited amount of friends (unlimited friends with limited resources) The cost of a vacation is simply the money cost of the plane, hotel, food, etc.: False! Time, possible money lost from taking off work
payoff matrix
In game theory, a table listing the payoffs that each player can expect from each move based on the actions of the other player
Econs are...
Rational... someone with -well-defined goals -who try to fulfill goals the best they can *ideal way that Economists use to make decisions *take an action/choice if the benefits are at least as great as the costs
Example question: what is more valuable- saving $100 on a $2,000 plane ticket to Tokyo or saving $90 on a $200 plane ticket to Chicago?
Think of it with Econ perspective (how much you're saving in all) $100 because $100>$90 HIGHER ABSOLUTE
Cost-Benefit Principle
an individual should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs B(x) IS GREATER THAN OR EQUAL TO C(x)
how much should you eat at an all you can eat buffet?
answer depends on assumption -Econs vs. Humans -explicit cost of getting another plate= $0 implicit cost= ?
average equation
average= total (cost)/n *shouldn't be using average to answer question (pitfall!)
benefit and cost of an action
benefit (max amount you'd be willing to pay/reservation price)= B(x) cost= C(x)
sunk costs
cost that is beyond recovery at the moment a decision is made and should not factor into the cost-benefit calculation -humans consider costs that cannot be avoided; costs occur whether or not additional action is taken, ex. all you can eat buffet
Opportunity cost question: "You're trying to decide whether to go for a run. If you don't go for a run, you'll either watch TV or do your homework. Your opportunity cost of going on a run is:"
either the value you place on watching TV or the value you place on doing homework, whichever is larger
incentive
factor that motivates a decision maker to act or exert effort -can be positive or negative and can result in unintended consequences
prisoners dillema
game in which 1. each player has a dominant strategy 2. when each plays it, the results payoffs are smaller than if each had played a dominated strategy *theres a conflict between narrow self-interest of individuals and the broader interests of a group
positive incentive
incentive that encourages action by offering a reward for an action -this reward would increase B(x) or decrease C(x), ex. BOGO Free
negative incentive
incentive that encourages action by threatening a punishment if action takes place -this penalty would decrease B(x) pr increase C(x), ex. fines or fees
change in demand
increase in demand (shifts right) decrease in demand (shifts left)
change in supply
increase in supply (shifts to the right) WHEN COSTS ARE REDUCED decrease in supply (shifts to the left) HIGHER PRICE OF INPUTS
opportunity cost
measure of the value of what must be foregone (or sacrificed) to take an action -value you place on the next best alternative -included both explicit and implicit costs opportunity cost= explicit + implicit costs
change in quantity demanded
movement along the demand curve (slide) -variable changing: price of 1 produce
dominant strategy
one that yields a higher payoff no matter what the other players in a game choose
unintended consequences
outcome from establishing an incentive that was not the initial intention of the incentive, ex. helmets and people not riding bikes
Pitfall #3: ignoring implicit costs
sometimes humans overlook implicit costs
Pitfall #2: measuring costs and benefits as proportion rather than absolute dollars
sometimes other information distracts or confuses humans as they measure B(x) and C(x) *Econs focus on total savings (shouldn't matter how much good is), humans focus on proportions
economics
study of how people make their choices under conditions of scarcity and of the results of those choices for society
microeconomics
study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markers
macroeconomics
study of the performance of national economies and the policies that governments use to try to improve that performance
economic surplus
the benefit of taking an action minus its cost economic surplus= B(x)-C(x)
marginal benefit
the increase in total benefit that results from carrying out one additional unit of activity
marginal cost
the increase in total cost that results from carrying out an additional unity of activity (subtract total cost from last total cost to get marginal cost)
implicit costs
time you use to take the action
vertical intercept
value taken by the dependent variable when the independent variable equals 0
Choices involve trade-offs between competing interests. How do economists suggest that one should remove the tradeoff?
when choosing whether to do/buy something, you weigh the cost vs. the benefits