Your first papers

• Study MLA

Your first papers

• Study MLA• Effects= noun• Affects= verb• Attribute when direct lift• Cite text to show you’ve done reading• Economics is a singular subject for this class…

(not “Economics are”)

Your first paper

• Awk= awkward, needs to be rewritten or the sentence/passage is not clear

• Proper nouns: be certain (e.g., it’s economics, not Economics as a general area of study)

• It’s= it is• Its= possessive

Ok, what’s up with all those scrawls on my paper??

What price did you find… and what did it say to you?

What is a nation’s wealth?

What make a nation prosperous?

• Total of goods and services available• Not just houses, cars, smart phones, strong

coffee… also the things that make a society great

• Universities, hospitals, security, freedom, the arts, scientific discovery, educated population

• Strong moral consensus… Judeo-Christian values

2006 Fender Telecaster American Deluxe FMT HH

• Gorgeous flame• Ebony board• Screaming Enforcer pups• Tweed hard case• Only played in church on Saturdays and

Sundays by a careful economics teacher

2006 Fender Telecaster American Deluxe FMT HH

• Price?

2006 Fender Telecaster American Deluxe FMT HH

Price?$149,999!!!!!!!!!!!!!!!!!!!!!!!!! You save $125,000 compared to the older Les

Paul Standard… wow!!!!!!!!!!!!

Is that the price?

Is it??

Prices

“…understanding how prices function is the foundation for understanding much of the rest of economics…”

iPhone

• Tens of thousands of people on three continents, working for more than 30 companies make the iPhone

• U.S., Korea, Taiwan, China, Germany, UK, Malaysia

• Only $10 in direct labor goes to Chinese workers, says Forbes

Other people had to be incented to produce these things for us

Other people had to be incented to produce these things for us

• Prices are at the heart of such incentives in a market economy

Other people had to be incented to produce these things for us

• Prices are at the heart of such incentives in a market economy

• We depend on millions of strangers for our food, clothing, shelter, entertainment, almost everything

• Prices do that

“Since we know that the key task facing any economy is the allocation of SRTHAU, the next question is: How does an economy do that?”

What are the two major options?

Price-controlled (capitalism) or central control

Prices or central control

• Margaret Thatcher didn’t bring food to the UK… prices brought food from throughout the world to a nation that cannot feed itself

Prices• No one person or bureaucracy -- whether in

Moscow, Beijing, Tallahassee or Washington -- can possibly effectively coordinate all the millions of economic transaction that occur each minute in a complex society

PricesNo one person or bureaucracy -- whether in

Moscow, Beijing, Tallahassee or Washington -- can possibly effectively coordinate all the millions of economic transaction that occur each minute in a complex society

Example of USSR food system compared to Britain’s

Gorbachev with “little understanding of economics” as leader of the biggest nation

President Obama’s ‘Les Paul guitars for guys and gals program’

President Obama’s ‘Les Paul guitars for guys and gals program’

• How would this work?

President Obama’s ‘Les Paul guitars for guys and gals program’

• How would this work?• Prices are not just an obstacle to your getting

a 1959 Les Paul. The $275,000 price reflects the reality that there are only a handful of these instruments in the world

Primary Roles of Prices

Primary Roles of Prices

• Provide incentives to affect behavior in the use of resources and resulting products

Primary Roles of Prices

• Provide incentives to affect behavior in the use of resources and resulting products

• Convey terms of financial transactions among consumers, producers, retailers, workers, landlords, etc.

“Prices are like messengers conveying news”

Prices• Why does Dr. Sowell compare prices to the

worldwide web?

Prices• Why does Dr. Sowell compare prices to the

worldwide web?• Prices connect you to anyone, anywhere

where prices operate freely

Prices• Why does Dr. Sowell compare prices to the

worldwide web?• Prices connect you to anyone, anywhere

where prices operate freely• Price-coordinated markets enable people to

signal to other people how much they want and what they’re willing to pay

Profits & Losses

• Why are losses as important as profits to businesses in a free market economy?

Profits & Losses

• Why are losses as important as profits to businesses in a free market economy?

• Losses tell companies what to stop producing

Romans 3:23

• “For all have sinned and fall short of the glory of God”

Romans 3:23

• “For all have sinned and fall short of the glory of God”

• Humans will make mistakes in every economic system. Key question: what incentives and constraints force them to correct mistakes?

Romans 3:23

• “For all have sinned and fall short of the glory of God”

• Humans will make mistakes in every economic system. Key question: what incentives and constraints force them to correct mistakes?

