Class #14 10/3/11

In class Rizzo said that the basic economic principles are
1. how people make decisions
2. how people interact
3. how aggregates work (i.e. the economy)

1. people face tradeoffs (nothing is free)
2. opportunity costs --> applications: broken window fallacy
3. marginal analysis
3a. application subjectivism
4. sunk costs
5. people respond to incentives

We live in a world characterized by scarcity. In presence of scarcity, we're always making tradeoffs.
Nothing is free. A "free" product always costs time resources and money to produce. For something to be truly free, when you produce and consume it, no resources are consumed, and you can use it without sacrificing anything else.  When we execute trade offs, it reveals our true values. The more money that we spend on national defense means the less money that we have to spend on education, fixing roads, and other things. To clean up the polluted rivers and lakes of America we need more resources. Economists always try to find the win-win solution in things.

Rizzo said that people who down size are not doing the social good. Rizzo quit his investment banking job to teach. He makes a lot less money, but he is happier.

There are not enough doctors to have free health care for everyone. We can spend too much time trying to get an A in Rizzo's class. We can have too much safety which in the end hurts us. FDA holding important drugs off the market for testing, people driving faster because it is required for them to wear seat belts so they are more daring. 500 billion dollars are spent on research and development of new drugs, but only 20 new drugs come out each year. The more testing we do= the less profit opportunity. When things are successful, company's get less money to spend. When we endure a trade off we endure a cost. A cost is anything that consumes resources. Taxes aren't costs. The right costs to worry about aren't just direct causes of actions.

Opportunity costs are understanding what we give up to get. It is the net value of the next best opportunity. Lebron James understands opportunity costs by not going to colege. He is making a lot more money sooner. If we win a "free" Bruce Springsteen ticket, but we can buy a Barry Manilow ticket for $40 for the same night when we would spend up to $50 for one, then the opportunity costs of seeing Springsteen is $10. We need to get $10 of pleasure from Springsteen in order to have the same enjoyment that we would from Manilow.

The broken window fallacy-Rizzo's against this because it is bad economics. We only see the direct part when this happens. Don’t see what would have happened if roof wasn’t blown off. No new jobs are created from this. Spending money on roof but not on drive way making progress go nowhere.  Net no change. Not spending money else where where it’s needed. Doesn’t spend money on roof because we would have sent money else where. Before storm roof and $1000 after storm just $1000. Net negative. World is poorer from this. We are pooer by amount of the damage that the storm causes.