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Choice, opportunity Cost, and Incentives

Choice, opportunity Cost, and Incentives. Guiding Questions. How is economics the study of choice? How do economists make choices? How do incentives influence our behavior? Discussion… How did we answer our warm-up? . Free pizza!.

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Choice, opportunity Cost, and Incentives

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  1. Choice, opportunity Cost, and Incentives

  2. Guiding Questions • How is economics the study of choice? • How do economists make choices? • How do incentives influence our behavior? • Discussion… How did we answer our warm-up?

  3. Free pizza! • Mr. Garcia puts up a poster announcing the whole school gets free pizza for lunch next Friday. You, ever the wise economist, are completely frustrated that he would say such a thing and march down tohis office. You demand hetake down thesign immediately.Why…?

  4. Opportunity Cost

  5. Opportunity Cost • = The next best alternative to the one that was chosen. • IMPORTANT! • Opportunity cost is NOT multiple alternatives put together.

  6. Opportunity Cost • Read the directions on your homework and fill out the chart right now (only the chart for now… do the rest as homework) • Your chart represents a small portion of the choices you actually make in a 24 hour period • For each choice you made about how you spent your time, you had: • Options • Costs and benefits • Opportunity cost

  7. Opportunity Cost – ThinkingLike an Economist • Analyze one of the choices you made in your log • What was your choice? • What were your options? (What could you have done instead?) • What was your opportunity cost? • Costs and benefits of choice v. the opportunity cost? • Did you make the best decision? Why was it the best decision?

  8. “Free” Pizza..? • So, the next time somebody offers you some free, delicious pizza, what will you tell them…? Cage the Elephantunderstands opportunity cost…

  9. So… How do we figure out what the best (rational) choice is? • First, a quick recap… • What is “utility”? • Synonyms? • There are always trade-offs in every choice you make • A rational choice is one that maximizes your benefits (your utility) and lowers your costs • Don’t forget about your opportunity cost!

  10. How do we measure costs and benefits? • Incentives!!

  11. People respond to Incentives • Incentives are actions or rewards that encourage people to act. • When incentives change, people’s behavior changes in predictable ways. • Incentives can be positive or negative • Positive = benefits you hope to get • Negative = costs you hope to avoid

  12. A short Game… • Volunteers? (4 total) • The Rules of the Game (Round 1) • You may fish for 20 seconds • For each fish you catch in the first 10 seconds you get one piece of candy • For each fish you catch in the last 10 seconds you get two pieces of candy

  13. Round 1 • What happened?

  14. Round 2… The Rules change • You have been granted part of the pond for private use. You are only allowed to fish in your part of the pond. • You may fish for 20 seconds. • For each fish you catch in the first 10 seconds you receive one piece of candy • For each fish you catch in the second 10 seconds you receive two pieces of candy

  15. Round 2 • What happened this time? • Why?

  16. Unintended Consequences • Sometimes incentives create unintended consequences… • Can seatbelts actually cause more accidents? “Three lessons for a better cycling future,” http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1119262/

  17. Can incentives save the rhino? – the problem • Growing demand for rhino horn in Asia & Middle East • Hunting and harvesting rhino horn is illegal in African countries because rhinos are critically endangered • Some countries have a “kill on sight” policy for poachers • Poachers can earn $40,000+ for each rhino horn • Poachers kill more than 2 rhinos per day • Sometimes rhino protectors help poachers for part of profits

  18. “Can economics save the black rhino?” • Your task is to use the idea of incentives to create a plan that changes the incentives for people’s behavior and saves the rhino. How will you change the costs and benefits for poachers? • Listen to the NPR report from May 15, 2013 • In your notes, write down any info that sounds important • You’ll discuss in groups after the first part of the report (stop at 1:50). Be prepared to share!

  19. “Can economics save the Black Rhino?” • Discussion • Listen to the rest of the report. • What are the 2 solutions people propose to change the incentives for poaching? Write them down in your notes. • An update…

  20. To sum up… • Every choice has a cost, even if it’s only the opportunity cost • There ain’t no such thing as a free lunch • People respond to incentives • When incentives change, people’s behavior changes in predictable ways • Vocab: • TANSTAAFL • Opportunity cost • Incentives • Trade offs • Utility

  21. Ticket out the door • “How is economics the study of choice?” • Go back to the answer you wrote at the beginning of the class. • Review it and correct any misconceptions you may have written. • Add further explanation, using specific vocab we talked about in class and examples to help clarify. • You MUST add more information to your earlier answer to make it more in depth and complete.

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