laws of economics everything is scarce. is there anything you consume that is not scarce? what does...
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Laws of Economics
• Everything is scarce.
Is there anything you consume that is not scarce?
What does it mean to “consume” something?
• Every choice involves an opportunity cost (tradeoff).
What do you give up in order to get something else?
Mom-Pop shops v. Big Box Retailers
Global warming v. Global warming
Laws of Economics
• Everything is scarce.
Is there anything you consume that is not scarce?
What does it mean to “consume” something?
• Every choice involves an opportunity cost (tradeoff).
What do you give up in order to get something else?
Mom-Pop shops v. Big Box Retailers
Global warming v. Global warming
Laws of Economics
• The cosmos is a non-linear place.
Opposing consumption forces: consumption & variety
Opposing production forces: specialization & congestion
• People respond to incentives.
Airplanes and car seats
Entrepreneurship and taxes
Russians and dead light bulbs
Laws of Economics
Cascade of tradeoffs due to choice and incentives…
Regulation: Require cars to have airbags so as to save lives.
The tradeoff of safety vs. time…
Airbag make cars safer thereby allowing people to drive faster yet maintain same level of safety as before.
Cost per life saved = $720,000
…presents a tradeoff of lives saved via airbags vs. lives saved via other means…
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$0.50
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Laws of Economics
Cascade of tradeoffs and mitigation due to incentives…
Regulate safety: The tradeoff of safety vs. time presents a tradeoff of lives saved via airbags vs. lives saved via other means…
Each 1 life saved via heart transplant costs 15,700 lives that could have been saved via malaria treatment.…which, in turn, presents a tradeoff of lives saved vs. impact on the environment, etc., etc.
Laws of Economics
Given that everything is scarce, every choice will involve a tradeoff.
Who decides what tradeoffs are acceptable?
Deciding by vote allows everyone an equal say.
Should everyone have equal say?
Should we weight each vote based on how strongly the voter feels about the tradeoff?
How do we know how strongly the voter feels?
Voter has incentive to lie!
Laws of Economics
Prices are much more than “how much something costs.”
Prices signal how strongly the community feels about things.
All other things equal…
• The more people want something, the higher the price.
• The greater the opportunity cost of bringing something to market, the higher the price.
Economic Models
20.000135 0.0011 0.000024
stopping distance (feet)
velocity (mph)
mass (lbs)
d m v v
d
v
m
Economic Models
60 ft.d
1,750 lbs.m
50 mphv
Economic Models
60 ft.d
1,750 lbs.m
50 mphv
2
2
0.000135 0.0011 0.000024
1,750 lbs.
50 mph
1750 0.000135 0.0011 50 0.000024 50 201 ft.
d m v v
m
v
d
Economic Models
Criticism: Ignoring factors that impact model results
• Is the driver cautious?
• Does the driver have good reaction time?
Criticism: Issues that invalidate the model
• The car isn’t moving.
• The car has no mass.
Economic Models
The point of the economic model is to strip away:
• Irrelevant information (e.g., the color of the car),
• Relevant but individual specific information (e.g., the reaction time of the driver), and
• Relevant but negligible information (e.g., the mass of the driver).
The Players and the Goals
In this experiment, there are WORKERS and FIRMS.
WORKERS sell labor to the FIRMS.
FIRMS make stuff and sell stuff to the WORKERS.
The Players and the Goals
Two types of worker
• Red workers (know how to make Red stuff)
• Blue workers (know how to make Blue stuff)
Each worker’s goal: Maximize utility
Three things make you happy: Red Stuff, Blue Stuff, and Leisure
The Players and the Goals
Two types of firm
• Red firms make and sell Red stuff
• Blue firms make and sell Blue stuff
Each firm’s goal: Maximize profit
Profit = Ending $ – Starting $
Phases of Play
1. Labor market round
2. Leisure round
3. Production round
4. Goods market round
5. Utility and profit round
Phases of Play
1.Labor market round
= 1 hour of Blue labor
= 1 hour of Red labor
= 1 dollar
Labor
$
Labor
Phases of Play
1.Labor market round
Red workers sell some of their labor to Red firms for $.
Labor
$
Phases of Play
1.Labor market round
Blue workers sell some of their labor to Blue firms for $.
Labor
$
Leisure
Phases of Play
2. Leisure round
Red workers turn in their unsold
labor for leisure.
UnsoldLabor
Leisure
Phases of Play
2. Leisure round
Blue workers turn in their unsold
labor for leisure.
UnsoldLabor
Phases of Play
3. Production round Firms turn Labor into STUFF!
Labor
Labor
Stuff
Stuff
Phases of Play
4. Goods market round
= 1 unit of Blue stuff
= 1 unit of Red stuff
= 1 dollar
Stuff
$
Stuff
Phases of Play
4. Goods market round
Red workers buy Red stuff and Blue stuff.
Stuff
Stuff
$
Phases of Play
4. Goods market round
Blue workers buy Red stuff and Blue stuff.
