Income & Poverty, Commercial/Industrial Revolution, Rule of Law, Mercantilism & Expenditures, Trade, Law of One Price, Basic Economic Principles: Trade-offs, Opportunity Costs, Broken Window Fallacy
Income & Poverty, Commercial/Industrial Revolution, Rule of Law, Mercantilism & Expenditures, Trade, Law of One Price, Basic Economic Principles: Trade-offs, Opportunity Costs, Broken Window Fallacy ECO 108
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Date Created: 11/12/15
ECO 108 Principles of Economics University of Rochester Professor Rizzo Fall Semester 2014 October 6 2014 Focusing on poverty a big gap could be seen between an average American and let s say Bill Gates but that gap is nothing compared to the vast difference between that average American and a person from Malawi where poverty is much higher The question is however do we choose to live in the world now no matter how much more expensive it is than living in the past receive better healthcare that people did not have before Product Proliferation The cell phone no longer an exorbitant gadget for the greed is good highrollers Is it a mere tri ing luxury Helps people in developing countries to better communicate with people Convenient for people at war in medicine etc An iPhone would have cost 35 million in 1991 which is something that a GDP does not capture We take for granted the resources that are available to us not thinking of how much harder it was to live in the past without these gadgets Income and Poverty 19672013 shows that only a few people earned a good income in the past today more people earn more however these comparisons are interesting a snapshot of what the world looks like but it does not capture people s experiences over time Has Poverty fallen in the last half century Some studies and some popular thought assert that antipoverty measures have been ineffective Meyer and Sullivan find that it matters whether you look at income measures of poverty vs consumption measures instead of looking at the overall number indicating the rate of poverty number of people living in poverty they measure each person s earning income overtime This kind of observation ignores how much poverty actually dropped Work effort purchases more as we work less Economists Ramey and Ramey have just found the amount of child care time spent by parents at all income leaves and especially those with a college education has risen dramatically since the mid1990s Risk of living in the past Tripling wheat prices in 1800 vs tripling wheat prices today starvation vs fewer iPod downloads for e g Death rate of deaths related to natural disasters has dropped by 99 now since 1920 Murder estimated longterm trend in American homicide rate Murder was much more prevalent in the 1700s Although the rate of murder is still high in places with poverty it has decreased overall compared to the murder rate in the past October 8 2014 Simplistic views Capital accumulation Expanding overseas trade Scientific revolution and new inventions Exploitation of iron and coal resources Workoriented religion Decline of religious rigidities life on earth today has become as important as a life after death In terms of science and technology big ideas had very little to do with creation throughout history QMPPP Origins of the commercial revolution 1 Lucas and demographic shift 2 Institutions 3 Semidirected bumbling process of trial and error by clever professionals 4 Economics 00 to 10 to 20 Why did the commercial revolution take so long to happen Technologies of defense must outweigh technologies of predation China had most of the world s technologies developed but took forever to come into power Institutions and the industrial revolution What economists refer to as institutions matter is everything that is important other than money October 10 2015 Rule of Law law versus legislation legitimacy under which arrangements are made agreed upon which comes first e g congress the rich the poor etc all should have the rules apply to them as the rest of us when we have these sets of laws e g an international student knowing to greet an American with a handshake we have the freedom to do so ie you know when you will be coerced e g NOT like we do with speeding profiling not true with everyone though blacks are treated differently than whites Example given in lecture Prof Rizzo running to catch a bus so that he could make it to school everyone that knows sympathizes with him because it might have not been his fault that he was late automatically thinks that the bus driver should stop for him However the right thought is for the bus driver not to stop because everyone else on the bus should be considered e g some of the passengers are trying to catch another bus to schoolwork the bus driver is trying to stick to his schedule etc We have more obligation to follow the rules so as to avoid issues such as discrimination e g a black man wearing a hoodie running after the bus will definitely not get it to stop vs a white business man carrying a briefcase running after the bus will possibly get the bus driver to stop discrimination The rule of law 1 Known in advance Prof Rizzo knew the bus s schedule in advance 2 Prof Rizzo knows when and where the bus leaves in order to be there early to catch it 3 Applies uniformlyequally to all the bus schedule is like a law applied to all the passengers and the bus driver so they should stick to it in order to be on time 4 Not arbitrary if the bus driver were to wait a few minutes past schedule so that a late passenger could get on it could be predicted that other passengers would be a little late as well in the future because they think the bus driver will stop for them too October 13 2015 Mercantilism and Expenditures income identity Adam Smith argued NOT that these institutions were sufficient for nations to advance prosper and grow Deirdre