Freakonomics
Ch. 3: Why Do Drug Dealers Still Live with
Their Moms? Economic Concepts
Essential Question:
What economic concepts will be discussed in the chapter 3 of
Freakonomics?
All the costs faced by
companies can be broken
into two main categories
• Fixed costs = costs that
are independent of output
• Variable costs = costs
that vary with output
• Generally variable costs
increase at a constant rate
relative to labor and capital
Fixed and Variable Costs
of Production
• “Winner Take All” Labor Market = Many laborers
compete for a position in the market, but few actually
succeed in finding employment.
• Those few who do are paid extraordinarily large salaries.
• The authors refers to this as a tournament -> refers to a
situation in which many players compete against each
other and, one by one, are eliminated.
• Finally, a victor emerges who takes home the prize.
A “winner take all” labor
market
In this chapter we will be looking at the…
Price of labor
• Whenever there are a lot of people willing and able to
perform a job, that job doesn’t pay well.
• In a capitalist society, intense competition will drive prices
down.
Price of Product due to Technological Change
• A technological change made a product cheaper, thus
increasing the supply, thus increasing the demand
Supply and Demand
Why are people willing to do a job for little pay and
many risks?
• Answer = those who succeed in this tournament labor
market are handsomely rewarded, and each believes he
can succeed.
Incentives between Owners and Workers
• Owners = seek to maximize profits
• Workers = seek to maximize pay or influence
Incentives Matter
1. What the two main categories of costs incurred by a
company?
2. What is an example of “winner take all” labor market?
3. What is responsible for driving prices down?
4. How are incentives different for owners and workers?
Review