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Slide 1
ECONOMIC CONCEPTS APPLIED TO EVERYDAY LIFE WHATS WRONG WITH
THIS PICTURE?
Slide 2
GOOD ECONOMIC THINKING HELPS TO MAKE SOUND CHOICES This is a
series of photos depicting scenes we'll likely never see in the
real world. Ask your students to explain why. The photos can be
used to introduce new concepts or to review definitions. In
addition, there are everyday applications of fundamental economic
concepts throughout.
Slide 3
KEY CONCEPTS ADDRESSED: PUBLIC GOOD NON-EXCLUDABLE NON-RIVAL
INCENTIVES OPPORTUNITY COST ECONOMIES OF SCALE VARIABLE COST
EQUILIBRIUM LAW OF ONE PRICE EFFICIENCY RISK EXTERNALITIES ADVERSE
SELECTION MORAL HAZARD COMPARATIVE ADVANTAGE ABSOLUTE ADVANTAGE
ELASTICITY SUBSTITUTES DEMAND AND SUPPLY PRICE DISCRIMINATION LAW
OF DIMINISHING MARGINAL UTILITY ASYMMETRIC INFORMATION PRICE FLOOR
SUNK COST
Slide 4
A sunset is a public good, non-excludable and non-rival.
Non-payers cant be prevented from enjoying them thus private
markets under produce because theres no incentive to pay. Other
examples are national defense, fireworks, and lighthouses. Whats
wrong with this picture?
Slide 5
The desire for Public Goods creates a role for government
EXCLUDABLE (ACCESS CAN BE LIMITED) NON- EXCLUDABLE (ACCESS CANT BE
LIMITED) RIVALROUS (MY USE DOES IMPACT OTHER PEOPLES ABILTY TO USE)
PRIVATE GOODS food, clothing, cars, personal electronics COMMON
GOODS fish stocks, timber, coal NON-RIVALROUS (MY USE DOESNT IMPACT
OTHER PEOPLES ABILITY TO USE) CLUB GOODS cinemas, private parks,
satellite television PUBLIC GOODS Free-to-air TV, national defense,
air, MP3 music files
Slide 6
Why is it rare to see shacks on expensive lakefront property?
The opportunity cost of living in a shack on highly valued water-
front property is very high. Owners usually conclude that they'd do
better by selling their property and buying a nicer house on a less
desirable lot. Whats wrong with this picture?
Slide 7
Black Friday application for OPPORTUNITY COST Millions of
people engaged in bizarre behavior in the days and hours prior to
the Friday after Thanksgiving. An example was this woman setting up
a tent on the sidewalk outside of a Best Buy, with her children, on
the Sunday before in order to be first in line. What are all of the
opportunities lost in committing that time and the toll taken in
the pursuit of a bargain TV?
Slide 8
An expense that you cant recover, so move on SUNK COSTS: An
expense that you cant recover, so move on How long would you watch
a bad movie? Lets say you rent a movie and after half an hour
decide it is unbearable to watchits not even good enough that you
can make fun of it. Most of us would watch the rest of the movie
since we paid for it, but the truth is, the price of rental is a
sunk cost.
Slide 9
Mark and Sally couldnt compete with UPS and Fed-Ex because they
lack economies of scale. Suppose a customer asks them to deliver a
small package to a city 200 miles away. Unless they have many other
packages going to the same city, they'd have to charge a lot just
to cover their variable costs--labor, gas, and depreciation. Whats
wrong with this picture?
Slide 10
ECONOMIES OF SCALE When more units of a good or a service can
be produced on a larger scale, yet with (on average) less input
costs, economies of scale are said to be achieved. Alternatively,
this means that as a company grows and production units increase, a
company will have a better chance to decrease its costs.
Slide 11
ECONOMIES OF SCALE One of the cost-cutting advantages of big
companies is the ability to experiment with innovative ways to
deliver services and product. McDonalds has dramatically increased
the efficiency of its drive-through order time by 30 seconds
because it outsources its drive-through order taking function to a
call center.
Slide 12
Two gas stations on adjacent corners of the street. The Law of
One Price says that identical goods in efficient markets must have
only one price in equilibrium. The more expensive gas station
probably won't get many customers and will be forced to lower its
prices. Whats wrong with this picture?
Slide 13
This equilibrium in the market assumes theres a full disclosure
of information Asymmetric information is a market condition where
one party has more or better information than the other. Thus it is
impossible for the compromised individual to determine the true
cost/benefit of the transaction. Car salesmen were notorious for
having this advantage over buyers. The internet has leveled the
playing field as an information source.
Slide 14
The supply of applicants will overwhelm the demand creating
disequilibrium. Since a business can get all the inexperienced home
typists it wants at a much lower wage, it makes no sense for it to
offer $40-$100 an hour. Whats wrong with this picture?
Slide 15
The Minimum Wage as a Price Floor During hard economic times,
advocates for the poor will demand the minimum wage be lifted to
improve living conditions. Employers will then seek alternatives to
human labor thus creating a shortage of jobs and a surplus of
workers.
Slide 16
The problems of adverse selection and moral hazard plague many
insurance markets. Adverse selection suggests that speeders will be
more likely to sign up for this kind of insurance, while moral
hazard suggests they'll have little incentive to slow down once
they're insured. Whats wrong with this picture?
Slide 17
ADVERSE SELECTION If the market doesnt properly price risk then
the insurance policy becomes a better value for the unhealthy
person and they become the only clients willing to take out
insurance. Safe driver discounts and premium pricing for smokers
are measures to correct that.
