A506: Chapters 1-2

1. A506: Chapters 1-2 Dr. Eric Schansberg Indiana University Southeast

2. Preface Two key, intro remarks: 1.) p. xvii’s focus on “thinking through the complex problems of getting incentives right…as much profit to be made from creatively structuring incentives as…from creatively developing products for sale” 2.) p. xix-xx’s value of (further) developing skills in creative and critical thinking; modeling as a useful abstraction from (distracting) detail! -p. 14: “Theory helps us generate insights that transcend the special cases [which] will quickly fade into history.”

3. Mkt. vs. Govt; Property Rights -p. 11a’s mkt vs. govt—who decides? -p. 11b’s info and motives—within each (for mkts, see: “I Pencil” on-line R #1.1) -p. 17-20’s individual p.r.’s—and environment in which markets operate -import of p.r.’s philosophically and practically -p.r.’s limited socially and legally -p.r.’s exchanged -p. 25-31’s communal/public p.r.’s -efficient enough… -avoid: without scarcity -overcome: with accountability, smaller and more homogeneous groups, objective standards -if not, “tragedy of the commons” (Perspective 2)—with an intro to ch. 5’s externalities (p. 28-29’s pollution) in absence of p.r.’s  a missing app. to p.r.’s (or not)—real or perceived—within the workplace…

4. Ch. 1’s assume desire to better one’s life (ch. 2’s U-max)—but subject to constraints -choices (constrained, given “scarcity”) given trade-offs and B vs. C; op. costs defined -inexact given info limits/problems -E(B) vs. E(C) -often subjective based on T&P -other assumptions: -some free will/choice (if not, uninteresting; but degrees of…) -ordinal vs. cardinal U—with transitivity in preferences -monotonicity: more is better (“econ good” vs. econ bad or satiation) -rationality (defined) with p. 53-54’s caveats -not mistakes (info; expectations) -not looking (much) at motives: self-interested vs. selfish -subjective  benefit/cost and changes in either: change incentives and may change behavior

5. Production PossibilitiesFrontier/Curve -linear (p. 45) or non-linear (if DMR in production) -inside, outside, on constraint—given resources, technology, and institutions -shift constraint out/in (p. 46) -micro/macro—and esp. on latter, govt vs. mkt

6. Chapter 1, Part B  all introduced; developed later…  at the least, note: importance of non-$$ (psych/soc—moreso in A508) issues/approaches

7. Chapter 2, Part B -group behavior, but stemming from individuals -through mkts. and within firms  how/when successful? -theories: common/public interest vs. economics/individual

8. but smaller groups = more mgmt…  surprising worker incentives for “tough” boss/mgmt or other monitoring—to deal with P.D. -w vs. MRPL (vs. not—skim; more later) -for each individual vs. (and) in general (see: P.D.; cartels) -balance: flex as efficient vs. undisciplined -can be morale problem either way; “optimal shirking”—MB vs. MC, vs. too much/little -w/ app. to tech and ability/need to “snoop” (on-line reading 2.2)  who’s a manager vs. managed in our class? groups at work?  groups (effective or not) in the classroom?

9. “public goods” -defined (p. 58; vs. publicly-provided goods; vs. “private” goods) -non-rival (not in book) and non-exclusive in consumption (defined); p.r.’s (revisited)  free-rider problem—increases as… -examples in text -other examples…  potential for govt failure/struggle in response to mkt struggle  w/ app. to workplace (again, related to p.r.’s problems)…