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Principles of Microeconomics 愺 Mr. Lilly Topic 3 Skills
1. Know, and understand what it means, that economists generally make an assumption of purposive or instrumental behavior. (Goodwin p. 2-4 to 2-5 + slide 3-2.) (2-5) Purposive or instrumental behavior consists of actions taken with the expectation that these acts will lead to desired goals. Purposive Behavior • Also known as instrumental behavior • Behavior deliberately engaged in for the purpose of achieving a desired goal Non-purposive behavior • Irrational behavior which brings harm to self • Random, unpredictable behavior • Playful behavior which has no purpose other than the amusement of self or others. 2. Know the meaning of the expressions ¨extrinsic motivationĦe and ¨intrinsic motivation.Ħe Given an action taken by an economic actor and the primary reason for that action, be able to identify the motivation for the action as either extrinsic or intrinsic. (Goodwin pp. 2-5 to 2-7 + slides 3-3 to 3-5.) (2-5) Extrinsic motivation impetus to an activity that arises from reasons outside the actor and the activity, such as doing something for a reward in terms of money, status, or power or to avoid punishment. (2-6) Intrinsic motivation impetus to do an activity that arises from reasons inside the actor, such as doing the activity for enjoyment or out of ethical values or identity. Intrinsic Versus Extrinsic Motivations Extrinsic motivation: An impetus to perform an activity that arises from reasons outside the actor and the activity, such as doing something for a reward in terms of money, status, power, or to avoid punishment. Intrinsic motivation: An impetus to perform an activity that arises from reasons inside the actor, such as doing something for enjoyment or out of ethical values or identity. Intrinsic Versus Extrinsic Motivations True or False? The more you are motivated by intrinsic rewards, the more ¨characterĦe you are said to have. (True) ¨Character is what you do when no one is looking.Ħe - The Boy Scout manual Incentives Work on Extrinsic Motivations •The Three Handcarts •What is the problem? •What is the best solution to this problem? •How could changes in incentives be used to help solve this problem? •A Center for Dropouts • What effect would individualized instruction, paid childcare, and a weekly stipend have on dropout rates? 3. Know the meaning of the terms and expressions ¨self-interest,·Y ¨altruism,·Y and ¨concern for the common good.·Y Know that altruism is the opposite of pure self-interest. (Goodwin pp. 1-3 to 1-7 and/or slide 2-6.) (2-8) If economic actors in an exchange economy just follow their own self-interest, acting in the way that most benefits them as individuals. (2-8) The opposite of pure self-interest would be pure altruism. (2-8) Perhaps more relevant to economics, is the fact that much economic behavior may be motivated by a desire to advance the common good 愺 the general good, of which one≈s own interests are a part. Self-interest: That which benefits me personally. Altruism: Action taken to help others in need or peril with total disregard for one≈s own safety or welfare. Concern for the Common Good: Interest in preserving things everyone needs, such as clean air, clean water, safety from terrorism, a business environment dominated by honesty, and the prevention of nuclear war. 4. Know that even Adam Smith saw human beings as motivated by more than just concern for their own welfare. Be able to recognize the name of his second most famous work, in which he addressed at great length the need of (and the natural tendency for) people to take into account the welfare of others. (Goodwin p. 2-8 and slide 3-7.) Adam Smith, among others, would have disagreed with this extreme view.(His other most notable work, The Theory of Moral Sentiments, addressed at great length the need to take into account the welfare of others). Concern for one≈s own welfare <- Yin and Yang -> Concern for the welfare of others 5. Know how the Ultimatum game is played. Know how real-world results for the ultimatum game differ from the results predicted by the simple mechanical model of human economic behavior, and be able to explain why in your own words. (Goodwin pp. 2-9 to 2-10 + the article ¨The Civilizing Effect of the Market·Y + slides 3-8 to 3-9.) The Ultimatum Game •Divide into groups of 2 and play the ultimatum game. •What happened? •What does neoclassical economics predict would happen? Why Does Neoclassical Economics Fail to Predict the Outcome of the Ultimatum Game? •Material needs: Getting a slice of the good life for yourself. •Social needs: To feel needed by others and appreciated by others for the help you give. To feel you fit in to your society and your world. To feel you belong, are loved, and are lovable. •Esteem needs: To be looked up to by others. To be able to boss others around. To have more than everybody else. •Justice needs: To feel that opportunities and outcomes are fair both for you and for others you care about. 6. Understand the definition of the expression ¨rational choices.