The Laws of Economics
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Use this chart to find your role in the simulation. Sit at the seat assigned to your role. Do not open the bag at your seat until you are told to do so. Name Adhikari Samrachana Aldrich Laura Andrei Amanda Austin Ben Barros Katie Barrows Christie Bell David Bernier Arcand Philippe Boskovski Joe Buchanan Joy Calise Cristina Chang Elizabeth Choi Moses Crail Drew Crooks Ashley Dhar Sreyashe Diggs Amy DiMaggio Vanessa Ennis Sean Galvez Xondra Grape Richard Guzenko Maria Harning Brian Harris Brandon Herman Lisa Huerter John Inden Margaret Johnson Jennifer Role Red Firm 1 Red Firm 2 Red Firm 3 Red Firm 4 Red Firm 5 Red Firm 6 Red Firm 7 Red Firm 8 Red Firm 9 Red Firm 10 Red Firm 11 Red Firm 12 Red Firm 13 Red Firm 14 Blue Firm 1 Blue Firm 2 Blue Firm 3 Blue Firm 4 Blue Firm 5 Blue Firm 6 Blue Firm 7 Blue Firm 8 Blue Firm 9 Blue Firm 10 Blue Firm 11 Blue Firm 12 Blue Firm 13 Blue Firm 14 Name Kotkin Rachel LeFebvre Nichole Leon Alejandra McClutchy Sarah Nguyen Helen Peterson Jenna Potter Sarah Potter Dylan Powell Andrew Quinn Abigail Rosenthal Evan Scott Katherine Shivers Tionya Smith Julie Smith Ross Sriram Matt Stegman Robert Stewart Michaela Sung Vannie Syeddah Ayesha Sylaj Adelina Thompson Jessica Turcotte Scott Tushe Isida Ueyama Kimberly Underwood Brittany Vasilyev Pavel Wang Jusy Yee Natalie Zhang Di Role Red Worker 1 Red Worker 2 Red Worker 3 Red Worker 4 Red Worker 5 Red Worker 6 Red Worker 7 Red Worker 8 Red Worker 9 Red Worker 10 Red Worker 11 Red Worker 12 Red Worker 13 Red Worker 14 Red Worker 15 Blue Worker 1 Blue Worker 2 Blue Worker 3 Blue Worker 4 Blue Worker 5 Blue Worker 6 Blue Worker 7 Blue Worker 8 Blue Worker 9 Blue Worker 10 Blue Worker 11 Blue Worker 12 Blue Worker 13 Blue Worker 14 Blue Worker 15 Laws of Economics • Everything is scarce. Is there anything you consume that is not scarce? What does it mean to “consume” something? • Every choice includes an opportunity cost (tradeoff). What do you give up in order to get something else? Mom-Pop shops v. Big Box Retailers Pollution v. No Pollution Laws of Economics • The cosmos is a non-linear place. Opposing consumption forces: consumption & variety Opposing production forces: specialization & congestion • People respond to incentives. Airplanes and car seats Entrepreneurship and taxes Russians and dead light bulbs Laws of Economics You want it. • Everything is scarce. • Every choice includes an opportunity cost (tradeoff). • The cosmos is a non-linear place. • People respond to incentives. What are you going to do about it? You can’t have it. Laws of Economics Economics is often non-intuitive. When it comes to economics, human intuition sometimes fails because the human mind has evolved to wring maximal use out of limited information. Good for making snap decisions. Bad for making thoughtful decisions. Left half of room: Put your heads down. Right half of room: Write what you read. The average person in Albania earns an annual income of $600 (in U.S. dollars). Right half of room: Put your heads down. Left half of room: Write what you read. The average person in the United States earns an annual income of $32,000. The average person on planet Earth earns what annual income (in U.S. dollars)? Anchoring When we see a piece of information, we evaluate subsequent information in light of the first piece of information. Information News interview of a single mother working three jobs to support her family. Policy Question Do we need welfare reform? Problem How common is this example? Left half of room: Put your heads down. Right half of room: Read and answer. Should we require school districts to pay to install seat belts on school buses? 1 Definitely not! 2 3 4 5 Absolutely! Right half of room: Put your heads down. Left half of room: Read and answer. Every year in the U.S., 17,000 children are treated in emergency rooms for injuries sustained in school buses accidents. Most of these injuries could have been avoided had the children been wearing seat belts. Should we require school districts to pay to install seat belts on school buses? 