“The Economic Way of Thinking” 10 th Edition by Paul Heyne, Peter Boettke, and David Prychitko “Information, Middlemen

1. “The Economic Way of Thinking”10th Editionby Paul Heyne, Peter Boettke, and David Prychitko“Information, Middlemen, and Speculators” Chapter 7 PowerPoint Slides prepared by Assistant Professor Paul Harris Camden County College

2. Chapter Outline • Introduction • Real Estate Agents As Information Producers • Reducing Search Costs • Middlemen Create Information • Varieties of Speculation • Consequences of Speculation

3. Chapter Outline V11. Prophets and Losses VIII. The Complex Question of “Insider Trading” • The Liability Question • Physicians and Malpractice Suits • Commodity Speculators and the Futures Markets XII. Once over Lightly

4. Introduction • The costs and benefits that affect decisions to demand or to supply are always expected (marginal) cost and benefits. • Mistaken decisions are sometimes costly. • Avoiding mistakes is costly. • One way to avoid mistakes is to acquire more information. • Information is also a scarce good with its own acquisition cost.

5. Real Estate Agents As Information Producers • “How to save about $5,000 and lose $15,000…right on your own home.” • Question………. • Is this possible?

6. Real Estate Agents As Information Producers • Realtors • Serve as middlemen • Question • Who do they serve--buyers or sellers? • Answer…… • Actually, both can gain from the services of a realtor because the realtor enables each to obtain additional information at a low cost.

7. Anticipated marginal gain Anticipated marginal cost > Real Estate Agents As Information Producers • Information is a scarce good. • For buyers and sellers to continue to acquire information:

8. Anticipated marginal benefit Anticipated marginal cost Worthwhile Not Real Estate Agents As Information Producers Value of costs and benefits Quantity of information

9. Real Estate Agents As Information Producers • Middlemen • Increase people’s wealth by acting as low-cost producers of information • Reduce transaction costs

10. Reducing Search Costs • Question……. • Would you save money if you sold your Yahoo stock yourself instead of using a stockbroker? • Internet brokers have emerged to compete against traditional brokers by substantially lowering their fees and commissions.

11. Reducing Search Costs • Question….. • Why is “getting it wholesale” a popular pastime for many people. • Retailers provide valuable information. • Market competition among suppliers and middlemen encourage them to find ways of informing potential customers and reducing their transaction costs.

12. Reducing Search Costs • Question…. • What role do job-placement agencies serve? • People frequently resent the fee charged by the agency. • Unless they expected the information obtained through the agency to be worth more than the fee, they presumably they would never have used the agency’s services. • But they choose to use it. • As soon as they find a suitable employer they begin to look at the fee as an imposition.

13. Reducing Search Costs • Middlemen’s Negative Reputation • Comes from our habit of comparing actual situations with better but nonexistent ones • Middlemen’s Negative Reputation • People perceive that middlemen take advantage of our ignorance. • Middlemen produce real wealth.

14. Middlemen Create Information • Markets generate high-quality information at low cost. • Middlemen serve a crucial role in the market process. • Well-Organized Markets • Bids and offers of many prospective buyers and sellers have been brought together to create a single price for a fairly uniform good over a wide geographic area.

15. Middlemen Create Information • Questions • Is the stock market well organized? • The furniture market? • The grocery market? • The Beanie Baby market?

16. Middlemen Create Information • Prices provide information about available opportunities. • Middlemen • Organize markets • Create valuable information • Specialize because they feel they have a comparative advantage • Sometimes called “speculators”

17. Varieties of Speculation • Speculation (dictionary definition) • Trading in the hope of profit from changes in the market price • Question…….. • Is this adequate?

18. Varieties of Speculation • Examples… • “Bears” on Wall Street • Commodity speculation • Your education expenditure • Consumer expecting price increases

19. Consequences of Speculation • Question… • What would farmers do if they expected a disease to wipe out part of this year’s corn crop? • Answer…. • People who think this is likely to occur will expect a higher price for corn in the fall. • This will induce some people to pull some corn out of current consumption to hold in expectation of the higher fall prices.` That’s Speculation!!

20. P P Harvested Sold Sold Harvested D D Q Q Consequences of Speculation Year 1 Year 2

21. Consequences of Speculation • Question…. • How can speculators reduce risk to others? • Speculators purchase risk. • Hedgers sell risk.

22. Prophets and Losses • Questions… • What if the speculators are incorrect in their anticipations? • What would you do if you had disagreed with the speculators’ anticipations? • Answers…….. • Speculators provide information. • They offer express judgments. • Their generated prices are indexes of value.

23. Prophets and Losses • Farmers’ decisions are affected by futures prices. • Natural disasters have relatively little affect on food prices due to speculators. Middle men coordinate market exchanges across regions. Speculators coordinate market exchanges through time.

24. The Complex Questionof “Insider Trading” • Questions… • What would occur if speculators’ decisions were impacted by information they had no right to know? • What do buyers have the right to know? • What do sellers have an obligation to reveal? • Is full disclosure possible when many people are not paying attention? • When is “inside information” both desirable and ethical?

25. The Complex Questionof “Insider Trading” • Fiduciary Obligations • Moral and legal duties taken on by contract or other agreement • It is illegal when “insider trading” occurs as a result of the violation of these obligations. • Questions…… • Should all “insider trading” be made illegal? • What is an “unfair” advantage?

26. The Liability Question • Questions • What should be done about transactions that don’t turn out as expected? • Who is liable? • What would motivate a seller to accept more liability?

27. The Liability Question • Courts have been throwing out contractual agreements. • Assuming unfair advantage • “Deep-pocket” judgments have become common.

28. The Liability Question • Question • What are the costs of the “deep-pocket” judgments?

29. The Liability Question • Caveat Emptor • “Let the buyer beware” • Caveat Venditor • “Let the seller beware”

30. The Liability Question • Question…………. • What would sellers do if they were forced to pay for the foolish actions of buyers?

31. Physicians andMalpractice Suits • Malpractice • Once meant negligent or improper action by a physician that resulted in death or injury to the patient. • Question • What does it mean today?

32. Physicians andMalpractice Suits • Questions • Won’t malpractice suits motivate physicians to try to make fewer mistakes? • Is this good or bad?

33. Physicians andMalpractice Suits • Questions….. • How many tests are necessary to ensure a diagnosis? • What does this cost? • Is prolonging life always worth the cost?

34. Next, Chapter 8 On “Profit and Loss” End of Chapter 7