ECONOMICS ECONOMIC SYSTEMS AND INCENTIVES THEME 2 ECONOMICS

ECONOMICS, ECONOMIC SYSTEMS, AND INCENTIVES THEME 2

ECONOMICS Economics: the study of how people choose to use resources. • It is the study of choices. What are your resources? Economics is not a science. • It is a set of theories, but none, has scientific validity. • Since it is about human choices, there is no scientific standard. • It assumes behaviors- rational or irrational (which is why theories often fail)

THE PROBLEM Why would we need to devote a whole study to choice? Consider WANTS and NEEDS Why would one want to devote a whole study to choice? Consider INTENTIONS

THE PROBLEM- CONSIDERED Economics exists due to scarcity. • Scarcity: lack of resources • Consider: Without scarcity, the science of economics would not exist. Economics is the study of production, distribution, and consumption of goods and services. If society did not have to make choices about what to produce, distribute, and consume, the study of those actions would be relatively boring. Society would produce, distribute, and consume an infinite amount of everything to satisfy the unlimited wants and needs of humans. Everyone would get everything they wanted, and it would all be free. But we all know that is not the case. The decisions and trade-offs society makes due to scarcity is what economists study (study. com) • Economics is the study of how we choose to use those limited resources. • There are many types of resources and choices to be made. Economists use economic models to predict how we will make choices. (Economic Model: representations of the “real world” that are used to influence decisions, explain how decisions are made, and predict economic change. )

EXAMPLE OF AN ECONOMIC MODEL Consider: You run a preschool. Parents are often late picking their children up on time which creates an burden on your staff to stay late, therefore, causing you to pay staff for additional time (or lose good staff members). As a savvy “choice architect”, you decide to change the decision making of parents. So you create fine of $8 if parents do not pick up their kids by the specified time. 1) Is this a good model? 2) Will it change behavior? 3) How does it work (what’s the logic/rationale)?

MAKING ECONOMIC DECISIONS Trade Offs: the alternative (the actual choices) you face if you decide to do one thing rather than another. Opportunity Cost: the cost of the next best thing, use of time, or resources when you choose to do one thing rather than another. (the value of the choice made in the trade off) THE METRO COOKIE? COLLEGE?

ECONOMIC SYSTEMS How communities are organized to allow for choices and the production, distribution, and consumption of resources. Capitalism v. Communism Capitalism: an economic system in which the citizenry is free to choose how to best utilize (produce, distribute and consume) their resources. • “Laissez Faire”: hands free of the government • Limited government regulation or control of production and consumption. • Pure Capitalism: NO government interference 1) Give examples of capitalist behavior. 2) Give examples of government regulation or control of the markets 3) Has a large scale “pure” capitalist system ever existed?

ECONOMIC SYSTEMS CONTINUED…COMMUNISM Communism: a social and economic system by which the citizenry is structured in a classless society through which “common ownership” of all property and choices determines the best means to utilize (produce, distribute, and consume) all resources. • Purest form of a “Command Economy” • Has a pure Communist system ever existed on a large scale? Socialism: characterized by a large degree of government control of how to best utilize (manufacture, produce, and distribute) resources. • Command Economy: government organizes the choices made in the economy • Often characterized by high taxes with access to specific public services. • Historically, has often lent itself to authoritarian forms of government.

NOWA HOTA- PLAN (KRAKOW, POLAND)

https: //jalopnik. com/what-it-was-like-to-buy-and-own-a-car-in-the-ussr-1783136956

BAD JOKE- COMPLIMENTS OF RONALD REAGAN This man laid down the money, and the fellow in charge said to him: Come back in 10 years and get your car. The man answered: Morning or afternoon? And the fellow behind the counter said: Ten years from now, what difference does it make? And he said: Well, the plumber is coming in the morning. Ha! Ha! Very funny!

PRUITT-IGOE

PRUITT-IGOE DEMOLITION - Watch on Youtube: The Pruitt-Igoe Myth

MIXED ECONOMY Mixed economy: an economy which contains elements of more than one type of economic system. • Americans utilize both socialist and capitalist principles in our economic approach. • What question does that create if we have a mixed economy? • What are the strengths of capitalism and socialism? Weaknesses?

INCENTIVES Rewards that are offered to try to persuade people to make certain decisions or actions. • Credit Cards • Buying in bulk • Honor Role => Prizes The study of incentive structure (“choice architecture) is central to the study of all economics. You’re me (gross!). You’re a teacher. What incentives would you put in place to motivate students to do well. (don’t consider your limits) Freakonomics Video

ECONOMIC ACTIVITY Costs Factor Market - Households sell - Businesses Buy Service Costs Businesses G and S - Buy resources - Sell Products Taxes Revenue Service G and S Government Taxes G and S Goods Money Income Costs Product Market - Businesses sell - Households buy Households - Sell Resources - Buy Products Goods Consumption Expenditures

MARKETS Markets: a place where exchanges of resources takes place • At work, labor is sold in the “factor market. ” • At stores, goods are purchased in the “product market. ” Who controls the markets?

CONSUMER SOVEREIGNTY Consumer sovereignty: the assertion that consumer preference determines the production of goods and services. • “Consumer as king. ” • Examples: • New Coke (1985) • Crystal Pepsi

1776 What happened in 1776? Wealth of Nations by Adam Smith (Scottish) • Used logic and reason to describe the benefits of Free Enterprise or “Laissez-Faire” Economics • “Free Hand” or “Let Do” • Laissez Faire: abstention by governments from interfering in the workings of the free market. • Who read his works? What is the role of this book in developing our current economic system?