Unit 1 Economics

Selfishness in economics

• can be interpreted as self-interest

• everyone benefits

  • if no one had aspirations beyond a fast food worker, we wouldn’t be able to grow and invent things

Incentives in economics

• behaviour manipulation prices

  • the cobra effect

  • sales (attracting participants)

  • tax on unhealthy drinks?

economic lens → exchange creates wealth

• south korea is so much richer than north korea because they internationally trade

• transaction must be beneficial both parties

economic lens → opportunity cost

• value of time

• should pro athletes mow their own lawns?

• skyrim → people spent too much time playing and not enough time contributing to the economy (failure)

economic lens → power of markets

• scale drives down price

• competition and innovation make things better

economic lens → reshoring

• cheaper production in another country

communism

• started by marx

• eradicate inequality

  • eliminate power struggle between bourgeois (rich) and proletariat (poor)

    • violent revolution → overthrow the bourgeois, politicians, and government

• classless society

  • no religion

  • no private property

  • no disagreement

in practice

• you need to harness people’s self interest

• if they know they are just going to receive the same they may not have the same motivation

  • eg. truckers paid by delivery vs by hour

socialism

• known as milder communism

• eg. sweden, norway, saudi arabia

• no violent revolution, not complete equality

• tax on corporations to pay for public goods

• government control on some vital industries

• progressive tax

capitalism

• fair competition = ideal productivity and standard of living

  • drives innovation

• smith’s idea

  • “laissez faire” → little government intervention

  • success and failure are necessary

  • little tax, few public goods

justification for capitalism

• natural wealth disparity

  • only the highly competitive and competent will end up doing well

  • trickle down economics will take care of the poor

capitalists don’t like

• monopoly → one person rules, no competition

• oligopoly → multiple parties, choose not to compete

authoritarian capitalism

• china → “communism”

  • they are actually capitalists → have private ownership and wealth gap

  • lots of government control

  • foreign policy → business not aid

    • will provide money for infrastructure as an investment for future business

economic political goals

• political stability → trust in the government, no riots

• manageable public debt → not all debt is bad

  • if it makes the economy better and will be paid off

• economic growth → steady growth (2-3%)

• equitable distribution of income

• full employment → ideally 93% of working age population

• economic freedom → buy the things you want

• environmental stewardship → take care of it

adam smith ideas

• invisible hand

  • markets self-regulate → “laissez faire”

• principle of scarcity

  • scarcity drives up price

    • diamonds are the hardest substance, we need water for life, but since there is more water, water is cheaper

  • professional training

    • some professional jobs are so rare that the workers can’t take sick days, but they get paid a lot

involution

• when you drop prices to attract more customers, but make competition and margins counterproductive

  • everyone loses → customers lose quality, company loses money

creative destruction

• have to allow failure and replacement for growth

  • eg. piano → gramophone → radio → television

• temporary loss of jobs will eventually lead to better products, overall growth and gain

built in obsolescence

• things designed to need replacement ahead of the longest they can actually make it last

  • lightbulb

• business model

  • tech is designed to need replacement so that they can make more money

ricardo

• contemporary of adam smith

  • absolute advantage → 2 communities will trade even if 1 is better at production of both things

veblen

• conspicuous consumption

  • branding and image → recognition

  • brand bombing → seeing chains everywhere

  • brand sabotage → celebrity influence for promotion or demotion

buddah’s second noble truth

1. life is suffering

2. suffering is caused by desire

haidt

• psychological adaptation → the problem with acquiring stuff is that it does little for your long-term happiness

  • eg. big house, longer commute

game theory

• created by van neuman

• framework for analyzing strategic outcomes where the outcome for each player depends on the choices made by all participants

  • eg. ultimatum game, prisoners dilemma

• foundational presumption of rationality

elements of game theory

• players

• strategies

• outcomes

elements of game theory → players

• firms

elements of game theory → strategies

• choices available

• kant → philosopher in russia

  • categorical (absolute) imperative (must do)

  • must always be honest

• sun tzu’s art of war book

  • dishonesty can be useful

  • if you’re weak, act strong; if you’re strong, act weak

elements of game theory → outcomes

• all players use a strategy to get an outcome

• zero-sum games

  • eg. chess, poker

  • one winner one loser

  • exception: phyrric victories (winner at a cost)

• positive sum games

  • eg. trade negotiations, business deals, paris climate conference

  • everyone can win

  • cooperative

bounded rationality

• we are rational human beings but we have limits on

  • info

  • time

  • mental bandwidth (we automatically filter options)

common biases in bounded rationality

• anchoring bias

• loss aversion

• status quo bias

• availability heuristic

• overvaluing of present

• scarcity messages

common biases in bounded rationality → anchoring bias

• take the first piece of information very seriously

• eg. “it was $100 but now it’s only $40”

common biases in bounded rationality → loss aversion

• if you go to the casino and lose $500 it feels worse than gaining $100

common biases in bounded rationality → status quo bias

• people tend to not want to change

common biases in bounded rationality → availability heuristic

• hearing an influencing single fact (even if it’s outlandish)

  • plane crash

  • crypto

common biases in bounded rationality → overvaluing of present

• delayed gratification

• waiting for a bigger reward

common biases in bounded rationality → scarcity messages

• “only 1 left”

fritz haber

• creates chlorine gas (loses his wife over this)

• also invented artificial fertilizer which was really helpful in agriculture, improving population

• received nobel prize which was protested against

• also created zyklon a, which the nazis based zyklon b on (gas used in chambers during ww2)

concept of disavowal

• you learn information but it doesn’t affect your decisions

• eg. child labour, health effects

de minimis fees

• no tax on small transactions

opiods vs opiates

• opiods → lab made

• opiates → naturally occurring, usually farmed

behavioural economics → commonly exploited heuristics

• trust heuristic

• loss aversion

• confirmation bias

• reciprocity norm

behavioural economics → confirmation bias

• “your parents did this and it worked out for them”

behavioural economics → reciprocity norm

• eg. free samples

• you feel like you owe the company something