McCloskey presents evidence for this thesis Until 200 years ago in Northwest Europe merchants traders and people engaged in commerce were treated as low status Then they were given respect swam The monarch saw as a right duty and responsibility to oversee every aspect of economic activity to protect each individual however not true were recognized in late 17th century and early 18th century started to ask the things that are recognized The economy showed that when one person did one thing it benefitted everyone FP argued that October 15 2014 On the Jealousy of Trade 1 improves production and trade because when there is more than one person who can offer the same thing 2 the more people you engage with the more chances there are that you will learn something new the more people you share knowledge with 3 when there is a world market global trade people are more likely to make the risk of Price Specie Flow Mechanism Law of One Price follow the resources not the money When you produce a product everyone values then you move they will be likely to follow you With the more customers you have resources are scarce so you raise the price The price gets so expensive that your customers move back or drop your product When that happens you lower the price to a fixed one and that s the law of one price because it s one price forever for everyone Beggar thy Neighbor it is Trading helps countries identify shared interests Smith believed that and was really concerned that which will be the end of economics Commercial activity is what makes a country rich so what is required to make commercial activity ourish I Law enforcement police national security protection from external bandits the only way you can make a lot of money is by thinking of others first Property rights Division of labor it s not possible for individual productive services to improve common good if one is just working for himself you need to engageshare knowledge Exchange Production Exchange wealth October 17 2014 Basic Economic Principle 1 People face trade01 when you re making these choices it shows your values If resources weren t scarce we will be able to choose more than one thing at a time That is why allocating our profits and resources is difficult because each person values different things E g if we all value clean air and clean water how come there is still pollution The fact is some people prefer other things like iPhones for example than cleaner waterair While we are enjoying certain things other people are currently struggling with poverty hunger etc Efficiency vs Equity policies that are meant to promote efficiency and policies that are meant to promote equity are different When economists hear about free stuff e g health insurance tuition other goods they tend to ask the question how did it get there When we are not valuing other things than free books in a library for example we understand why things are free and we don t have to make tradeoffs But reality is we value different things and so we can t choose to have everything Another question we should ask is when things are given to us free we should ask who the provider is There are things about getting an education that correlates with having good health but when we dedicate all our time to one thing we can have too much of it and less to nothing of other things Another example what about air is free We eat because our bodies need the calories in order for our lungs to take in the air It s also not free because if it was we wouldn t worry about problems of global warming and pollution Nothing in this world is free Even the air we breathe isn t free Coming from one of the vulnerable regions to problems of climate change I understand that certain actions affect the quality of our resources If air was free then we wouldn t have to worry about global warming and pollution From an economic perspective we can agree that different people value different things and that we each face trade offs to satisfy our values But the real question and it probably will never inherit an answer is whose values are greater Cost something that consumes valuable resources e g spending 20 minutes driving to school could be used to do something else Similarly driving to school uses up 12 gallon of gas that could be used to power other things But some things that we may think is costly may not be For example the action that goes into the president s decision to lower our taxes is not costly Some may argue that it is costly because it will lower our country revenues in the future but economists argue in terms of the action itself is not costly Taxes aren t a cost because it s just taking money out of your pocket and giving it to the government which they then use to allocate somewhere else So taxes are just transfers Opportunity costs considering all options when one decides whether to do one thing than the other e g should I go to class this morning or sleep for another hour These refer to the Net Value of what you sacrifice when making a choice The options of having a free ticket to Bruce Springsteen or purchasing a 40 ticket to Barry Manilow during the same weekend resale of the free ticket is not allowed so you could go watch his concert or not Question what is worth more to you seeing BS or BM If the opportunity costs of seeing BM is worth 50 then the benefits minus the costs 5040 leaves you with 10 worth of opportunity costs to see BS So the question we should always be asking when we make decisions is should I do this OR that Compare your options Definition when you make a decision the opportunity costs of that decision is the net value you would have gained if you were to choose your next best option It is considered opportunity costs because such costs are never realized These are implicit costs and such costs matter for economic decision making Question 3 An Opportunity to Explain