economics for leaders i have with me at this efl program a new dell vostro 13 notebook computer. it...
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Economics for Leaders
I have with me at this EFL program a new Dell Vostro 13 Notebook computer. It has 13” screen, DVD drive, 500 GB hard drive, 4 GB Ram, i5 processor, windows 7, internal wireless, etc.Questions:
It is mine. How much money would you give me for the computer? (You have until the end of the week to come up with the cash) ________
I have applied for a grant to study cigarette tax policies across the different states of the United States. To perform this project punctually, I will probably have to hire some research assistants. This work will have to be performed during the next 30 days. (at your home) The work will include data collection, research, and data coding.Questions:
2.How many hours would you work total over that time period?(next 30 days) if I paid you $35 per hour
3. I will probably undertake the project even if I do not get thegrant. How many hours would you be willing to work if I paid you $10 per hour?
Economics for Leaders
Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes.
Scarcity necessitates choices
Economics for Leaders
How Do You Know When
Scarcity Forces You to CHOOSE
Something Is Scarce?
SCARCITY CHOICE
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.
Economics for Leaders
Opportunity Cost: the value of the next best or
foregone alternative
Think: “next-best”
Economics for Leaders
Opportunity Cost =the value of the
Next-Best Alternative
– What are the considered alternatives?• What would you do – not what could you
do?• What does the decision-maker perceive
to be the benefits of each alternative?
Economics for Leaders
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Choice
Opp. Cost
Benefits Refused
Decision Maker: YOU
Economics for Leaders
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Shower bkfst don’t rushOn time coffee
Choice
Opp. Cost
Benefits Refused
Decision Maker: YOU
More sleep
Economics for Leaders
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Shower bkfst don’t rushOn time coffee
Choice X
Opp. Cost
Benefits Refused
Decision Maker: YOU
More sleep
X
Economics for Leaders
People’s Choices are always RATIONAL
Rational choice = choosing the alternative that has the greatest excess of benefits over costs.If ALL choices are rational, then the challenge is to understand the decision-maker’s perception of costs and benefits.
Economics for Leaders
Characteristics of Cost
Costs are the results of ACTIONSCosts are TO people; things have no costAll costs lie in the FUTURE (past costs are “sunk” costs)Costs are frequently not monetary (although we may value them in dollar terms)
Economics for Leaders
What Determines YourOpportunity Cost?
AlternativesTastes and preferences (values)Rules of the Game--Institutions
Economics for Leaders
Do Gov’t actions have opportunity costs?
Government DebtEconomic Stimulus PackageWar in IraqLimiting Carbon EmissionsUniversal Healthcare
All alternatives have cost and benefitsIndividuals perceive the value of costs and benefits differently
Economics for Leaders
Should weShould weAllocate?Allocate? ration? ration?
Given that we MUST ration, what is the best mechanism?
Back to Scarcity: What’s the Question? (And what does
opportunity cost have to do with it?)
Economics for Leaders
Methods of Rationing Scarce Methods of Rationing Scarce Goods and ServicesGoods and Services
pricesprices
command command (someone decides)(someone decides)
majority rulemajority rule
contestscontests
by forceby force
votingvoting
first-come-first-first-come-first-servedserved
sharing equallysharing equally
lotterylottery
personal personal characteristicscharacteristics
need or meritneed or merit
Economics for Leaders
Why is price rationing the most common method of allocating scarce goods, services, and resources in our economy?
1.1. The outcome is clearThe outcome is clear
2.2. Individuals can affect the outcome based Individuals can affect the outcome based on their desire for the producton their desire for the product
3.3. It directs resources to their most highly It directs resources to their most highly valued usesvalued uses
4.4. Individuals’ power and freedom is Individuals’ power and freedom is enhancedenhanced
5.5. It provides incentives for both consumers It provides incentives for both consumers and producers to reduce scarcity.and producers to reduce scarcity.
Economics for Leaders
Where do Prices Come From?
The market interaction of buyers and sellers in open and competitive markets!
Economics for Leaders
Prices: POWERFUL Incentives
When prices change, opportunity costs change –that’s an incentive!Both consumers and producers react to prices in ways that help us to deal with scarcity.
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.
Economics for Leaders
When incentives (Prices) change, behavior changes in predictable
ways.
When prices go up consumers demand a larger/smaller quantity?
Demand
The willingness and ability to purchase goods and services at various prices.
Economics for Leaders
When incentives (Prices) change, behavior changes in predictable
ways.
When prices go up consumers demand a larger/smaller quantity?
SmallerWhen prices go down consumers demand a larger/smaller quantity?
LargerAlways?Law of Demand P Q
Economics for Leaders
When incentives (Prices) change, behavior changes in predictable
ways.
When prices go up producers supply a larger/smaller quantity?
Supply
Producers willingness and ability to produce goods and services at various prices.
Economics for Leaders
When incentives (Prices) change, behavior changes in predictable
ways.
When prices go up producers supply a larger/smaller quantity?
LargerWhen prices go down producers supply a larger/smaller quantity?
SmallerAlways?Law of Supply P Q
Economics for Leaders
Choices are made at the Margin
Our only choice is the next choiceOur only choice is the next choice
Marginal = additional, next, a little Marginal = additional, next, a little more or a little lessmore or a little less
Economics for Leaders
As long as the marginal benefit is greater than the marginal cost you should continue the activity
MB=MC
Economics for Leaders
The “Big Ideas” from Lesson 2:
1. Scarcity forces us to choose and every choice has an opportunity cost.
2. When opportunity costs change, incentives change, and choices change.
3. Because costs lie in the future, the important costs and benefits occur at the margin.
4. Money price rations goods in markets.5. Consumers and producers respond to
changes in price in predictable ways.