Class Summary 12/9

Profits Losses & Entrepreneurs

Bill Gates we don't celebrate the accumulation of wealth we celebrate when we give all of the money away BUT... what is doing more good? Microsoft or charity? These are important aspects of life to think about. 

Do we care about the poor as much as we think we do? No, Mayor of Boston won't allow Wal-Mart, which would provide healthy food for the poor, and he also won't allow CVS Minute Clinics, which would provide healthcare for the poor. 

While health insurers, providers, and doctors DO make money off of our sickness we have to think about HOW they make money. (i.e. Healthcare makes money not by keeping us sick but by making us better, same with clothing, food grocers, even Hallmark).  

When you really want something we show it by how much we're willing to pay for it. 

EWOT #12

I found this article and connected it directly to what Rizzo has been talking about in class recently. The article talks about Obama's plan to reform tax payments and to tax the rich more. The tax system we have now seems completely unfair, however how easy will it be to change? The answer: it won't be. This article highlights all of the specific taxes that we discussed in class (e.g. payroll tax) and the unfairness that Rizzo hinted at. It will be interesting to see how and if the tax system will be reformed. 

"The Sumptuary Manifesto"

After reading this excerpt it made me think about all the taxes that we had been discussing in class. If we really did tax everything that a person ate to stop obesity, and to tax each extra yard of clothing, in a society with so many rules and taxes no one would ever flourish. There would be no choice, no preference, and if people did develop preferences and choice those would be taxed as well. We have learned that taxes do nothing except change the behavior of buyers, which we see clearly in this article. In the society described with all of the imposed and proposed taxes the buyers wouldn't even have a "behavior" and if they did it would be very limited because their choice and preferences are limited. There would be no true economic system with fluctuating supply and demand. Living in a society with choice, preferences, and yes, still taxes, it is almost impossible to imagine a society as described in "The Sumptuary Manifesto". 

Class Summary 12/7

We started talking about Taxes and the Economic Incidence of Supply & Demand and how that changes an application....

First, an excise tax means that sellers are legally responsible to give tax to the government. This means that to make the profit that the seller needs to they must charge a price that helps them both benefit and pay the excise tax. The main problem with taxes is that it east away at potential trade/exchange of a transaction. It is dead weight loss, taxes prevent mutually beneficial trade. 

When looking at sales tax we try to make the buyers pay the tax again. Taxes are really transfers neither good or bad, but taxes change people's behavior.

With payroll tax, which is a tax that is paid by everyone who works, goes to medicaid, medicare, and social security. This is the tax that "screws" everyone. 

There is clearly inefficiency with how we collect taxes. We ultimately want to tax things where behavior will not change very much for buyers; since demanders are insensitive to price change they often bear the cost of the tax. 

So we wonder... why doesn't the real incidence matter? And what DOES matter?

Class Summary 12/5

We began looking at the illegal sale of drugs and how the legality effects both Supply & Demand... 

We saw that the supply curve rotates up and becomes less elastic; whether selling drugs is legal or illegal marginally the trade-off is the same to the drug dealer. When drugs become illegal there is less sold but there is still a desire for the product. We tend to see more dangerous drugs produced when drugs are illegal. What the government and what we need to think about is opportunity cost, for example, instead of improving technology for everyone we are spending money putting people in jail for drug-related charges. (U.S. spends $33 billion on attempting to stop "drug wars")

EWOT #11

This is a picture of the Occupy Protests in Portland, as I've been studying economics and following the OWS movement, I wonder what they're truly protesting and if it is all worth it. I am also in an anthropology course which has shown me other sides to the economic issues which we discuss in Rizzo's class. However, after doing more of my own research I'm not sure if I agree with anyone. I know the data that Rizzo has shown us proves a lot of the common beliefs throughout America wrong, however since the beliefs are incorrect how did our economy get like this? And what are people actually protesting? This image and other images from "The 45 Most Powerful Images of 2011" made me think not only economically about the culture that we live in today, but also about how I want things to change and what information I want others to be aware of. 

"Bethpage Gray (Market)"

"Perhaps the equilibrium isn't as balanced as estimated. It's impossible to know for sure. There are more than 70,000 members in the Bethpage State Park reservation system. The course can accommodate 35,000 rounds per year. The phone system books up completely by 7:03 p.m. every night. People want to play golf. Until there is a greater supply of affordable, quality options, NY Golf Shuttle will continue to play the market. And if you want to get on Bethpage, remember this outfit is the cause of, and solution to, your problem."

The above quote from the article from Golf Digest says it all, the equilibrium isn't balanced. There is more demand than there is supply and if there continues to be scalpers, and other agencies like NY Golf Shuttle will continue to exist. People don't care what means they go by to receive their ends, they just in this case want to play golf. Whether this is morally right or wrong is beside the point, economically this is what's happening because there isn't an equilibrium being reached at any price. This article relates exactly what we've been talking about and can be related to the concept of price ceilings, which we discussed earlier this week in class. 

Class Summary 12/2

What About Price Floors?

(Looked at a graph with regard to price floors and wage) 

With regard to wages, if the wage isn't allowed to fall you make fewer jobs available. Is the minimum wage a good policy to help the poor? Well first we have to think about if poor people actually make minimum wage, and if they do how many make minimum wage? There must be better ways to help people.

Class Summary 11/30

The Economics of Price Controls & Price Ceilings

We looked at the effect of price controls on rent. The question we asked was why is there a social obligation for renters to make rent cheaper for community? Rent control puts constraints on price and messes up supply and demand flow. 

Looking at a graph we saw that when you introduce price controls:

Supply is not effected, however Quantity Supply decreases and price controls do not let it rise.

Demand doesn't change either we simply just move along the demand curve and the Quantity Demand increases.

You then get a new equilibrium, which in an effort to make housing more affordable you create shortage.  

EWOT #10

Over this Thanksgiving weekend there was of course a lot of planning for Black Friday, even my 80 year-old grandmother was up at midnight snagging the door-buster deals. However, as I was looking around I saw a lot more people shopping than last year which made me think about the economy and if this surge in shopping meant the economy was better or if it would even allude to how the economy was this holiday season. After doing some research online I found an article that talks about how many people were out and shopping over Thanksgiving weekend, how much was spent, and all of this in comparison to last year. 

