{
"cells": [
{
"cell_type": "markdown",
"metadata": {
"collapsed": true
},
"source": [
"# Lecture 1 [econ 133]\n",
"## Prof. Rabanal"
]
},
{
"cell_type": "markdown",
"metadata": {},
"source": [
"### Incentives \n",
"Economists think that people respond predictably to incentives. For example, when British government decided to ship convicts to Australia, the resulting conditions on board were monstrous. On one such voyage more than a third died. Consider this: if a captain is paid for every prisoner taken on board, there is little incentive to treat these prisoners well. When captains are paid for surviving prisoners, their incentives change.\n",
"\n",
"There are still some problems in aligning the right incentives in markets. For example, in 2016, Wells Fargo Bank, one of the largest financial services companies in the United States, faced public outrage because its employees opened over two million unauthorized bank and credit card accounts. Some of the former employees said that they sold these unauthorized products to reach monthly sales quotas and that management tacitly approved the deceptive practices. This leads to a conflict between the individual interest agains the social. \n",
"\n",
"![alt text](http://web.colby.edu/cell/files/2017/08/wf.jpg \"Title\")\n"
]
},
{
"cell_type": "markdown",
"metadata": {},
"source": [
"\n",
"\n",
"### Self-interest and social interest\n",
"\n",
"Just as in example above, in order to get good outcomes, you sometimes need to align the social and self-interest. Adam Smith said that when markets work, pursuing self-interest can promote social interest.\n",
"\n",
"Sometimes, markets do not align social and self-interest. In such cases, we observe bad outcomes, such as pollution, overfishing, etc. We can improve markets by changing incentives with taxes, subsidies and other regulations/mechanisms.\n",
"\n",
"Of course, this does not mean that always we need formal institutions to get along. For example, consider the following experiment that compares 3 year old children with chimpanzees. Usually, kids tend to collaborate and are able to exclude free riders (a partner who chooses not to participate in the task). \n",
"\n",
"![alt text](http://web.colby.edu/cell/files/2017/08/coop.png \"Title\")\n",
"\n",
"It is important to mention that we also have other regarding preferences.\n",
"\n",
"\n",
"### Trade-offs\n",
"Every choice involves an opportunity cost. An opportunity cost is the value of opportunities lost. By showing up to class, you are forgoing some other activity. By attending college, you are forgoing income of a full-time job in hopes that you will make enough after college to make up for this.\n",
"\n",
"In general, we are going to assume that we have some constraints of resources. \n",
"\n",
"\n",
"### Thinking on the margin \n",
"We want to consider choices in terms of marginal costs and benefits, which help highlight the trade offs we face. \n",
"\n",
"For example, when we talk about **marginal cost** means the extra cost (for example in $$) to produce an additional unit. This does not consider the cost of ALL units of production. We are just analyzing what the cost is for the ***extra*** unit. \n",
"\n",
"### Trade\n",
"Better outcomes can be achieved for all when we trade. Specialization and economies of scale can help increase production. \n",
"\n",
"Specialization is related to the concept of trade-off. People are better at doing different stuff, so you should do what you do best. \n",
"\n",
"Economies of scale means that you are better at something as you do it more. \n",
"\n",
"We will cover in detail these concepts in the following weeks. \n",
"\n",
"For now, it is perhaps important to say that trade is related to the growth of an economy. Let's look at the history. Why do you think this happened? \n",
"\n",
"\n",
"![alt text](http://web.colby.edu/cell/files/2017/08/trade.png \"Title\")\n",
"\n",
"\n",
"\n"
]
},
{
"cell_type": "code",
"execution_count": 1,
"metadata": {},
"outputs": [
{
"data": {
"text/html": [
"\n",
"\n",
"\n",
"\n",
"\n",
"\n",
"\n",
"\n"
],
"text/plain": [
""
]
},
"execution_count": 1,
"metadata": {},
"output_type": "execute_result"
}
],
"source": [
"from IPython.core.display import HTML\n",
"import urllib2\n",
"HTML(urllib2.urlopen('https://cdn.rawgit.com/rabsjp/12a2a65da4e56271fcc1230743fb519d/raw/93bbd513c205a3183941b6230a8a671a8923332c/custom.css').read())"
]
},
{
"cell_type": "code",
"execution_count": null,
"metadata": {
"collapsed": true
},
"outputs": [],
"source": []
}
],
"metadata": {
"celltoolbar": "Raw Cell Format",
"kernelspec": {
"display_name": "Python 2",
"language": "python",
"name": "python2"
},
"language_info": {
"codemirror_mode": {
"name": "ipython",
"version": 2
},
"file_extension": ".py",
"mimetype": "text/x-python",
"name": "python",
"nbconvert_exporter": "python",
"pygments_lexer": "ipython2",
"version": "2.7.10"
}
},
"nbformat": 4,
"nbformat_minor": 1
}