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…

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

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 $

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. Unsold Labor

Leisure Phases of Play 2. Leisure round Blue workers turn in their unsold labor for leisure. Unsold Labor

Phases of Play 3. Production round  Firms turn Labor into STUFF! Labor Stuff

Phases of Play 4. Goods market round = 1 unit of Blue stuff = 1 unit of Red stuff = 1 dollar Stuff $

Phases of Play 4. Goods market round Red workers buy Red stuff and Blue stuff. Stuff $

Phases of Play 4. Goods market round Blue workers buy Red stuff and Blue 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 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.

LaborStuff LaborStuff 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

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 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 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

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…