"The Problem With Price Gouging Laws"

Is Price Gouging Unethical?

The article written by Michael Giberson highlights the problems with many states attempting and succeeding in their use of price gouging laws. Price gouging laws seem morally correct, as the article shows, however it goes against all economic thinking. 

"Economic analysis of the effects of price gouging laws reveals concerns on both the demand and supply sides of the market. As already noted, price constraints will discourage conservation of goods at exactly the time they are in especially high demand. Simultaneously, price caps discourage extraordinary efforts to bring goods in high demand into the affected area. As Sowell explained, price gouging laws keep goods from being used where they are most needed. It is a result not intended by state legislators, but completely predictable."

The quote above shows simply the economic consequences of price gouging and how states such as Georgia, South Carolina, and others need to re-think their price gouging laws. I agree with Michael Giberson and think that by instating price gouging laws many states are just going against the natural flow of the economy. The more laws that are instated, like the price gouging law, the more our economy will continue to suffer. 

Class Summary 11/25

No class due to Thanksgiving Break. 

Class Summary 11/23

How Market Use Knowledge

De-centralized VS Centralized Knowledge 

What Rizzo is trying to say is that centralized knowledge is an impossible dream, but decentralized knowledge can, but not always, will work very well. Some types of knowledge are useful and others are not. The best systems are those that can gather and process decentralized knowledge; like democracy and well functioning markets are akin to giving people 'their own thermostat'. 

Prices adjust to clear the market, if a price is "wrong" we'll see a price rise or fall so that the number of people who want the good becomes close to the number of people who receive the good. A price however seems to be more than that; stuff gets on the shelves even though so many parts of our demand are constantly changing. There is more to just simply shifting supply and demand curves. 

When prices of a good change, various consumers will either purchase more, purchase less, or not change their behavior. What we're trying to get at is how much less or how much more; we're bringing in elasticity. SO... what we need to think about are how many substitutes are available to consumers. When we start looking at elasticity we need to think about the trade-offs suppliers make to supply their good. 

Class Summary 11/21

Equilibrium & The Price System

First we want to think about why we use money and the advantages that using money give society. We use money because it lowers the cost of exchange with anything else. In reality, with money we no longer have to use a bartering system, per say, if you went back to bartering you would end up trying to become self-sufficient because it is more costly to barter. "Double-coincedence of Wants;" what you barter with may not be what someone else wants, therefore it would become difficult to get the goods that we want and by becoming self-sufficient we would end up with the '100-mile suit'. When you think about money it is just used as a mode of transaction. Without money it becomes harder to divide goods and to trade. Money lubricates trade. Money is a "transaction-cost reducer". The process by which prices are determined is what is really important...

When looking at supply & demand curves you have to always have two questions in mind, how is each side of the market affected? And whose plans are satisfied within the market? When you think about each question in relation to buyers and sellers you can relate the supply and demand curve to each of the buyers and sellers and their outcome. (Think about when there is surplus of a good OR a shortage of a good).

Equilibrium is where at one particular price and quantity NO ONE wants to change their behavior. Neither buyers or sellers have an incentive to change behavior.

EWOT #9

After learning about how companies capitalize on events, and other various things it made me think about Thanksgiving tickets and how much the airlines capitalize on holiday flights.  A ticket from Rochester, NY to Kansas City, MO was costing close to $800 even in September. Even though the flights are expensive there is always someone willing to pay that price to get to family. We value something more than the price of the flight, if we didn't then we wouldn't pay for the airline ticket. Thanksgiving flights show exactly what Rizzo has been talking about this past week in class. 

Propaganda Posters in relation to Rationing Goods

World War II: Propaganda Posters and Rationing Mechanisms

This World War II propaganda poster urges consumers to reduce the use of their materials so that they can excel in the war. This poster is not suggesting that goods should be rationed, but that we need to conserve our energy and goods. Therefore, thinking back to our "water ban" example if people raised the price on these materials it would force consumers to make a value-cost trade-off. 

This poster is advocating for a rationing method in which one saves fuel by joining a car-sharing club. Again, like the poster above, they are trying to ration a good. Here, if the price of gas were to increase people again would have to make a trade-off. The poster plays toward one's emotions, by saying that by driving alone they are letting their country down and "riding with Hitler". 

The "Sacrifice for Freedom!" logo of this propaganda poster suggests a rationing mechanism known as "equal shares". I believe that this is "equal shares" because it is explicitly saying that the world cannot exist half slave and half free. Equal shares means that no matter how much one produces or works everything will be split equally between all of society. Therefore creating no gap between being a slave and being free. 

This poster shows the relationship between the people and the government during war time and how everything is connected. The government needs ration stamps for ration goods, and they want the people to pledge that they will accept all goods fairly as to not disrupt the economy during wartime. 

Class Summary 11/18

What are the advantages of using prices to ration goods?

The way we choose to ration goods defines how we compete for the good. The way you ration goods has long-term implications. Much of our economic activity happens over time. When consumers have no financial incentives to deliver more of a product, no one would innovate or create new products. When you ration by lottery, you let people decide for themselves what they want and when they want it. Can you actually allocate goods by people who need it most?? No, examples of how this doesn't work are financial aid and healthcare. The beauty of markets is there's no false choice, no "honor" standard. No one has a powerful enough persuasion to change incentives of individuals. Think of water shortages, water bans, and "water police". When water supply is reduced and the price of water goes up, because of this you will only use so much water, and you are forced to make a value-cost trade-off. The price system regulates our use. If you price water and it rises it provides short-term and long-term incentives. You ration by choice and create more abundance through incentives. 

Class Summary 11/16

The Challenge

The main problem is scarcity and the "price system" regulates this.  If we all have different willingness of what to pay some businesses will lose money, it's a cost. Market prices force us to consider somebody else. Someone is willing to pay a high price which is why they charge and price goods the way they do. Companies have to capitalize on high demand because of incentives.

When goods are scarce how do we ration goods?

1. Need

How do you convey what people need? This is costly and invasive. Won't satisfy it's own condition. 

2. Queues

The line is a price for some people but everyone has a somewhat equal chance.

3. Lottery

People who value the good the most won't get it. People who need the good the most won't get it because of the lottery system.

