Factors of Production – Land, Labour, Capital and Entrepreneurship

Ceteris Paribus

Scarcity Is Not Shortage

Opportunity Cost

Opportunity Cost #2

Extreme Couponing and Opportunity Cost

• Don’t forget to watch the video clip associated with Extreme Couponing

There is no such thing as a free lunch

• Questions:
  1. Is Jerry’s suit free? If not, what are his costs?
  2. The reason everything has costs is because of scarcity. What are the things (not just monetary) that are scarce in Jerry’s life, which he has to give up for the suit?
  3. Are the costs the same for everyone? Imagine if you had lots of money (like Jerry Seinfeld the actor), would you accept a “free” suit, if it meant creating an obligation?
  4. What if you really liked (for some weird reason) Kenny Bania (the guy giving away the suit). Would that change the costs? Could a dinner obligation with him ever be a benefit, rather than a cost? If so, do you think he’d be so eager to give away an expensive suit to get a dinner invitation?

Thinking at the Margin – Marginal Thinking#1

Marginal Thinking Topic Overview

Marginal Thinking and Utility Per Dollar Spent

Diminishing Marginal Utility and Price

Marginalism – Just One More

• When you go to an “all you can eat” restaurant, unless you’re Homer Simpson, does the last bite taste as good as the first? What changes? Do you sometimes regret overeating?

Incentives Matter

• There’s no way to get around the importance of incentives. They are a part of human nature. …
• For example: In the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass they produced. Their revenues depended on the weight of the glass, so most factories produced sheet glass so thick that you could hardly see through it. As a result, the rules were changed. Managers were compensated according to the number of square meters of glass produced. Under these rules, the firms made glass so thin that it broke easily.
• Some think that incentives matter only when people are greedy and selfish. Not true. The choices of both the self-centered and altruistic will be influenced by changes in personal costs and benefits. Example – both the selfish and the altruistic will be more likely to attempt to rescue a child in a shallow swimming pool than in the rapid currents approaching Niagara Falls.

Incentives Matter — King Size Homer

• Question:

  1. The exercise program caused Homer Simpson to get even less fit. What
  2. about his company’s incentive system caused him to do so?
• To see what happens to Homer, feel free to watch Part 2 and Part 3

All of economics rests on one simple principle: Changes in incentives influence behaviour in predictable ways. Both monetary and non monetary factors influence incentives. If something becomes more costly, people will be less likely to choose it.

Economist Potty Training – Freakonomics Movie

• Questions:
  1.  How did changing (creating) incentives for Amanda to use the toilet change her behaviour? Did incentives matter?
  2. How did Amanda figure out how to take advantage of the “system” to her benefit?
  3. The video illustrates the power of incentives, but it also illustrates how difficult creating incentives to maintain desired results is.