Stuff
Stuff
$
Phases of Play
5. Utility and profits round
Utility = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1)
Phases of Play
5. Utility and profits round
Profit = Ending $ – Starting $
Ready to begin…
Labor Market Round
Red workers sell some of your labor to Red firms for $.
Blue workers sell some of your labor to Blue firms for $.
= Labor
Utility = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1)
Leisure
Leisure
Leisure Round
1. Red workers return unsold labor for Leisure.
2. Report your Leisure to moderator.
3. Write down how much Leisure you have.
1. Blue workers return unsold labor for Leisure.
2. Report your Leisure to moderator.
3. Write down how much Leisure you have.
Labor Stuff
Labor Stuff
Production Round
1. Red firms report hired labor to moderator.2. Report remaining money to moderator.
1. Blue firms report hired labor to moderator.2. Report remaining money to moderator.
Goods Market Round
Red workers buy Red stuff and Blue stuff.
Blue workers buy Red stuff and Blue stuff.
= Stuff
Utility = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1)
Utility and Profit Round
1. Red workers report red stuff purchased to moderator.
2. Report blue stuff purchased to moderator.
1. Blue workers report red stuff purchased to moderator.
2. Report blue stuff purchased to moderator.
1. Red firms report unsold red stuff to moderator.
2. Report remaining money to moderator.
1. Blue firms report unsold blue stuff to moderator.
2. Report remaining money to moderator.
New Rules
The discovery of the nature of redness enables Red Firms to produce the same amount of Red Stuff using the one-third the amount of Red Labor.
Labor Stuff
Stuff
Stuff
Questions
What will be the effect (if any) on the price of red stuff?
What will be the effect (if any) on the price of blue stuff?
What will be the effect (if any) on the red wage rate?
What will be the effect (if any) on the blue wage rate?
What will be the effect (if any) on red worker employment?
What will be the effect (if any) on blue worker employment?
What will be the effect (if any) on red firm profits?
What will be the effect (if any) on blue firm profits?
Will the red workers be better or worse off?
Will the blue workers be better or worse off?
Ready to begin…
Labor Market Round
Red workers sell some of your labor to Red firms for $.
Blue workers sell some of your labor to Blue firms for $.
= Labor
Utility = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1)
Leisure
Leisure
Leisure Round
1. Red workers return unsold labor for Leisure.
2. Report your Leisure to moderator.
3. Write down how much Leisure you have.
1. Blue workers return unsold labor for Leisure.
2. Report your Leisure to moderator.
3. Write down how much Leisure you have.
Labor
Labor Stuff
Production Round
1. Red firms report hired labor to moderator.2. Report remaining money to moderator.3. Triple your quantity of red stuff.
1. Blue firms report hired labor to moderator.2. Report remaining money to moderator.
Stuff
Stuff
Stuff
Goods Market Round
Red workers buy Red stuff and Blue stuff.
Blue workers buy Red stuff and Blue stuff.
= Stuff
Utility = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1)
Utility and Profit Round
1. Red workers report red stuff purchased to moderator.
2. Report blue stuff purchased to moderator.
1. Blue workers report red stuff purchased to moderator.
2. Report blue stuff purchased to moderator.
1. Red firms report unsold red stuff to moderator.
2. Report remaining money to moderator.
1. Blue firms report unsold blue stuff to moderator.
2. Report remaining money to moderator.
Results…
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
Red Wage Rate Blue Wage Rate Price of Red Stuff Price of Blue Stuff
Round 1 Round 2
0
20
40
60
80
100
120
140
160
Avg Red Utility Avg Blue Utility
Round 1 Round 2
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Red Employment Rate Blue Employment Rate
Round 1 Round 2
-$150
-$100
-$50
$0
$50
$100
Red Profits (total) Blue Profits (total)
Round 1 Round 2
units of red stuff consumed by the red player
units of red stuff consumed by the blue player
units of blue stuff consumed by the red player
units of blue stuff consumed by the blue player
u
R
B
R
B
R
R
R
B
B
L
nits of labor sold by the red player
units of labor sold by the blue player
units of labor endowed to the red player
units of labor endowed to the blue player
price per unit of red stuff
pri
B
R
B
R
B
L
E
E
P
P
ce per unit of blue stuff
wage per unit of red labor
wage per unit of blue labor
number of red workers
number of blue workers
number of red firms
number of blue firms
output of red indust
R
B
R
B
R
B
W
W
N
N
F
F
R
ry
output of blue industryB
Utility functions
1 1 1
1 1 1
Constraints
Utility maximizing consumption
1 2
3
1 2
3
2 1
3
R R R R R
B B B B B
R R R R B R
B B R B B B
R R R BR
R
R R R BR
B
R R R BR
R
U R B E L
U R B E L
W L P R P B
W L P R P B
W E P PR
P
W E P PB
P
W E P PL
W
1 2
3
1 2
3
2 1
3
B B R BB
R
B B R BB
B
B B R BB
B
W E P PR
P
W E P PB
P
W E P PL
W
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