4. Equal Share

Everyone produces and it gets split equally. Making for communism.

5. "Kickin' Ass"

You can't plan for anything because you don't know what has to happen to get the good.

6. Merit

Wouldn't want to trust anyone to determine merit. How do we know what to merit? A society in which a person is valued for their effort and not the value they produce then we're going to have the "100 mile suit". There are real down sides to choosing the meritorious route. 

Evaluation of Rationing Mechanisms

"Where does competition come from?"

1. What is nature of competition; constructive or destructive?
2. How does mechanism impact supply (Q)?
3. Other considerations

Class Summary 11/14

The "Law" of Supply

What matters is opportunity cost when looking at prices of goods. 

When the price of a good goes up producers want to make more. 

Each point on the supply curve actually represents the marginal opportunity cost of producing that particular unit. 

What changes Supply?

Own price "Quantity Supplied" and when "Supply Shifts" 

Input prices, technology, expectations, and substitutes all can increase or decrease supply

Class Summary 11/11

Elasticity and Total Revenues

Total Revenues = P x Q, when P increases, Q decreases; and when P decreases, Q increases.
So if the change in total revenue and the change in price are in opposite directions... then?
Looking at a graphic example we saw that at Point B prices are higher and less customers buy, therefore there was a decrease of $180. You added $120 by increasing your price of a burrito by $30 you multiply $30 by 4, the amount of customers who still buy your burritos, to create your increase of $120. But you also need to look at your loss of 6 customers and each of their $50 that are no longer being paid. Therefore $50 multiplied by 6 is $300. This accounts for the decrease of $180.

We also talked about how elastic goods that we "need" are. When you look at the demand curve would it be perfectly "inelastic"? No, that is saying that there are NO substitutes for any good that is necessary. We need to look at both wants & ability when you think about demand curves. "People will do anything for healthcare." This statement is completely untrue. If we were so desperate to save our own lives at any cost then we would be exercising everyday and never take risks but we do make trade-offs.

The whole concept of cost is derived from scarcity. When you look at a cost you have to think of an action that is attributed to a cost, and to whom? The whole point of suppliers costs are opportunity costs.

Class Summary 11/9

ELASTICITY 

Today in class there were a lot of graphs and tables on the board that all helped the class to understand the concept of elasticity. Rizzo basically said that elasticity is the:

% of change in Quality Demand

% of change in Whatever else you're interested in (e.g. Own Price)

There are times when people are very sensitive to price change and other times when we are not. Big numbers from the formula above mean that we are very sensitive, small numbers means we are not very sensitive. Our big decisions happen over time. Even if we are ready to change our behavior producers need time to adjust too. 

Another major idea we talked about was substitution for goods, because our ability to substitute goods also impacts our elasticity. In regard to substitution, when you define your good more narrowly, the more substitutes you will have because there will be more elasticity. 

"The Theory of the Leisure Class"

After reading the designated pages I had some idea of what Thorsten Veblen was trying to show his readers. After doing some more research into the entirety of the "The Theory of the Leisure Class" it became more apparent to me how this relates to our economics class. I enjoyed reading reviews and then relating their ideas to what I had read. Thorsten Veblen combines philosophy and economics and I found coined the term "conspicuous consumption" which basically means you don't buy because you NEED something you buy because you WANT something. You want to show your status through the goods that you purchase. One establishes an identity in society through the goods that you purchase and how others perceive has a lot to do with how you view yourself. The pages that we read for Rizzo illustrated how each job is classified and what the status of that job entails as an individual in society. Some of the issues brought up are no longer relevant to today's society but it was interesting to read and reading reviews and thoughts on Veblen's book helped me gain more of an understanding of what was being said and how these ideas relate to class, society, as well as trade! 

EWOT #8

I have a friend who whenever someone eats meat constantly tells me that I am eating a carcass. What I don't think she understands is that if I were not eating meat, then all of these animals like cows, chickens and turkeys would die out on their own. If we as humans had no use for them then we would not need to keep them around. Just like Rizzo's example of how to stop tigers from becoming extinct was to "eat them". If we find a use for something it will never be completely gone. If everyone became a vegetarian and stopped eating meat then the animals whose rights they were fighting for would become extinct altogether because they would no longer be needed. Just made me think about the economic implications of everyone becoming a vegetarian and sharing the same beliefs. 

Class Summary 11/7

We talked more about moving from an Individual Market to a Market Demand. When we look at Market Demand we want to know how EVERYONE would behave if the price of the burrito is $3. (e.g. How many would you buy? You would then add up across horizontally the graphs of the individual market to make market demand curve)

Two important things to notice while looking at demand curves were the shape of market demand curve versus the individual demand curve and is it possible to aggregate further? We learned that the more aggregated we get the flatter the demand curve is going to be. And when you aggregate beyond a single good it becomes hard to define "Q".

We also talked about comparative statics and specifically what changes our consumption:
-Own price
-Everything else, which has 5 categories (Income, substitutes, expectations, tastes, and the number of individuals in the market).

There are also two types of goods:
-"Normal"where when income increases Q also increases, so the demand curve will shift right.
-"Inferior" where when income increases Q also decreases, so the demand curve will shift left.

Class Summary 11/4

Today in class we talked about Supply & Demand.

Looking at a simple chart of the relationship between the quantity of burritos eaten, and the price of the burritos showed us how much information we can obtain from a chart. One of the main points I took away from class was that price is constant and given in a chart and graph, and our behavior is the same, always, according to the Law of Demand. This behavior is that if prices go up, we will buy less. WHY? Because when prices go up we are poorer, so we spend less. Also, when we are deciding whether or not to purchase something, we aren't choosing between having "6 quarters" in our pocket or a burrito, we are choosing between whatever else we could buy with "6 quarters" and if we value everything else more than the burrito. So really, price should be re-named as trade-off.