½\ Be able to recognize and generate examples of economic decision making under uncertainty in the real world. Understand that when rational decisions are made in a world of imperfect information, the result does not always advance the decision maker toward his or her goals. (Goodwin p. 2-11 and slide 3-10.) Rational Choices 愺 thoughtful choices that would normally be expected to move actors toward their goals. Information and Rationality True or False? If a person fails to achieve their desired goal, then their behavior was not rational. Rational choices: Thoughtful choices that would normally be expected to move economic actors toward their goals. Imperfect information examples: •If I buy this digital camera, will I like its features? Is there a better one for the money? •Will it break 3 months after I buy it? • Could I buy it somewhere for less? 7. Understand the meaning of the terms and expressions optimize, satisfice, melioration, and bounded rationality. Know which one of these four is included in the simple mechanical model of economic behavior. (Goodwin pp. 2-12 to 2-14 + slide 3-11.) (2-12) To optimize means to chose that option, out of all available options. (2-12) To satisfice means to choose a level of outcome that would be satisfactory and then seek an option that at least reaches that standard. (2-12, 13) meliorating – starting from the present level of achievement and continuously attempting to do better.. (2-13) bounded rationality – the identification of some arbitrarily defined subset of information to consider when making decisions. Do Individuals Optimize, Satisfice, or Meliorate? Should We Care? •Neoclassical economics assume they optimize. •If people actually satisfice or meliorate, will the behavioral predictions of neoclassical economics still largely hold true? •More importantly, will government policymakers focus on measures of success that lead to maximum happiness? 8. Understand the meaning of the expressions “high time discount rate” and “low time discount rate.” (Goodwin pp. 2-14 to 2-15 and slides 3-12 to 3-13.) (2-14) High time discount rate – the economist’s phrase for describing a strong preference for present benefits over those in the future. (2-14) Low time discount rate – the economist’s phrase for describing a strong concern with future benefits, even if getting them is costly in the present. Now or Later? High time discount rate: A person with a high time discount rate has the attitude “Life is short, and tomorrow is uncertain. I am going to live primarily for today.” Low time discount rate: A person with a low time discount rate has the attitude “I will experience pleasure and pain when I’m fifty just as intensely as I am experiencing them now. I need to balance my activities between living for today and building for the future.” Discussion Question “If a person decides to get a college education, can we safely conclude that they have a low time discount rate?” •There is at least one other possible explanation (Not if they enjoyed it) 9. Know the three sectors of the economy as explained by the Goodwin text. Know several examples of economic actors in each of the three sectors. Know several examples of economic interactions between two of the sectors. (Goodwin pp. 2-16 to 2-26 and slide 3-14.) The Three Sectors of the Economy •The Core Sector – consists of households, families, and communities. •The Public Purpose Sector – consists of governments (federal, state, local) and non-profit organizations. •The Business Sector – is composed of firms that produce goods and services for profitable sale. 10. Know the two distinguishing characteristics of economic activities within the core sector of the economy. Know that approximately 30% of all economic activity (value creation) in the United States occurs in the core sector. Know that the unpaid services performed in the core sector tend to be undervalued by our society. (Goodwin pp. 2-16 to 2-17, plus figure 2.4 on page 2-27, + slides 3-15 and 3-16.) Economic Activities Within the Core Sector •The result or end product of work is also the reward for the work. –Tomatoes from a garden –A happy, healthy child •The ability of the recipient to pay is not considered in the production decision. –The kids need lunch, but do they have the ability to pay? Economic Activities Within the Core Sector •Are a significant generator of value –The value of unpaid elder care alone is worth $200 billion annually! –Six times as much value as is generated by elder care in the business sector! –The unpaid services performed in the core sector tend to be undervalued by our society. •Are often of much higher quality –Who would you rather have taking care of you, your mom or a paid babysitter? 11. Know what “public goods” are. Know why they should be provided by the public purpose sector. Know what nondiminishable, nonexcludable, and free riders mean in the context of public goods. (Goodwin pp. 2-18 to 2-19 + slide 3-17.) (2-18) public goods – goods for which (1) use by one person does not diminish usefulness to others, and (2) it would be difficult to exclude anyone from benefiting. (2-18) nondiminishable – a public good (or service ) is one where the use of it by one person does not diminish the ability of another person to benefit from it (“nondiminishable”) (2-18) and where it would be difficult to keep any individual from enjoying its benefit (“nonexcludable”)