• Price-controlled economy, bankruptcy looms; in socialist, leaders can continue to make same mistakes indefinitely (Cuba, N. Korea)

Prices and Central Planning

• Countries with socialist or Marxist economic systems rely on central planners to set prices and determine what goods are produced and where

Prices and Central Planning

• Countries with socialist or Marxist economic systems rely on central planners to set prices and determine what goods are produced and where

• Importantly: at no point in history can we find an example where central planning has consistently produced more prosperity than allowing prices to fluctuate via supply and demand

Growing U.S. central planning

Growing U.S. central planning

• Health care reform (aka Obamacare) creates 159 new federal agencies

Growing U.S. central planning

• Health care reform (aka Obamacare) creates 159 new federal agencies

• Financial reform act (aka Dodd-Frank) creates dozens of new agencies to do everything from set credit card interest, ATM fees and dictate % of minorities/women in financial businesses

Growing U.S. central planning

• Health care reform (aka Obamacare) creates 159 new federal agencies

• Financial reform act (aka Dodd-Frank) creates dozens of new agencies to do everything from set credit card interest, ATM fees and dictate % of minorities/women in financial businesses

• All federal agencies such as EPA and SEC aggressively expanding regulations

Growing U.S. central planning

• Obama administration added 12,000 pages of regulations in its first three years to Federal Register

“No matter how much we wish to organize everything rationally, without waste, no matter how passionately we wish to lay all the bricks of the economic structure tightly, with no chinks in the mortar, it is not yet within our power.”

Nikolai Shmelev & Vladimir PopovUSSR economists

Consequences matter more than ______

Consequences matter more than intentions

Prices and Costs

• Prices become economic realities only if others are willing to pay them

Prices and Costs

• Prices become economic realities only if others are willing to pay them

• Not up to us to decide prices

Prices and Costs

• Prices become economic realities only if others are willing to pay them

• Not up to us to decide prices• Up to other producers selling same goods and

services and what others are willing to pay

Prices and Costs

Prices become economic realities only if others are willing to pay them

Not up to us to decide pricesUp to other producers selling same goods and

services and what others are willing to payAll we have to decide is what we’re willing to

pay for the few things in our day to day: yogurt, coffee, hair styling, gadgets, songs

Gordon Gekko: ‘Greed is good’

Do high prices reflect greed?

Do high prices reflect greed?

• Competition is what limits what you can charge and still make sales

Do high prices reflect greed?

• Competition is what limits what you can charge and still make sales

• Floyd Mayweather: $85 million/year

Do high prices reflect greed?

• Competition is what limits what you can charge and still make sales

• Floyd Mayweather: $85 million/year• Barista: $15,800-$23,900/year

Do high prices reflect greed?

• Competition is what limits what you can charge and still make sales

• Floyd Mayweather: $85 million/year• Barista: $15,800-$23,900/year• What news do those figures bring us?

Do high prices reflect greed?

• Competition is what limits what you can charge and still make sales

• Floyd Mayweather: $85 million/year• Barista: $15,800-$23,900/year• What news do those figures bring us?• Mayweather is not greedy; barista is not

generous

How do prices allocate SRTHAU?

How do prices allocate SRTHAU?

• The price one producer is willing to pay becomes the price that other producers must pay for that same SRTHAU... e.g., milk, wood

How do prices allocate SRTHAU?

• The price one producer is willing to pay becomes the price that other producers must pay for that same SRTHAU... e.g., milk, wood

• Therefore, resources tend to flow to their most valued uses

How do prices allocate SRTHAU?

• The price one producer is willing to pay becomes the price that other producers must pay for that same SRTHAU... e.g., milk, wood

• Therefore, resources tend to flow to their most valued uses

• The cost of anything is the value that it has in alternative uses

How do prices allocate SRTHAU?

The price one producer is willing to pay becomes the price that other producers must pay for that same SRTHAU... e.g., milk, wood

Therefore, resources tend to flow to their most valued uses

The cost of anything is the value that it has in alternative uses

This efficient allocation of SRTHAU determines how well or badly millions of people live

Adam Smith on prices

“Everything is interconnected in the world of prices so that the smallest change in one element is passed along the chain to millions of others.”

Two really important laws

• People tend to buy more at a lower price and less at a higher price

iPhone

• Now available for $19.99

iPhone

• Now available for $19.99• Now available for $1999.99

Two really important laws

• People tend to buy more at a lower price and less at a higher price

• Producers tend to supply more at a higher price and less at a lower price

A few final thoughts on prices

A few final thoughts on prices

• People tend to do more for their own benefit: Kibbutz example, USSR factory managers, famines

A few final thoughts on prices

• People tend to do more for their own benefit: Kibbutz example, USSR factory managers, famines

• Horses and buggies: under current administration we probably would have -government-owned buggy-whip companies

A few final thoughts on prices

People tend to do more for their own benefit: Kibbutz example, USSR factory managers, famines

Horses and buggies: under current administration we probably would have government-owned buggy-whip companies

Prices “tie together a vast constellation of economic activities among people too widely scattered to know each other”

The last slide on prices (today)

• Dr. Sowell contends there is no “fixed” supply of oil or of most other things... why??

Assignments for 1/28/14

Read and STUDY chapter 3 of Basic Economics: “Price Controls”

There will be a test on chapters 1-3 and our in-class discussions… so review all