CHOICE, OPPORTUNITY COST, AND INCENTIVES

GUIDING QUESTIONS How is economics the study of choice? How do economists make choices? How do incentives influence our behavior?

Discussion… How did we answer our warm-up?

FREE PIZZA! Mr. Garcia puts up a poster announcing the

whole school gets free pizza for lunch next Friday. You, ever the wise economist, are completely frustrated that he would say such a thing and march down tohis office. You demand hetake down thesign immediately.

Why…?

OPPORTUNITY COST

OPPORTUNITY COST = The next best alternative to the one that was

chosen.

IMPORTANT! Opportunity cost is NOT multiple

alternatives put together.

OPPORTUNITY COST Read the directions on your homework and

fill out the chart right now (only the chart for now… do the rest as homework)

Your chart represents a small portion of the choices you actually make in a 24 hour period

For each choice you made about how you spent your time, you had: Options Costs and benefits Opportunity cost

OPPORTUNITY COST – THINKINGLIKE AN ECONOMIST Analyze one of the choices you made in your

log What was your choice? What were your options? (What could you have

done instead?) What was your opportunity cost? Costs and benefits of choice v. the opportunity

cost? Did you make the best decision? Why was it the

best decision?

“FREE” PIZZA..? So, the next time somebody offers you some

free, delicious pizza, what will you tell them…?

Cage the Elephantunderstands opportunity cost…

SO… HOW DO WE FIGURE OUT WHAT THE BEST (RATIONAL) CHOICE IS? First, a quick recap… What is “utility”?

Synonyms?

There are always trade-offs in every choice you make

A rational choice is one that maximizes your benefits (your utility) and lowers your costs

Don’t forget about your opportunity cost!

HOW DO WE MEASURE COSTS AND BENEFITS?

Incentives!!

PEOPLE RESPOND TO INCENTIVES Incentives are actions or rewards that

encourage people to act. When incentives change, people’s behavior

changes in predictable ways.

Incentives can be positive or negative Positive = benefits you hope to get Negative = costs you hope to avoid

A SHORT GAME… Volunteers? (4 total)

The Rules of the Game (Round 1) You may fish for 20 seconds For each fish you catch in the first 10 seconds

you get one piece of candy For each fish you catch in the last 10 seconds

you get two pieces of candy

ROUND 1 What happened?

ROUND 2… THE RULES CHANGE You have been granted part of the pond for

private use. You are only allowed to fish in your part of the pond.

You may fish for 20 seconds. For each fish you catch in the first 10

seconds you receive one piece of candy For each fish you catch in the second 10

seconds you receive two pieces of candy

ROUND 2 What happened this time?

Why?

UNINTENDED CONSEQUENCES Sometimes incentives create unintended

consequences…

Can seatbelts actually cause more accidents? “Three lessons for a better cycling future,”

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1119262/

CAN INCENTIVES SAVE THE RHINO? – THE PROBLEM

Growing demand for rhino horn in Asia & Middle East

Hunting and harvesting rhino horn is illegal in African countries because rhinos are critically endangered Some countries have a “kill

on sight” policy for poachers Poachers can earn

$40,000+ for each rhino horn

Poachers kill more than 2 rhinos per day

Sometimes rhino protectors help poachers for part of profits

“CAN ECONOMICS SAVE THE BLACK RHINO?” Your task is to use the idea of incentives to

create a plan that changes the incentives for people’s behavior and saves the rhino. How will you change the costs and benefits for poachers?

Listen to the NPR report from May 15, 2013 In your notes, write down any info that

sounds important You’ll discuss in groups after the first part of

the report (stop at 1:50). Be prepared to share!

“CAN ECONOMICS SAVE THE BLACK RHINO?” Discussion

Listen to the rest of the report. What are the 2 solutions people propose to

change the incentives for poaching? Write them down in your notes.

An update…

TO SUM UP… Every choice has a cost, even if it’s only the

opportunity cost There ain’t no such thing as a free lunch People respond to incentives When incentives change, people’s behavior

changes in predictable ways

Vocab: TANSTAAFL Opportunity cost Incentives

Trade offs Utility

TICKET OUT THE DOOR “How is economics the study of choice?” Go back to the answer you wrote at the

beginning of the class. Review it and correct any misconceptions you

may have written. Add further explanation, using specific vocab

we talked about in class and examples to help clarify.

You MUST add more information to your earlier answer to make it more in depth and complete.