"Economics of a P.O.W. Camp"

I found this article by Radford very interesting. It seems to make sense that a barter system and trade system would arise in a P.O.W. camp, but I never thought it would go so far as to have a common currency, the cigarette, and that prices for goods would vary so much throughout different huts and camps. Because of the stress, if people smoked more, cigarettes became more scarce, prices went up. This is astounding, such a simple society and the same impulsive buys that we experience every day. Businesses grew in the camp and Radford talks about these businesses and restaurants and how the whole scheme was vulnerable to deflationary waves. This article really captivated me, it gave an economic insight to a P.O.W. camp that I had never thought to explore before. Reading this article was like experiencing what living in a P.O.W. camp was like but through the eyes of a monetary expert. This article also gave insight into what we're learning and discussing about in class, the idea of free trade, local trade and local goods, as well as tariffs and supply and demand.

EWOT #8

Occupy Wall Street and the 99% phenomenon has been all over the news and CNN.com. After being in Rizzo's class and hearing about how many of our economic beliefs are misconstrued due to misleading information that is twisted to become something that we, as Americans find easier to believe and identify with. The 99% phenomenon has done just that, can 99% of America really be living in those conditions? Aren't there jobs? We seem better off than ever before, in fact we are better off! Rizzo has proven that through his lectures and his factual evidence. This article highlights that it may not be 99% of America that is feeling these needs to Occupy Wall Street. I found this article very interesting and seem to agree with the 53% of Americans, and their voices need to be heard.

Class Summary 11/2

"I give China $10."

1. You want to come back to America and buy $10 or $5 worth of goods.

2. If they don't buy American goods maybe they buy American assets. Remember all imports are exports.

3. Buy goods from other countries (e.g. Italy) If they do spend $10 on the Italian vendor, the Italian vendor would go back and spend the money on an American good. 

4. The "worst" thing they could do is eat the money. 

Money is only useful if you can buy other goods. Therefore even if one dollar, ten dollars, or ten million dollars are "eaten" it makes our money more valuable. In all cases of giving money to China, money comes back into America. FOLLOW THE GOODS NOT THE MONEY!

It's easy to say we shouldn't allow free trade, but if we do we're back to only producing locally. We're ignoring everyone else besides Americans when we impose tariffs against free trade. We blight the American poor and outsourcing of jobs but why do we not look at the benefits given to these around the world? 

Class Summary 10/31

No Summary. Class cancelled due to fire alarm. 

EWOT #7

I know that Obama is beginning to implement a new system where it will be easier for us to pay off our loans. As a college student who has taken out loans, I am excited about the new loan pay off system. In this  article it highlights how this is going to effect our economy and change it hopefully for the better. It's an interesting concept that I found interesting. 

Paul Krugman Analysis

First, looking at Ricardo's Difficult Idea, highlights the arguments against Free Trade. While showing how completely untrue the majority of the arguments against Free Trade are we can see how many people are given false information about Free Trade and therefore without understanding the economic concept properly just outright reject it.

The main idea of comparative advantage is that trade between two nations normally raises the real incomes of both. It's interesting that a concept so simple can be misunderstood by so many people and challenged by 'new' economists.

Paul Krugman also looks into cheap labor and why he is in favor of it. He says, "More importantly, however, the growth of manufacturing and of the penumbra of other jobs that the new export sector creates has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for works, and urban wages also begin to rise. Where the process has gone on long enough in South Korea or Taiwan, average wages start to approach what an American teenager can earn at McDonald's." Although in this article everything points to cheap labor being favorable, we can't condone women and children working for extremely low wages because it is for OUR benefit, this is something that we either need to re-think or change so that we can begin to see how this labor helps their economies and ours.

Finally, Krugman looks at the "berry outbreak", which after the fact Clinton asked for legislation to ban food imports from countries that do not follow adequate sanitary standards in agriculture. But doesn't this create a double standard? "Intellectual opponents of globalization gleefully noted a double standard: We're willing to seize shipments of foreign berries to protect yuppie consumers (the sort of people who eat raspberries out of season) from inadequate foreign sanitary standards, so why aren't we willing to protect U.S. workers from inadequate foreign labor standards? Isn't it the same thing?" Krugman goes on to show us that it's not the same.

Through these articles Krugman raises some very controversial issues in economics, that really shouldn't be controversial if you look at the facts. Yes, the wages may be very very low and unacceptable for our standards the facts show that cheap labor is improving Third World countries. There is more that needs to be understood and investigated before people make judgements and begin to oppose economic principles when they don't fully understand the outcomes.

Class Summary 10/26

The miracle of trade is figuring out how to make the goods we want with as few resources as possible. 

Many people believe that trade has decreased jobs within America, however that can be shown completely unfounded. We produce more now than ever before and any other country.  We're the fourth largest economy on Earth. We've lost manufacturing jobs but our manufacturing output has increased. An individual now produces $3,000 worth of stuff, therefore we've become more productive with less people working.

Although, many people who lose their jobs blame trade, but they were only in that job because of trade.

Now, jobs that are being created seem to only be an advantage to educated people with a specific set of skills (e.g. Now stock traders have to be physics gurus). It is not trade that is creating the growing gap between classes.

Class Summary 10/24

NOBODY CAN HAVE A COMPARATIVE ADVANTAGE IN EVERYTHING!

In class, we created graphs, which showed that Rochester has an absolute advantage in producing cameras in comparison to Cornell. Rochester also has an absolute advantage at making wine over Cornell. 

We also computed opportunity cost, where we saw that Rochester has the least opportunity cost, making them the most "efficient". So we say that Rochester has a comparative advantage over Cornell. 

When we ask who is more "efficient" we are really asking who sacrifices the least when producing goods. Therefore, who can provide wine for a lower cost? Here, price is nothing more than a trade-off. 

When we talked about trade and specialization we saw that it makes all parties better off. What matters for trade are relative price differences within each country. Also self-sufficiency is that way to poverty. Policies that restrict trade will make you poor. Restricting trade is costly. You pay for your imports with exports, every export is used to buy an import, there is a circular flow. 

EWOT #6

Since we've been talking about how ads can play to our emotional side, like the milk that says the farmers "care" about you, or for that matter any product that says they "care" about the customer reminded me of the All State Insurance  commercials. They play directly to our emotional side, and I'm sure many people like their commercials and feel like the company "cares" about them. 

Class Summary 10/21

"People co-operate to get more of what they want."

