1 G492, Big Ideas in Economics Lecture 1, January 14, 2010 This is not a complete lecture– just slides to supplement my lecture notes.

I will be passing around a form for writing your name on a seating chart, so choose your seat with care. 2

Please me if the time slot I have assigned you for oral report or office meeting is bad for you. I will you tomorrow to remind you to do this. 3

IDEAS IN ECONOMICS 4

5 The opportunity cost of doing X is that we lose the chance to do Y instead.

6 Marginalism: The idea of looking at the value of a small change in the amount of a good from its present level, instead of a jump to zero or to a much higher level.

7 MASLOWS HIERARCHY OF NEEDS Physiological Needs These are biological needs. They consist of needs for oxygen, food, water, and a relatively constant body temperature. They are the strongest needs because if a person were deprived of all needs, the physiological ones would come first in the person's search for satisfaction. Safety Needs When all physiological needs are satisfied and are no longer controlling thoughts and behaviors, the needs for security can become active. Adults have little awareness of their security needs except in times of emergency or periods of disorganization in the social structure (such as widespread rioting). Children often display the signs of insecurity and the need to be safe. Needs of Love, Affection and Belongingness When the needs for safety and for physiological well-being are satisfied, the next class of needs for love, affection and belongingness can emerge. Maslow states that people seek to overcome feelings of loneliness and alienation. This involves both giving and receiving love, affection and the sense of belonging. [Source here]here Further needs: Esteem of other people, self-actualization.

8 Incentives: Always ask what a government or company policy will actually encourage people to do, not what it intends to encourage people to do.

9 Supply and Demand: Think separately about things that affect buyers and things that affect sellers. Use a diagram to see how they interact.

10 Consumer Surplus: the excess of what a consumer would be willing to pay over the price he actually pays.

11 A situation is efficient if the there is no change such that the winners from it could compensate the losers and still be better off than before the change. A market is efficient if it maximizes the sum of consumer and producer surplus. Ordinarily, the competitive output is efficient.

12 Adam Smith in Wealth of Nations: "Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

13 Market Failure: A situation where an unregulated market is inefficient. Leading reasons for market failure: 1. Poor information on price or quality 2. Monopoly 3. Externalities

14 Government Failure: A situation where government regulation is inefficient. Reasons: 1. Government employees may lack incentive to make wise choices for other people. 2. Government employees may wish to help some people (special interests) and hurt others.