(2-18) free riders – who would like to enjoy a benefit without paying Goods for which (1) use by one person does not diminish usefulness to others, and (2) it would be difficult to exclude anyone from benefiting, i.e. goods which are nondiminishable and nonexcludable. Examples: •Local police protection/protection of basic liberties •Local fire protection •National defense •Clean air •Enforcement of contracts •Enforcement of basic private property rights 12. Be able to recognize as false the statements “firms act only to maximize profits,” “firms act only from self-interest” and “it is necessary and appropriate for business owners and managers to act in the short-term best interests of the business in all matters and at all times.” (Goodwin pp. 2-20 to 2-21 and slide 3-18.) The Business Sector True or False? “The purpose of engaging in business is to make a profit; therefore it is necessary and appropriate for business owners and managers to act in the short-term best interests of the business in all matters and at all times.” •Businesses need the cooperation of their workers to be fully successful. •This is even more true in “customer service” industries such as airlines, hotels, and restaurants. •Also, businesses are run by people! 13. Be able to recognize key element of economics #7 and know what it means. (Gwartney and Stroup pp. 19-20 and slide 3-19.)
(done) Is There Anything Good About Profit? “Income is compensation derived from the provision of services to others. People earn income by helping others.” Is income really proportional to value created in the business sector? •More so every year •Enough so that the trend worldwide is toward greater use of free markets –China, Vietnam, Sweden, Finland, United Kingdom, et al. 14. Know the three types of behavior that explain why people do things. (Book only: Goodwin pp. 2-10 to 2-11.) Bahavior: Habit, Constraint, or Choice? (2-10) Habitual behavior: repetivitive behavior that involves minimal thought and is often based on social custom. (2-10) Constrained behavior – behavior of an actor subject to limits set by others, who usually have some power over the actor. (2-11) Choice behavior – behavior selected by an actor from a range of alternatives, generally involving the actor’s conscious deliberation. 15. Know that, in the simple mechanical model, firms are treated as monolithic decision making entities. The fact that they are actually voluntary associations of individual employees, managers, and owners, each with their own goals and interests, is ignored. (Book only: Goodwin p. 2-30.) Three economic activities in simple mechanical model were Production, exchange, consumption. 16. Know that the natural resource base of the economy, the public purpose sector, and the resource maintenance activity are all left out of the simple mechanical model. (Goodwin pp. 2-30 to 2-31 and instructor’s notes on slide 3-20.) (2-30) circular flow diagram – represents the simple mechanical model view of an economy as consisting of households and firms engaging in exchange. 1. What does this picture show? 2. What’s missing from this picture? (the public purpose sector, the resource maintenance activity, and the global ecosystem) 3. What’s the most important thing wrong with this picture? (Implies infinite growth is possible.) Note that rapid and infinite economic growth, if possible, would be highly desirable. That’s how we could give the many have-nots in the world great material comfort. We could eliminate hunger, malnutrition, and poverty. We could eliminate much crime and war. We could greatly increase human happiness.
17. Know that better decisions about the desirability of economic growth can be obtained by viewing the circular flow diagram (Goodwin figure 2.6) as a subsystem of the global ecosystem. Understand figure 3-1 in slide 3-21. Know, for example, that the only input to the global ecosystem is solar energy, and the only output is waste heat. Know that the economic subsystem contains the circular flow diagram pictured in Goodwin figure 2.6. Know that the primary inputs to the economic subsystem are materials, fossil fuels, and solar energy. Know that the primary outputs of the economic subsystem are industrial wastes, pollution, and waste heat. (Goodwin pp. 2-30 to 2-32 + slides 3-20 and 3-21.) What does this picture show? Households and businesses trade labor for money for goods and services within the economic subsystem, but ultimately, this subsystem cannot grow beyond a specific size. It is not a “perpetual motion machine” that can grow without limit and meet all human wants and needs regardless of the size of the human population.
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