Unit One

3 decision characteristics

1. guided by incentives

2. constrained maximization

3. resourcefulness and creativity

incentives

good or bad

money, prestige, spiritual, punishments, embarrassments

constrained maximization

limited information, resources (money, time), knowledge and intellect

knowledge

ability to use information to make decisions

understanding of someting acquired from education or experience

resourcefulness and creativity

humans try to expand positive incentives and minimize the impact of negative incentives.

athens swimming pools

getting around the law, getting an education

why is there so much disagreement in the world

heuristics

heuristics

• mental shortcuts to making a decision to simplify decisions

• examples

  • confirmation bias

  • hindsight bias

  • actor/observer bias

  • self serving bias

confirmation bias

• for processing info

• process information by looking for, or interpreting information that is consistent with one’s existing beliefs.

hindsight bias

• for viewing events

• look back at past situations and believe the outcome was obvious, even if we couldn't have possibly known it at the time

actor observer bias

• towards actions

• attribute our actions to external forces beyond our control, but that of others to their own internal causes

self serving bias

• actions

• We tend to give ourselves credit for successes but blame failures on outside causes.

facets of human nature

• evaluative, imperfectly maximizing and resourceful

economic activity is

the production, distribution and consumption of the goods and services/assets

two defining characteristics of economic activity

1. resources are scarce - fighting

2. demand is infinite

Economic Assets

Things of value that you legally own and can get benefits from (like money or usefulness) by keeping or using them over time

3 facets of economic activity

• government - imperfect spending

• experts - limited

• markets - imperfect buyers and sellers

property rights

the right to control an asset: how it is used, how the benefits from this use are distributed, and the ability to dispose of the asset

2 ways of allocating property rights

• socialism

• capitalism

socialism

• property rights are possessed by government

• allocate what is produced to the people that need it

capitalism

• property rights possessed by markets

• focuses on incentives and efficiency

positive and negative incentives in economy

• choice: positive, markets/capitalism

• regulation: negative, socialism

positive incentives encourage efficiency = higher standard of living

efficiency

Getting the most output from scarce productive resources.

measures that evaluate efficiency

• economic freedom heat map

• The World Bank's Annual Doing Business Report

• Corruption Perceptions Index

why governments can’t run businesses - incentives

1. politicians are looking for re-election, short-term, constituent success

2. Need headlines/action - can’t js do nothing

3. Use taxpayers money - incentive to bend to taxpayer will

4. Can’t compete

5. Monopolies = incentive to raise price

6. Government acts slowly, CEO must act fast

7. Regulates itself - incentive to do whatever it wants

three rankings of economic success

• property rights freedom - the degree to which property rights are controlled by individuals

• government involvement - regulation/involvement in economic activity

• corruption

Imperfect maximization: 

Humans try to maximize welfare but can’t get, absorb, or understand all information.  Resources are limited and decision makers are constrained

Fairness: 

All humans have value and should be treated equally, decent standard of living and adequate access to economic assets.

mixed economy

A synthesis of socialism and capitalism, combines the elements of a market economy and a planned economy.  

corruption

Dishonest or illegal activity by persons in authority, especially political leaders, government administrators, judicial officials and police.