Slide 18
ADVERSE SELECTION The current healthcare debate in the U.S. has
a lot to do with this as the high cost of services, the
deteriorating health of the population and the aging of America
have made it difficult to properly price coverage.
Slide 19
MORAL HAZARD In economic theory, moral hazard refers to a
situation in which a party makes a decision about how much risk to
take, while another party bears the costs if things go badly, and
the party insulated from risk behaves differently from how it would
if it were fully exposed to the risk.
Slide 20
MORAL HAZARD The housing foreclosure crisis can be partially
attributed to the absence of risk when mortgage brokers convinced
customers to buy more house than they could afford. The lender
would sell the loan to Wall St. and avoid the losses when the
homeowner couldnt make the payments.
Slide 21
It's nice of Superman to rescue a kitten, but has he considered
the opportunity cost of doing so? The concept of comparative
advantage suggests that Superman should focus on tasks that others
can't do well, like stopping runaway trains or transporting nuclear
weapons into deep space so they can detonate safely. Whats wrong
with picture?
Slide 22
The father has an absolute advantage in both chores while the
boy has a comparative advantage in sweeping. The father can
accomplish both tasks faster than the boy, but the entire job could
be completed in even less time if they both specialized in the role
that took the least time to finish. Whats wrong with this
picture?
Slide 23
The practice of charging price sensitive customers less is
called price discrimination. Theater owners know they can earn more
revenue by charging students and children less. The reason is that
kids are more price sensitive (in economic terms, they have a
higher price elasticity of demand), and therefore less likely to
come to the movies if the prices are high. Whats wrong with this
picture?
Slide 24
PRICE ELASTICITY OF DEMAND The return of lay-away plans this
holiday is in direct response to the struggling shopper who has to
decide between buying gifts for the kids and putting food in the
refrigerator. The difficult economy has made many people price
hyper- sensitive.
Slide 25
Marginal utility is the additional satisfaction from the last
unit consumed The law of diminishing marginal utility says that as
a person increases consumption of a good, holding consumption of
other goods constant, the marginal utility he or she gets from each
additional unit of that good declines. Whats wrong with this
picture?
Slide 26
IN THE END, THE LOVE YOU GET IS NO LONGER EQUAL TO THE LOVE YOU
GIVE This guy cant quite imagine why shes breaking up with him?
DIMINISHING MARGINAL UTILITY
Slide 27
What is the opportunity cost of getting the rebate? The
opportunity cost of getting the rebate includes the cost of the
stamp and envelope, plus the time it takes to fill out the form,
cut out the UPC code, get a copy of the receipt, address an
envelope, and mail it off. For most of us, that cost is greater
than $1. Whats wrong with this picture?
Slide 28
Equilibrium is defined as a state in which there is no tendency
to change. In economics, this usually occurs when everyone is doing
the best he or she can. The lanes in this picture aren't in
equilibrium because some drivers could do better by moving into the
relatively empty lane. With cars distributed more evenly among the
lanes this would promote efficiency in that it would help all
drivers reach their destinations faster. Whats wrong with this
picture?
Slide 29
Why dont we make ourselves safer by wearing helmets when we
drive?. It appears that most of us are quite willing to sacrifice
safety in order to keep our hair looking nice. Whats wrong with
this picture?
Slide 30
We rarely see banana peels on the floor at grocery stores, why?
Lawsuits can improve economic efficiency by causing firms to
internalize some of their external costs. Whats wrong with this
picture?
Slide 31
People offer this service in less developed countries, but they
don't in richer countries. Most Americans have scales at home (a
substitute for public scales), so the demand for this service is
small. It's unlikely that this man would get enough customers to
cover the opportunity cost of his time. Whats wrong with this
picture?
Slide 32
People offer these products and programming in richer
countries, but they dont in developing nations Though Americans may
have bath- room scales, the demand for the discipline to control an
appetite constantly bombarded by temptation has created a huge
market for quick fixes to keep the dial from spinning out of
control. People see diet pills as a substitute to a gym membership
and public berating on television as an alternative to
self-control.
Slide 33
Price provides incentives to produce more of a good or service.
Time is important to supply because suppliers must, but cannot
always, react quickly to a change in demand or price. So it is
important to try and determine whether a price change that is
caused by demand will be temporary or permanent. A producers
ability to react is called price elasticity of supply.
Slide 34
Price Elasticity of Supply In 1983, Cabbage Patch Dolls were
the rage for little girls at Christmas. Parents were camping
outside of K-Marts fearful of disappointing their little ones. A
small factory in Georgia was producing them at the time and couldnt
keep up with the runaway demand. A secondary market for the cherubs
opened up where twins were going for ten times their original
price.
Slide 35
Freeway accidents, even if they're off on the side of the road,
usually cause traffic jams. Drivers don't take the external cost of
their actions into account when they slow down to take a look.
Whats wrong with this picture?
Slide 36
NEGATIVE EXTERNALITIES The devastating BP oil crisis in the
Gulf of Mexico had an immeasurable impact on the lifestyle,
occupations, pleasures, wildlife, and unique flavor of the
communities bathed in the millions of barrels gushing from the
broken well.
Slide 37
POSITIVE EXTERNALITIES When you hire mariachi singers to play
at your table in a restaurant, you pay the cost, but the other
diners there get the benefit as well. Of course, if the singers
play badly, you have created a negative externality, which is
generally more common in economic life.