• What's the sole purpose of production? CONSUMPTION
• Trade produces more wealth in other countries. 
• Even if exchange doesn't create any value its a pre-requisite for creating products that we do value. 
• Good trade is where the gains are shared equally (Rizzo's yard work example)

This all leads to Production Possibilities Frontier (PPF), a chart that shows all the possible combinations of products we can produce with current resources and technologies. 

Class Summary 10/19

What is it about Fed-Ex that gives you the confidence to ship valuable goods?

-Feedback loops

-There are serious consequences if Fed-Ex fails

-Competition is one of the reasons feedback loops work

-When Fed-Ex fails, they have to care about failing, their workers need a moral conscience, therefore it is in Fed-Ex's interest to hire a trustworthy person. 

Trade & Specialization

-We don't just trade goods we trade "property"

What's the point of economic activity?

-World has scarcity

-We want "stuff"

How do we decide what to provide society? The Economic Challenge

-Production Questions

-Allocative Questions

What is economic activity?

-The second you decide to not do something for yourself is economic activity, spending transaction in the market. 

Three Aspects to Spending:

1. Specialization

2. Exchange

3. Discovery

Class Summary 10/17

THE GOLDEN RULE

People would probably like society if it followed the golden rule, do unto others as you would have them do unto you. Sure, it'd be nice, however the golden rule only works in small settings, not necessarily large, interconnected, and impersonal ones.

The golden rule fails, not because of us, but because people don't like organizing themselves by the principle of other people. It can't work in a large society because we have a knowledge problem, not an honesty problem.

Why is our thinking about self-interest so colored?
Interesting how we idolize people who have the self-control to workout and eat healthy for themselves. We celebrate most self-interested actions, but there are some that we condemn (e.g. creating your own business) The person who goes jogging is virtuous, the person who makes the shoes so you can go jogging is evil and self-interested.

It seems that instead of the golden rule, the more appropriate rule may be the "silver rule". Do not do to others what you would consider unfair or unjust if they did it to you.

"The Case of Contamination"

This article talks about people's identities being challenged and cultural identities becoming challenged because of global economy. Why do they feel threatened? Because the world is changing. One example of this is the pull of the global economy, for Asante farmers if chocolate prices happened to fall like they did in 1990 they might have to find new crops to grow, new sources of livelihood and they don't necessarily like that idea. Underlying all of this change is the fact that relationships are changing. Not too long ago a father could expect to pass a long a farm or a business to his sons and family, nowadays everything is changing.

"Cocoa prices have not kept up pace with the cost of living. Gas prices have made the transportation of the crop more expensive. And there are new possibilities for the young in the towns, other parts of the country, and in other parts of the world."

However looking deeper into this article if everyone in the world is slowly moving towards more consumerism, less traditional values it is going to create somewhat of a "utopia" which is what we should be afraid of. With everyone becoming the same it will then become difficult to get different cultural opinions, and different view of products, markets, institutions, and what makes our world go 'round. We shouldn't be afraid of what capitalism is producing, we should be afraid of this "utopia".

The article also talks about decision making and how often our decisions are not made by logical and time-consuming thinking, they are instead made at times irrationally and almost always immediately. This type of thinking is what we have been talking about in Rizzo's class. We can't predict how everyone or even one person will react to something. Economists can't know it all.

EWOT #5

The other day I drove past a Blockbuster and was surprised to see that it was still in business. This got me thinking about all the competition and technological advances that have occurred in the past ten years even! With new companies like Netflix constantly being created it must be challenging for businesses to continue to innovate. It made me wonder if this is creating new jobs within specific markets? I know that Blockbuster is now working on updating it's business to keep up with Netflix, but how hard is it actually to cross technological boundaries once your company has been "established" and will loyal followers continue to follow? And how does this all effect the economy that we live in today?

Class Summary 10/14

MARKETS

People's income should have nothing to do with what you produce. (Marxist View)

• Market transactions tend to produce positive outcomes. 
• Markets are often "wrong". 
• Institutions MATTER
• "Lack of Markets" 

One of the goals of economic policy is "efficiency"
-We want to make sure economic system is producing what people want and at the lowest feasible cost.

You can't have market unless all of the other institutions in society are working correctly (institutions matter). There are generally accepted ways of how to act within a society. "Rule of Law" means that laws have to apply equally to EVERYONE. Laws should not be arbitrary.

If you get institutions "right" you can grow remarkably fast. Institutions are not rivalrous. No corruption, trust, good churches. All of this sparks good processes.

Class Summary 10/12

UNINTENDED CONSEQUENCES

When cost of something changes it is going to affect someone's behavior. 

-You can pass a law banning something but we'll use our ingenuity to get around the law. 

Incentives change, while unintended consequences are "implemented"

(e.g. When drugs were made illegal, drugs became more powerful, needle-drug injection began, which led to the spread of AIDS in the 1980s.

Why does this keep happening?

We have two worlds we live in: Simple VS. Complex Systems

You get unintended consequences when you try to fix complex systems by simple rules. Can't use the "simple" limited information  to rule a complex system.

American Disabilities Act raised the stakes of hiring a disabled person due to people suing for being fired in the future. Therefore hiring of disabled people decreased considerably. 

"Pie Fallacy" is that there's a fixed amount of wealth in the world. If Steve Jobs never created Apple we would be richer. 

Pie fallacy says that by getting wealthy all you're doing is stealing from other people. Consequences of following this pie fallacy is that by supporting these policies are created that stop entrepeneurialism, free trade, and other positive influential programs. While we don't want vast inequality can't stop individual businesses. 

Class Summary 10/7

"Everyone should have healthcare!"

Now looking at this statement, you agree, but what is healthcare to you? Healthcare is relative to what we have been taught by society for it to be. If healthcare was just a bandaid for a cut, then healthcare could be provided to everyone. Is healthcare a bandaid? No. 

Looking at the idea of relativity we can also relate it to scarcity. When comparing teachers and athletes salary does it seem that we value athletes more because we pay them more and give them more monetary value? yes, but this is relative scarcity. Teacher's skills are more frequent than a famous athlete's skills are. Therefore famous athletes are more scarce. If you take 200 athletes out of the NBA, it would deplete, but if you take 200 teachers out of school it wouldn't be detrimental because there are so many other teachers. However, if the world had to re-build itself and only an athlete and a teacher were there to re-build, the teacher would be far more valuable to society, and is far more valuable to society now. 

