Naked Economics

Undressing the Dismal Science

Why did the chicken cross the road?

Who feeds Paris?

What is GDP?

• Why is it a good measure?• Why is it NOT a good measure?

What is price discrimination?

• Airplane ticket prices

Do incentives matter?

What is the “superstar phenomenon”?

What is creative destruction?

• Who loses out most often?

Do brands matter?

How can black rhinos be saved?

What is human capital?

What are the two basic assumptions that economists make about individuals and firms?

1. Self-interested2. Rational

Role of prices in the market economy?

• determining an efficient distribution of resources in a market system.

• signal for shortages and surpluses which help firms respond to changing market conditions

Advantage of market economy?

• Allocative efficiency• The best available model• BUT . . . (market failures)

Adverse selection

• When you do business with people you would be better off avoiding. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer

• “What you don’t know CAN hurt you”?

Informational asymmetry

• transactions where one party has more or better information than the other.

• E.g. – buying a used car, life insurance (adverse selection)

Perverse incentives

• an unintended and undesirable result which is contrary to the interests of the incentive makers

• E.g. car seats on airplanes

Principal-Agent problem

• principal–agent problem or agency dilemma concerns the difficulties in motivating one party (the "agent"), to act on behalf of another (the "principal").

• E.g. corporate management (agent) and shareholders (principal), fast food employees

prisoner's dilemma

• example of a game that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so

• Ac, Bc – 1 year, 1 year• Ac, Bs – 0 , 2 years• As, Bc – 2 years, 0• As, Bs – 3 months, 3 months

What is an externality?

• is a cost or benefit that is not transmitted through prices, and is incurred by a party who was not involved in the transaction.

• negative externality – pollution from a factory• positive externality – fire department

What is a public good?

Role of Government

• Stability• legal framework • Protection of property rights • Protection of contracts

What is a public good?

• Examples

What is productivity?

Why are many poor countries poor?

Are foreign sweat shops bad?

What is the primary role of the Federal Reserve?