Week2 Notes ECN 222 - 005
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This 5 page Class Notes was uploaded by Abigail Johnson on Tuesday January 5, 2016. The Class Notes belongs to ECN 222 - 005 at University of North Carolina - Wilmington taught by Adam Talbot Jones in Spring 2016. Since its upload, it has received 152 views. For similar materials see Macroeconomics in Economcs at University of North Carolina - Wilmington.
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Date Created: 01/05/16
1/22/16 4:02 PM WEDNESDAY JAN 20 th Assignment due next Wednesday (available 01/21): Advancing, not retreating • Read two articles and answer Q’s Last class we began principles of economics. 1. People face tradeoffs i. Major tradeoff: efficiency vs. equality 2. The cost is what you give up to get instead. Opportunity Cost. 3. Rational people think at the margin. i. Rational People: Do the best they can for themselves. 1. They systematically and purposefully do the best they can to achieve their objectives (assumes self-interest) ii. Making decisions by evaluating cost and benefits of marginal changes: incremental adjustments to an existing plan. Small changes to future-based ideals or plans. 1. Increase in output: compare the costs of labor and materials needed to the end-result, or output iii. Sunk Cost: What happened in the past that is regretted 1. EX: bought an engagement ring, proposed, she said no. Sunk Cost. iv. Examples: 1. Is it worth the extra effort, loss of dignity, etc. to gain a penny? 2. Is another year at college worth it? a. Cost-Benefit: fees, foregone wages, tuition, debt vs. salary 3. NBA player: school and debt and classes vs. millions of dollars for a professional sport contract v. Marginal Utility: Newspaper stands cost 75cents and the machine fully opens and you can take as many as you want. Soda machine costs $1 and gives you 1 soda. Marginal utility of the newspaper is very low after the first one, whereas all sodas maintain high utility for longer periods of time. vi. Applying the principle: 1. Buy a nice 1996 car of your choice, spend $1,000 on repairs. Transmission dies. Costs $600 to repair the transmission. In either scenario, should you repair the transmission. Why. a. Valued at $6,500 if it works, or else $5,700 if it doesn’t. i. YES: spending $600, gains you an extra $200 in value b. Valued at $6,000 if it works, or else $5,500 if it doesn’t. i. NO: lose $100 in value with repair Explanation: Option Benefit Cost Net 6500- a 5700 600 200 6000- b 5500 600 -100 4. People respond to incentives i. Incentive: induces a person to act. (stimulus in environment) Looking for a reward or avoid a consequence 1. Increase in gas price: buy more hybrids, sell trucks, use less gas 2. Policy: a. Taxes- increase cigarette taxes, teen smoking decreases, overall smoking rates decrease b. Retirement savings averages $100,000 i. Incentives to save more = tax breaks through IRA and other programs ii. Could re-vamp tax code, tax what they earn, don’t tax what they “long-term” save. CURRENT tax code rewards spending and taxes saving 3. Greed is Good speech from movie “Wall Street” with Michael Douglas a. Greed works, especially in free market at equilibrium b. Management has no stake in the company (own less than 3% of company) c. Share holders own 97% of company and can manipulate company in aligned self-interests 4. Seatbelt laws: accidents increased and deaths decreases significantly. Same concept with airbags. Scarcity à Tradeoffs à Opportunity Cost à Rational/Self-Interest à Incentives The Principles of How People Interact • Example in Class: o 10 volunteers, each given a food item (candy mostly). o Rate 1-10 how much they wanted their treat (least to best) o Trading began amongst 10 volunteers o “International trading” à trading with professor o Re-rate their items 1-10: most increased their ratings o Principle: Trading makes everyone better off! 1/22/16 4:02 PM 1/22/16 4:02 PM
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