We don't necessarily care about resources, we care about what the resource are giving us. 

"Value Arises From Human Interpretation." 

Class Summary 10/5

"Broken Window Fallacy" 

1. I wouldn't have bought the roof (i.e. consumer product)
2. Before the storm I have $1,000 and a roof. Post storm I have $0 and a roof.
3. But.... what if roofers were idle/unemployed/we're in a recession? 
4. Costs are subjective, the value you place on options is the cost you make on decisions.
5. Marginal thinking "little bit" 

Looking at consumer preferences you did NOT want the roof before the storm, so did you want it after? NO. When you think logically about what the world looks like before and after destruction it is clear that destruction is NOT good for our economy. Although there are arguments against this...
-We're willing to trade jobs today and look at the future later.
-The government itself has no ability to create resources.
-After destruction, although we create jobs today, we are destroying jobs of tomorrow.

TO THINK ABOUT: How was WW2 good? Yes, GDP increased, but 15 million people died, how is that good? The same argument can be made for Hurricane Katrina and Tsunami in Asia. War and destruction is NOT good for economies! 

Class Summary 10/3

Three Basic Economic Principles:
1. How People Make Choices
2. How People Interact
3. How "Economics" Works

What follows Scarcity?
-People make trade offs
-Opportunity costs
-Thinking at the margin
-People respond to incentives

MAIN EXAMPLE:

If the FDA spends a lot of money testing drugs and a lot of time testing drugs, the longer the process takes the more lives are taken.  The fact that life saving drugs are still being tested and are not in use are causing deaths. For every $50 million we get 20 new drugs, 10 of which are probably life saving. What is the incentive structure of the FDA? They do not let a drug out if there is even a very small chance that a drug is dangerous. However, FDA makes more money when they make bad decisions than when they make good ones... 

EWOT #4

Why do people care so much about material goods? Yes, there are some goods with intrinsic value and we have heard Rizzo say that when he buys his daughter earrings, he's not buying the earring he's being quality time with his daughter and the good is enhancing this. But what has really made me think is when you don't have enough money to even clothe, or support yourself or your family why do you care about having a nice phone? I have seen many "poor" people with nice touch screen phones and it just makes me wonder, why spend your money on a mobile phone when you could be buying other things. I'm sure for these people there is intrinsic value and it may make them feel more in with society. It just goes to show that what sometimes you don't really understand why a good is purchased by an individual if you think about intrinsic value and what that good may mean to that person you could justify many many purchases that seem unnecessary.

"Are Happiness & Income Related?"

DOES MONEY BUY HAPPINESS?

Justin Wolfers, first says he is an empiricist and shows many graphs which show the high correlation between happiness and income relative to twenty-five countries. For many of his empirical information it seems that there is a high correlation between income and happiness, however correlation does not always prove causation.

Robert Frank argues that while money can buy happiness it does not buy it to the extent at which we think it does. Frank argues that in one hundred years we will all be saying that Charles Darwin is the founder of economics. I found this very interesting, Frank continued to argue that Darwin's "survival of the fittest" theory shows through within economics in relation to competition. He also states that the brain from the Darwin point of view is supposed to not just be happy, but it's main job is to get you to do what it takes to pass your genes to the "next round". Your brain does this however by prompting negative feelings which get you to a position to get your genes further. Frank says that pleasure and happiness is the fleeting when you move from discomfort to comfort; it is not our goal to maximize pleasure through life.

I found both arguments very persuasive but found myself leaning more towards Frank's point of view than Wolfers', which was surprising because I feel I would normally lean towards empirical information. Frank's theories seem to make sense within many societies and his examples highly illustrate this. I still am unsure as to whether money really does buy happiness and if so to what extent but this has prompted me to do more research and look into the theory of Darwin creating economics, not Adam Smith and the Invisible Hand. Overall I found this debate very interesting and eye-opening in many ways for me personally having lived and visited in many different countries. This definitely sparked my interest.

Class Summary 09/30

WHAT DOES TRADE CREATE?

According to Hume...

1. Competition, which drives firms to innovate

2. Imitation, Learning

3. Division of Labor, which is import because it splits up job tasks and creates more goods.

ADAM SMITH

-Said you don't need the government to control and regulate everything 

-"Laissez-faire" 

-Three important things, Police and Courts, National Defense, "Public Goods"

*If these three ideas are met then parties in the market should be free to sell and buy, entry into different trades should be open to anyone, everyone has the right to buy and sell, and ANY attempt to suppress this is suppressing the price system. 

For Smith our source of wealth comes from our ability to produce and exchange peacefully. If someone is poor you want to ask, what is stopping your ability? Unless you appeal to other people's interests you're not going to get very far.

Commercial society emerged on its' own. Order in society is possible without conscious design. We consciously try to make effort to improvement but NOTHING was planned. 

Class Summary 9/28

Mercantilism, was an economic system tied in with the feudal system.

-There were heavy restraints placed on individuals
-Practiced protectionism; support of craft guilds
-Heavily licensed and many large government monopolies
-Import & export regulations; severe restrictions of the free movement of people.
-Limits on domestic production; price controls were controlled by centralized third parties; wages were controlled "maximum wage".
-Blended with the feudal system because that's just how the world seemed to work.

"You didn't expect the government to do things for you, you expected them to do things to you."

Know differences between what Physiocrats, Mercantilists, and Scottish Moral Philosophers thought about the SOURCES OF WEALTH.

David Hume

Argued that the laws of economics can stand on their own through time, through peoples changes, internally and externally. 

Identified "commerce" as the engine that drives improved living standards.

Argument against Mercantilists

"Price-Specie Flow Mechanism"means prices rise in your country you go somewhere else for the good (Law of One Price). 

Money doesn't matter! Money is neutral! What matters is purchasing power! 

Class Summary 9/26

Basically, there are TWO population theories:
1. Classical ("High Fertility")
2. Modern ("Low Fertility")

• Adam Smith & Karl Marx thought that the world worked with the classical population theory that when families have a little more money and resources they don't make their families richer, they make their families bigger.

• The modern theory is the idea that the fertility rate is fixed throughout society, therefore families save money and create more "high quality children".

We want to know what caused this shift from Classical Population Theory to Modern Population Theory.