1 Definitely not! 2 3 4 5 Absolutely! Availability It’s easier to see what’s in front of us that it is to see what isn’t. Information News report showing the benefit of school bus seat belts. Policy Question Should we require seat belts in school buses? Problem What is the cost? What does it cost to save a life? Seat belts in school buses Airbags Heart transplant Colonscopy every 10 years PAP smear every 3 years Malaria prevention Smoking cessation intervention Mitigate global warming Malaria treatment Midwife training in Third World HIV blood test for sex workers Cost per Life Saved $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Seat belts in school buses Airbags Heart transplant Colonscopy every 10 years PAP smear every 3 years Malaria prevention Smoking cessation intervention Mitigate global warming Malaria treatment Midwife training in Third World HIV blood test for sex workers Cost per Life Saved $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Seat belts in school buses Airbags Heart transplant Colonscopy every 10 years PAP smear every 3 years Malaria prevention Smoking cessation intervention Mitigate global warming Malaria treatment Midwife training in Third World HIV blood test for sex workers Cost per Life Saved $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Seat belts in school buses Airbags Heart transplant Colonscopy every 10 years PAP smear every 3 years Malaria prevention Smoking cessation intervention Mitigate global warming Malaria treatment Midwife training in Third World HIV blood test for sex workers Cost per Life Saved $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Seat belts in school buses Airbags Heart transplant Colonscopy every 10 years PAP smear every 3 years Malaria prevention Smoking cessation intervention Mitigate global warming Malaria treatment Midwife training in Third World HIV blood test for sex workers Cost per Life Saved $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 But, we’re talking about saving children’s lives. You can’t put a price on that! If it saves just one life, no price is too much! Bring it on! Spending $2.75 million on bus seat belts will save 1 life. Spending $2.75 million on malaria prevention will save 275,000 lives. Cost of 1 life saved via seat belts is 275,000 lives lost via malaria. Everything is scarce. Every choice includes a tradeoff. Laws of Economics Given that everything is scarce, every choice will involve a tradeoff. Who decides what tradeoffs are acceptable? Deciding by vote allows everyone an equal say. Should everyone have equal say? Should we weight each vote based on how strongly the voter feels about the tradeoff? How do we know how strongly the voter feels? Voter has incentive to lie! Laws of Economics Prices are much more than “how much something costs.” Prices signal how strongly the community feels about things. All other things equal… • The more people want something, the higher the price. • The greater the opportunity cost of bringing something to market, the higher the price. Economic Models d m 0.000135 0.0011v 0.000024v d stopping distance (feet) v velocity (mph) m mass (lbs) 2 Economic Models m 1,750 lbs. d 60 ft. v 50 mph Economic Models m 1,750 lbs. d 60 ft. v 50 mph d m 0.000135 0.0011v 0.000024v 2 m 1,750 lbs. v 50 mph d 1750 0.000135 0.0011 50 0.000024 50 2 201 ft. Economic Models Criticism: Ignoring factors that impact model results • Is the driver cautious? • Does the driver have good reaction time? Criticism: Issues that invalidate the model • The car isn’t moving. • The car has no mass. Economic Models The point of the economic model is to strip away: • Irrelevant information (e.g., the color of the car), • Relevant but individual specific information (e.g., the reaction time of the driver), and • Relevant but negligible information (e.g., the mass of the driver). The Players and the Goals In this experiment, there are WORKERS and FIRMS. WORKERS sell labor to the FIRMS. FIRMS make stuff and sell stuff to the WORKERS. The Players and the Goals Two types of worker • Red workers (know how to make Red stuff) • Blue workers (know how to make Blue stuff) Each worker’s goal: Maximize utility Three things make you happy: Red Stuff, Blue Stuff, and Leisure The Players and the Goals Two types of firm • Red firms make and sell Red stuff • Blue firms make and sell Blue stuff Each firm’s goal: Maximize profit Profit = Ending $ – Starting $ Labor Market Labor = 1 hour of Blue labor Labor = 1 hour of Red labor $ = 1 dollar Labor Market Red workers sell some of their labor to Red firms for $. Blue workers sell some of their labor to Blue firms for $. Labor $ Labor $ Leisure Red workers turn in their unsold labor for leisure. Leisure Unsold Labor Leisure Blue workers turn in their unsold labor for leisure. Leisure Unsold Labor Labor is Transformed into Stuff! Labor Stuff Labor Stuff Goods Market Stuff = 1 unit of Blue stuff Stuff = 1 unit of Red stuff $ = 1 dollar Goods Market Red workers buy Red stuff and Blue stuff. Stuff $ Stuff Goods Market Blue workers buy Red stuff and Blue stuff. Stuff $ Stuff How Happy Are the Consumers? Happiness = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1) How Profitable Are the Producers? Profit = Ending $ – Starting $ Ready to begin… Labor Market Round = Labor Red workers sell some of your labor to Red firms for $. Blue workers sell some of your labor to Blue firms for $. Happiness = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1) Leisure Round 1. Red workers return unsold labor for Leisure. Leisure to moderator. 