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Naked Economics. Undressing the Dismal Science. Why did the chicken cross the road?. Who feeds Paris?. What is GDP?. Why is it a good measure? Why is it NOT a good measure?. What is price discrimination?. Airplane ticket prices. Do incentives matter?. What is the superstar phenomenon?. - PowerPoint PPT Presentation

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Slide 1

Naked EconomicsUndressing the Dismal ScienceWhy did the chicken cross the road?Who feeds Paris?What is GDP?Why is it a good measure?Why is it NOT a good measure? What is price discrimination?Airplane ticket pricesDo incentives matter?What is the superstar phenomenon?What is creative destruction?Who loses out most often?Do brands matter?How can black rhinos be saved?What is human capital?

What are the two basic assumptions that economists make about individuals and firms?

Self-interestedRational

Role of prices in the market economy?determining an efficient distribution of resources in a market system.signal for shortages and surpluses which help firms respond to changing market conditions

Advantage of market economy?Allocative efficiencyThe best available modelBUT . . . (market failures)Adverse selection

When you do business with people you would be better off avoiding. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyerWhat you dont know CAN hurt you?Informational asymmetrytransactions where one party has more or better information than the other. E.g. buying a used car, life insurance (adverse selection)Perverse incentivesan unintended and undesirable result which is contrary to the interests of the incentive makersE.g. car seats on airplanesPrincipal-Agent problemprincipalagent problem or agency dilemma concerns the difficulties in motivating one party (the "agent"), to act on behalf of another (the "principal"). E.g. corporate management (agent) and shareholders (principal), fast food employeesprisoner's dilemma example of a game that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so Ac, Bc 1 year, 1 yearAc, Bs 0 , 2 yearsAs, Bc 2 years, 0As, Bs 3 months, 3 months

What is an externality?is a cost or benefit that is not transmitted through prices, and is incurred by a party who was not involved in the transaction.negative externality pollution from a factorypositive externality fire departmentWhat is a public good?Role of GovernmentStabilitylegal framework Protection of property rights Protection of contracts

What is a public good?ExamplesWhat is productivity?Why are many poor countries poor?Are foreign sweat shops bad?What is the primary role of the Federal Reserve?