From previous midterm exam 1 point Explain the concept of opportunity cost to someone who has never ever thought about the economic way of thinking 1 point Every decision we make requires that we trade off one thing for another Opportunity costs capture the value of another which we sacri ce in order to obtain something of value In other words Extra 1 point if student mentions What makes this an opportunity cost is that The costs that matter for economic decision making are not seen When you decide to go to the coffee shop the direct costs to you are the time and gas money you spent to get there plus the explicit cost of the bagel and coffee like taking a walk But you don t take that walk if you go the coffee shop so to take a walk Another thing we consider when we face a costly event is whether we will have jobs afterwards The truth is jobs are a cost and not a benefit EX if I had a broken window I would pay to have it repaired and that is a seen cost but I would never consider what I could have used that money for instead of repairing the broken window Definition the costs that people can see are captured but never the costs people can t see For example if I had a broken window I would allocate money to have it fixed I am providing someone with a job to fix my window that is a cost to me but a benefit to the worker However people don t see the economic impact of my choice I would have used that money for something else like buy food for my family This is called the broken window fallacy October 24 2014 scarcity is axiomatic because it s unprovable When This Other related issues Medicaid paying mental institutions more money for more patients results in doctors keeping patients mandating law in Mexico City to decrease smog by reducing the number of days people are able to drive their car resulted in people having more than one car just so they could use one on the days they are not allowed to drive Getting rid of all the wolves in Yellowstone resulted in an increase in the number of deer that ate all the trees around the lake and caused erosion The costs of hiring a woman or black man is higher than hiring a white man so it leads to discrimination assumptions Definition when people act to make themselves better off they approach things by responding to incentives this is called the axiomatic approach However this can lead to unintended consequences For example if the gov t mandated safety seat belts when driving it may lead drivers to drive more aggressively than without seatbelts because of that safety net But it is axiomatic because it is unprovable you can t predict how people will respond to things October 27 2014 I Trade is NOT zerosum Those who are powerful congress gov t etc can demand anything from people those who are rich producers not necessarily in power cannot force people to buy their products but persuade them to buy their products this shows that those who are rich can control those who are in power most of the reasons why entrepreneurs are rich is because people provide the wealth for them in return for goods and services I Markets are NOT always efficient Three reasons for this because are 1 e g Prof Rizzo applying to teach at a community college they may reject him because based on his educational background having graduated from an elite school they would be more likely to think that Rizzo applying to teach at their community college is a backup plan But the truth is Rizzo wanted to teach there so badly 2 we don t think about the costs of our actions on others because our benefits are greater E g me choosing to drive a Hummer is a cost to those who drive PT Cruisers because my car is bigger and safer It s an externality because those people did not have a say in my decision but my decision still affected them even though markets tend to be good at delivering services poverty still exists October 29 2014 In ation is NOT a monetary phenomenon e g when oil prices increase there is no in ation until people start dropping money along the way Societies function well when people are honest Selfinterest vs other regarding activities it s not selfishness that motivates people to do well rather it is selfinterest that motivates people How do we distinguish this Selfinterest concerns pursuing projects that interest you and sometimes selfinterests can make you selfish Prof Rizzo gave up a 1million job in Wall St to become a teacher at U of R Though he makes less now he gets more of the other things he likes than before more time to exercisekeep fit amp healthy spend more time with his wife amp family etc We are all self interested in things all the time Many cases do not make sense for example those who run to improve their health are celebrated but those who produce shoes for those who run are considered more of a bad person Review 1 3 Absolute advantage when one person is the best at producingproviding a good or service than others E g starbucks is best at making coffee than any other cafe However to be economically better off it must be that starbucks is the lowopportunity cost for something else When they are dedicating all their time and resources into making the best coffee the world is missing out on starbucks making the best pastries Opportunity cost is the cost of making a decision that would have been a net gain if you were to choose your next best option E g you have a free ticket to see beyonce but you wanna see rihanna however the ticket is 50 Your opportunity cost is the net gain you would have had if you chose to see beyonce instead of rihanna but because you valued rihanna more you chose to see her Broken Window Fallacy e g the real costs of WWII this could be considered economically beneficial for the US if we consider all the technology that emerged from building weapons tanks bombs etc for the war
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