Econ

Econ. 170: Microeconomics

Olds – Chapter notes: Cowen & Tabarrock

Chapter 1: The Big Ideas

Big Idea One: Incentives Matter  Incentives are rewards and penalties that moderate behavior  People respond in predictable ways to all kind of incentives  Money  Power  Fame  Reputation  Sex  Love  Security  Benevolence  Fairness o Example: survival rate of prisoners rose when captains transporting prisoners were paid by live bodies delivered to Australia than by prisoners boarded in England. o Example: public school teachers tend to accept lower salaries in exchange for better health and retirement benefits, i.e., security Big Idea Two: Good Institutions Align Self-Interest with the Social Interest  When self-interest aligns with broader public interest, good outcomes result o E.g., supermarkets stock the products we prefer o Many markets operate in the private and social interest  When self-interest and social interest are at odds, bad outcomes often result o Not all markets align self-interest with social interest  E.g. fishermen overfish the oceans E.g., coal companies pollute the atmosphere, destroy mountains  When markets don’t properly align self-interest with social interest, government can sometimes improve the situation by offering better incentives: taxes, subsidies, regulations Big Idea Three: Tradeoffs are Everywhere  All activities involve tradeoffs: no one can have everything they want o Example: Merck withdraws Vioxx (anti-arthritis drug) from market, 2004; a case of trading off between drug lag and drug loss  Drug lag: time and cost of testing a drug for safety

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Drug loss: the cost of lives lost because an approved drug is not safe and/or because a drug is not developed Opportunity cost is how tradeoffs are measured o Opportunity cost is the value of the opportunities lost. o E.g. opportunity cost of college: tuition, books, foregone earnings, anxiety & stress. It does NOT include room & board which is a cost regardless of...