Economics, 9/8

1. Economics, 9/8

2. Learning Objectives • Reviewmarketequilibrium (homework) and complete a supply and demand chart for price • Understand how priceceilingsand pricefloorseffectquantitysupplied and quantitydemanded • Explain how incentives affect indidualbehavior

4. Changes in Demand • If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price. • If demand decreases (demand curve shifts to the left) supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.

5. Changes in Supply • If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price. • If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.

8. Vocabulary • Altruistic- not selfish • Fungibility- Being able to replace one item with another • Itinerant- Wandering, rarely staying in one place • Blithely- Carefree • Monetary- relating to money or currency. • Marxist- the belief that the struggle between social classes is a major force in history and that there should eventually be a society in which there are no classes

9. RG 30-34 • How does the black rhino illustrate the importance of incentives?

10. Incentives • Incentives are what motivates an individual or group to behave in a certain way or perform a certain action • In a market economy prices are an

11. Incentives • Why do people kill black rhinos? • Because they can make a lot of money relative to getting caught • People weigh benefits versus costs • Maximize their Personal Utility

12. Incentives and Productivity • “In any system that does not rely on markets, personal incentives are usually divorced from productivity. Firms and workers are not rewarded for innovation and hard work, nor are they punished for sloth and inefficiency.” • Examples?

13. Perverse Incentives • What are some examples of “perverse incentives?” • With your group think of why these examples did not work:

14. Perverse Incentives

15. Perverse Incentive Examples • In Hanoi, under French colonial rule, a program paying people a bounty for each rat tail handed in was intended to exterminate rats. The Rat population increased • When a day care put a small late fee on late parents late pick ups increased • Several states have enacted laws requiring judges to impose tough sentences for a third felony conviction.  The result?  An increase in the murder rate.

16. Describe how London reduced its congestion.

17. RG Question • What is the principal-agent problem?

18. Principle- Agent Problem • When the interests of one person making decisions on behalf of a another person (principle) do not align with that person • The two parties have: • Different interests • Asymmetric information

19. Prisoner Dilemma • A paradox in which two individuals acting in their own best interest pursue a course of action that does not result in the ideal outcome. • both parties choose to protect themselves at the expense of the other participant. • By Trying to maximize their individual utility both participants find themselves in a worse state than if they had cooperated

20. How does the fishing industry reflect the prisoner’s dilemma?

21. What is creative destruction?

22. Creative destruction • A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

23. Why is it difficult to transfer money from the rich to the poor? Think about aligning incentives. (49-51)