We don't have any idea what caused the shift but some important questions we can ask are:

What motivated entrepreneurs to start industrializing?

What is the engine behind all this progress? 

What caused families to make the shift between "quantity children" and "quality children"?

EWOT Goggles #3

A Rough 10 Years For the Middle Class

This article really made me think about what Rizzo has been lecturing about recently. Have our living standards really improved? 

Yes, I know that we have seen lots of data that has been linked to our rising living standards, but this article seems to highlight the issues of the class system within America, and also the specific issues of the middle class.

Although after learning about economic biases and how more often than not articles and biases are produced based upon fiction not fact it is still hard to believe that living standards are improving when articles like this are continually published and seem to prove what we've been learning wrong. 

What Social Science Does and Doesn't Know

This article is about how to use scientific experiments in the social science field. And whether or not this would help mainly the field of economics in creating a more clear picture of how economics works within a society. The use of scientific proven facts in a field like economics would help other people understand what is going on in the world and in their society and how they could potentially change and shape their economic environment. 

One part of the article that I found particularly interesting is the success of Capital One and their reliance as a company on experimentation. Capital One was founded as an application of experimentation directly to business. Everything from product design, marketing, credit lines, and many more aspects of the company are all subjected to testing using thousands of experiments. Therefore the success of Capital One can be mainly attributed to the participation of consumers in experimentation.

This idea to me is astounding that it first, actually works and is successful, and second that it can be applied to something as amazing as a large company. As time goes on I think that this idea should be taken further and applied to not only large corporations but small businesses as well.  As our economic growth continues to build, and our economic society continues to change form, this experimentation should continue to advance and change with the times.

Moving away from how experimentation effects how businesses should be run and over-looked, could this method also be applied to more of our society? 

Class Summary 09/23

Population Growth Stimulates Economic Growth- We Are Better Off Than Ever Before.

• Recently everything is healthier, cleaner, and safer. EVERY resource is now more abundance and cheaper than when we were born. All of this is improving because of population growth and economic growth. 
• Standards of living are also improving greatly. There are more people on Earth than ever before and we are being nicer to each other, although it may not seem that way at first glance. 

Standards of Living Improvements: 

Freedom for Minorities

-Markets are made for minorities

Freedom Itself

-Commerce is also important for freedom itself.

-Advances in liberty (Racial Segregation, Immigration) were helped by media and commercialization.

Question to Think About:

Does money and being rich make you happy? Has all of this economic growth and need for "stuff" ruined our psyche?  

Class Summary 09/21

The Two Main Points:

1. Today, we don't buy a product, BUT we buy the service the product provides.                                 (e.g. When we purchase a lightbulb we are not buying the glass that the lightbulb is made out of we are buying light, the ability to read a book, and many other uses.) 
2. We are also NOW at LEAST 14 times richer today than compared to 1790. 

Class Summary 09/19

Economic Biases: 

1. The percentage of the population of the world that is poor is growing. 

"The rich have indeed gotten richer, but the poor have done even better." 

• The graphs in Rizzo's powerpoint show that if you look from the years of 1970 to 2006 there has been an 80% reduction in the absolute number of people that are poor. 
• Today there are less than 200 million people making a dollar a day. At the start of the chart 27% of the world lived on less than a dollar a day. 
• The numbers of the poor have decreased significantly. The poverty rates in Korea, Japan, and China have fallen by 98%.
• Chine RIGHT NOW is ten times richer than they were ten years ago.

 Overall the World, as a whole, has become richer than they have ever been in the past. This fact can put to rest this ONE economic bias. 

Another question we can ask ourselves after hearing this lecture is where do these economic biases originate from when there is hard evidence that is stating the opposite of the bias? 

EWOT Goggles #2

This weekend I drove up to Saratoga Springs, as I was driving along the highway I was noticing and admiring all the trees and fall colors. It made me think though, people keep saying we're cutting down trees all over the world and not taking of the Earth the way it was "made to be taken care of"but if you still stop to appreciate the little things, like the fall colors of the trees or the ocean breeze you can also appreciate the goods that nature gives to us now. As Rizzo said, no resource will ever run out if there is always a demand. Seeing all of the trees reminded me of this and how rumors like "There are NO trees left" expand throughout society when obviously these rumors are false. If people stopped and took a second to think about the world around them, the rumors being spread about economics, job opportunities, natural resources depleting, they would see that we are in a great economic state and should be thankful for all of the opportunities that surround our society. 

An Interview with Deirdre McCloskey

Capitalism- an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

• McCloskey has many interesting points about how capitalism works within our society and about how economics works within our society. 
• McCloskey echoes Rizzo's points about how economics is a tangled web of individuals' choices; therefore economics is always changing and growing as society grows and changes. McCloskey says we can look at the economy as two different stories. One as a story of "brutal greed" the other "as a story of cooperation, we celebrate it and the working lives it is made up of." 
• Later in the interview McCloskey says, "A capitalist at her pretty good best is humble." He then goes on to talk about McDonald's and Wal-Mart which are two cooperations that many people are hostile towards. McCloskey says that these hostile opinionated people "...do not have the tight budget that goes so much further at McDonald's or Wal-Mart." I connected this with Rizzo's points about how the poor in America today are better off than the rich in history. Although poor, there are many cheap food options now and McCloskey argues that capitalism is in favor of the poor. 

This article made me think about how everything and everyone plays a part in the economy which is now presented to us as a society.  Politically there are many sides that people look at economy from, McCloskey in particular criticizes the left wing, but this got me thinking that many people don't think about their individual impact on the economy. For example, by purchasing trifling goods and enjoying the benefits that come from not just the purchase but the emotional benefits is something that has completely transformed our society and economy as we know it.

McCloskey's line, "Lovers leave, friends move away, riches get spent. And then what? If your life plan consists of accumulating SUVs and antique houses and young lovers, what is the point?" got me thinking, what is the point? What do my trivial purchases and opinions say about me as an individual, and most importantly what is the point? What do you think the point of all of this is?

Class Summary 09/16

For this lecture Rizzo focused on Standards of Living: 

• What do we mean when we say standard of living? 

It is your ability to command goods and services. 

• Many people e-mailed about economy and our need to buy "trifling goods" BUT are these goods really trifle? 

