ECONOMIC CONCEPTS APPLIED TO EVERYDAY LIFE WHAT’S WRONG WITH THIS PICTURE?

ECONOMIC CONCEPTS APPLIED TO EVERYDAY LIFE WHATS WRONG WITH THIS PICTURE?

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.

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

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?

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

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?

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?

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.

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?

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.

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.

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?

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.

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?

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.

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?

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.

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.

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.

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.

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?

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?

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?

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.

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?

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

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?

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?

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?

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?

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?

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.

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.

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.

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?

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.

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.

Documents

ECONOMIC CONCEPTS APPLIED TO EVERYDAY LIFE WHAT’S WRONG WITH THIS PICTURE?