3. Write down how much Leisure you have. 2. Report your 1. Blue workers return unsold labor for Leisure. Leisure to moderator. 3. Write down how much Leisure you have. 2. Report your Leisure Leisure Production Round 1. Red firms report hired labor to moderator. 2. Report remaining money to moderator. Labor Stuff 1. Blue firms report hired labor to moderator. 2. Report remaining money to moderator. Labor Stuff Goods Market Round = Stuff Red workers buy Red stuff and Blue stuff. Blue workers buy Red stuff and Blue stuff. Happiness = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1) Report 1. Red workers report red stuff purchased to moderator. 2. Report blue stuff purchased to moderator. 1. Blue workers report red stuff purchased to moderator. 2. Report blue stuff purchased to moderator. 1. Red firms report unsold red stuff to moderator. 2. Report remaining money to moderator. 1. Blue firms report unsold blue stuff to moderator. 2. Report remaining money to moderator. New Rules The discovery of the nature of redness enables Red Firms to produce the same amount of Red Stuff using the one-third the amount of Red Labor. Stuff Labor Stuff Stuff Questions What will be the effect (if any) on the price of red stuff? What will be the effect (if any) on the price of blue stuff? What will be the effect (if any) on the red wage rate? What will be the effect (if any) on the blue wage rate? What will be the effect (if any) on red worker employment? What will be the effect (if any) on blue worker employment? What will be the effect (if any) on red firm profits? What will be the effect (if any) on blue firm profits? Will the red workers be better or worse off? Will the blue workers be better or worse off? Ready to begin… Labor Market Round = Labor Red workers sell some of your labor to Red firms for $. Blue workers sell some of your labor to Blue firms for $. Happiness = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1) Leisure Round 1. Red workers return unsold labor for Leisure. Leisure to moderator. 3. Write down how much Leisure you have. 2. Report your 1. Blue workers return unsold labor for Leisure. Leisure to moderator. 3. Write down how much Leisure you have. 2. Report your Leisure Leisure Production Round 1. Red firms report hired labor to moderator. 2. Report remaining money to moderator. 3. Triple your quantity of red stuff. Labor 1. Blue firms report hired labor to moderator. 2. Report remaining money to moderator. Labor Stuff Stuff Stuff Stuff Goods Market Round = Stuff Red workers buy Red stuff and Blue stuff. Blue workers buy Red stuff and Blue stuff. Happiness = (Red Stuff + 1) (Blue Stuff + 1) (Leisure + 1) Report 1. Red workers report red stuff purchased to moderator. 2. Report blue stuff purchased to moderator. 1. Blue workers report red stuff purchased to moderator. 2. Report blue stuff purchased to moderator. 1. Red firms report unsold red stuff to moderator. 2. Report remaining money to moderator. 1. Blue firms report unsold blue stuff to moderator. 2. Report remaining money to moderator. Results… $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Red Wage Rate Blue Wage Rate Round 1 Price of Red Stuff Round 2 Price of Blue Stuff 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Avg Red Utility Avg Blue Utility Round 1 Round 2 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Red Employment Rate Blue Employment Rate Round 1 Round 2 $1 $1 $1 $1 $1 $1 $0 $0 $0 $0 $0 Red Profits (total) Blue Profits (total) Round 1 Round 2 RR units of red stuff consumed by the red player RB units of red stuff consumed by the blue player B R units of blue stuff consumed by the red player B B units of blue stuff consumed by the blue player LR units of labor sold by the red player LB units of labor sold by the blue player E R units of labor endowed to the red player E B units of labor endowed to the blue player PR price per unit of red stuff PB price per unit of blue stuff WR wage per unit of red labor WB wage per unit of blue labor N R number of red workers N B number of blue workers FR number of red firms FB number of blue firms R output of red industry B output of blue industry Utility functions U R RR 1B R 1E R LR 1 U B RB 1B B 1E B LB 1 Constraints WR LR PR RR PB B R WB LB PR RB PB B B Utility maximizing consumption WR 1 E R 2PR PB RR 3PR WB 1 E B 2PR PB RB 3PR 2WR 1 E R PR PB 2WB 1 E B PR PB WR 1 E R PR 2PB BR 3PB LR 3WR WB 1 E B PR 2PB BB 3PB LB 3WB