The measured increase of our consumption correlates well with everything that is not trifling in our society. Our measured income has shortcomings but it is improving our standards of living. 

Do we get pleasure from the ACTUAL trifling good? No, we get pleasure from the stream of benefits that connect us to the goods. IT's not the good that matters it's the stream of services you receive that matters. 

(e.g. Rizzo's earring example) 

The general idea of this lecture that Rizzo was trying to expose us to was that NOW we are better off poor, than the richest person in the 1700s. Although we seem to believe that we are worse off now than ever before in human history there are no hard facts that support this theory. Looking alone at the technological and medical advancements of today it is clear that the poorest NOW are "richer" than the richest person in the past. 

Class Summary 09/14

What is GDP? What is Rizzo Talking About?

To begin the lecture Rizzo gave a standard definition of what GDP actually is: 

GDP is a dollar value of all the goods and values offered in a society. GDP is a measure of wellbeing.

Then we learned that there are a lot of things that do not actually enter into GDP statistics; Only about 15% of what we consume is actually produced. 

For example, Rizzo's lecture is being consumed but it is not being produced literally, however this lecture still goes into GDP and is counted. 

After learning about GDP, we started questioning population growth and how that effects population income and wealth. The general consensus is that population growth is BAD and is hurting our economy; people say we're running out of space to live comfortably and running out of money and economic opportunities for the world population. Rizzo then CHALLENGED this:

We would take 0.47% of the Earth for comfortable living space for all of the people on the Earth and use the rest of the space for whatever we wanted. Would we want to do that? Probably not. 

World population has increased by a factor of 7, but world income has risen by a factor of 65. 

Maybe at some point more people are good? 

Population growth seems to create more wealth; more products are bought.

FINALLY it was said that, human progress always has enemies in one sort or another. People attack population growth for creating poverty within the world, however population is in some ways showing off to the world, it should not be viewed as something negative. 

Class Summary 09/12

Economics is not complex, but economic systems are.

Psychologists say some people have an analytic brain “Type C” and some of us have a “Type M” brain which is the part of our brain that uses empathy which helps us fit in, in a social situation.

Sometimes when people are in control of things there may seem like there is “order”. However, we only recognize “order” when something goes wrong. 

• What Adam Smith spoke about the “Invisible Hand” he meant that there’s a possibility that through each of us doing our own social thing, something good may come out of it. 
• The importance of “Tacit & Dispersed Knowledge” means that there’s a mechanism inside each and every one of us where we may appreciate something but are not able to vocalize or articulate the feelings to someone else.
• In economic terms, you on the farm may have the intuition about certain products that cannot be articulated to a third person.

“I, Pencil” in relation to the production and distribution of coffee (Rizzo's Economic Example) :

Impersonal- one common bit of nostalgia in older citizens is how personal everything USED to be. We should think more about the process and the people who are involved in the process.

Self Interest- Every part of this process is people exchanging skills for efforts and money.

Cognitive Issues- Everybody knows how to pack and distribute goods, but how come no one else tries? It only takes 40 cents to bring a kiwi from New Zealand to the United States, but no one else can bring it over than the people specialized to bring the fruit over.

No One Directed- no one was directed in bringing you these goods like coffee, but somehow there is always pizza made on Friday night, bagels on Saturday morning, and coffee whenever you want it. You never call someone to direct them on when you will want coffee or a bagel or pizza but the goods are always there. Everyone is somehow part of the “bigger picture”.

The record of command of economics illustrates the importance of “Tacit and Dispersed Knowledge”. We want to understand what are the things that exist in an economy that allows this process to work. What is the thread that ties everything together, to make tacit knowledge work in our society? 

The thread that makes this all possible is the price system. 

Class Summary 09/09

Understanding Economics: 

What is Economics? 

Economics is 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.

There are two broad fields within economics: Micro and Macro.

What do we mean by that? 

• Generally Micro is the study of the trees (small details) we analyze the choices individual choosing agents make. You as a CEO, as a religion, as an individual. 
• Macro in some sense is an aggregate; we look at the choices of many and then see what effect is on society. We can look at the impact of individual choices on society. 
• Microeconomics is properly the study of price theory.

 Why Study Economics?

1. It helps you appreciate the wonders of where we live. We should have a sense of wonder about the world.

2. There are important concepts. Every action we take involves a consequence. “The road to hell is paved with good intentions.” Intentions do not equal results.

3. People need to understand certain facts. Get facts correct instead of relying on other people. 

EWOT Goggles

TOILET PAPER ROLL COVER COMMERCIAL

THIS is definitely the dumbest product ever created. (Roll Cover Commercial)

This really makes me wonder:

• How much energy does it take to create this useless product?
• How many resources are we depleting to create this product? 

There are so many products in the world and I wish I knew why some of them were created and what audience or consumer market the creators are trying to reach.  Clearly these products are bought or else they wouldn't be able to continue creating useless products, like jibbits, or toilet paper roll covers. It makes me wonder what compels people to buy these products, and how these consumers compare the benefits and costs of these products. Clearly there has to be logic and thinking in a more economic way has made me look deeper into every commercial and how it must effect someone in a way that I may never be able to understand, but maybe thinking in an economic mindset will lend some insight to why people make the choices they do.

i, Pencil

"i, Pencil," an essay written by Leonard E. Reed at face value describes how a pencil is made. Before reading this piece I never thought about how a pencil was made, or how many skills go into making something so simple. A pencil is an item used everyday and not often thought about therefore this item is perfect for exposing the heart of economics, the ideas behind central planning, and division of labor. 

• "i, Pencil" shows how the creation of something so simple cannot be planned centrally. There are many parts that have to played and considered. This makes the individual questions how economics and the economic system should be planned; by ONE authority, or MANY individuals? 
• Also, this essay alludes to the idea that as a humankind we have lost faith in the power of the individual, they use the example of distribution of mail, which is organized and distributed by the government to show how humans and individuals can move so much more than mail but we fail to see the relationship. Therefore we have begun to believe that we can't get anything done without a company, or the government, or a governing force. This essay made me ask myself why have we lost faith in the power of the individual? What has led us to begin thinking that we need a governing force? Also how can we gain more faith in the individual and how would that change our economy?