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| | {{Economics_Lectures}} | | {{Economics_Lectures}} |
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| − | <in progress; trim this lecture; add history about economics centuries ago in shipping people to Australia from England>
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| − | Over 400 years ago, William Shakespeare wrote a play (Henry VI Part II) in which one of his characters exclaimed upon seizing power, "The first thing we do, let’s kill all the lawyers." It is one of Shakespeare's most famous lines.
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| − | A smart economist might observe that Shakespeare was expressing the undesirability of transaction costs caused by lawyers nearly 200 years before Adam Smith discovered the invisible hand, and over 350 years before Ronald Coase discovered and criticized transaction costs. Perhaps Shakespeare understood economics before it was even recognized as a field of study!<ref>Believe it or not, lawyers claim that Shakespeare was actually ''complimenting'' them, because the line was spoken by an enemy of freedom. See http://www.johnlocke.org/news_columns/display_story.html?id=962</ref>
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| − | But many careers in addition to lawyers create transaction costs. Real estate brokers, stock brokers, accountants, waiters and waitresses, and countless other occupations live off of transaction costs. One student who took this course in 2004 is paying her way through college by working as a waitress in a fancy Manhattan restaurant, where the tips can be very profitable! Waiting on tables is a service, and some develop the skill much better than others. (That student first learned how to wait on tables in Hackettstown.) There will always be restaurants, even when the economy is not doing well, and there is nothing wrong with developing a skill as a good waiter or waitress. People are going to pay transaction costs in many different ways, and it is better to be successful at improving delivery of those services than unsuccessful at complaining about them!
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| | == The "Firm" == | | == The "Firm" == |
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| | Debate question: Should the government bail out a company to keep it from going bankrupt? | | Debate question: Should the government bail out a company to keep it from going bankrupt? |
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| − | ==Alfred Sloan and Charity==
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| − | Born in 1875 in Brooklyn, Alfred P. Sloan, Jr., was a hard-working student. After attending college, he went to work in ball-bearing factory in New Jersey. His employer was having financial difficulties, and Alfred persuaded his father to buy the troubled company at a discount. His father was an importer of coffee and knew nothing about the ball-bearing business. Alfred took it over and spent all his time and energy trying to make a success out of the struggling firm.
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| − | In just six months Alfred was able to revive the company, and then ran it for 17 years before selling it in 1916 at a handsome profit to the founder of the General Motors (GM) car company. Alfred then joined GM and spent five years studying its operation in detail as he worked there. He wrote and published “The Organizational Study,” which was the first treatise on management ever written. His inspiration was the U.S. Constitution and its system of checks and balances. Sloan’s vision was to divide GM into many small divisions that could have their own revenue and cost targets, and check and balance other divisions in the company. The high performers could be easily identified, rewarded, and given greater resources; the poor performers could be replaced.
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| − | Eventually Sloan himself was rewarded for his valuable work by being promoted to become Chairman of GM in 1923. When Sloan took over leadership of GM, it had less than one-fifth of the car market. Ford Motor Company, founded by the legendary Henry Ford, was much bigger and more successful, selling more than half of all cars in the market. But within a mere eight years, by 1931, GM surpassed Ford based on Sloan’s organizational principles. GM became the largest corporation in the world. Sloan’s vision was for GM to make “a car for every purse and purpose.” Many felt that GM's success was important to the success of the United States. “What’s good for GM is good for America” became a popular saying due to Sloan’s leadership of the company.
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| − | Sloan was an example of what some students discussed in their answer to the homework question about charity and the free market. Sloan made a fortune in the free market, and that enabled him to make enormous gifts to charity. He kindly donated much of his wealth to found the Sloan-Kettering Cancer Center in New York, considered the finest in the world for treating cancer.
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| − | Long after Sloan died, GM collapsed. In 2009, it failed and was taken over by the United States government. Most firms do fail, if not in the first few years then later. But Sloan's charity continues to help cancer patients at the Sloan-Kettering Cancer Center.
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| − | == "Real" Price and the CPI ==
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| − | Let's return for a moment to an important concept we mentioned earlier in this course: opportunity cost. Recall what the opportunity cost is: it is the value of the best forgone alternative. Now consider this: '''''the real price of a good is its opportunity cost'''''. When someone buys something for $10, the real cost of that good is the best alternative use of that $10. The real price of watching television for one hour is value of that time if you had spent it in the best way possible. It may seem like the cost of that hour watching television was $0, but in fact the real cost is the best alternative use of that hour. The real price of that hour of television watching is your highest hourly wage if you worked, or your future wages made possible by studying harder now.
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| − | Defining the real price of a good in terms of opportunity cost is helpful in avoiding the confusion caused by "inflation". Inflation is the amount that prices increase each year for the same goods. Back in the late 1970s, inflation was more than 10% per year. What cost $10 one year would cost $11 the next year, and over $12 in the third year.
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| − | Economists created something called the “Consumer Price Index,” or CPI, to measure changes in basic prices of many goods over time. It looks at the typical purchases by urban (not farming) families and monitors the change in prices of those goods and services from month-to-month. It includes the costs of food, beverages, housing, clothes, transportation, medical care, recreation, education, and even services like haircuts. It then combines all those values into one number. To make it easier to compare, the values are combined in a way that the CPI for the period 1982-84 averaged “100". In January 2004, the CPI was 185.2. You can view all the CPI numbers going back nearly a hundred years on the internet.<ref>ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt</ref> In July 2009, the CPI was 215.351. Inflation causes it to go higher and higher, as the government prints more and more dollars and cause them to lose their value.
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| − | By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive. If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.
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| − | Now think about this: if inflation is 10% per year for three years, but one particular good keeps the same price during those three years, then its opportunity cost and real price actually decreased. Think about that. An honors homework problem asks you to explain why.
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| | ==Assignment== | | ==Assignment== |
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| | <br>(d) use resources such that their marginal products per unit cost are equal | | <br>(d) use resources such that their marginal products per unit cost are equal |
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| − | 13. Charity, revisited: Sloan's charitable efforts (Sloan-Kettering) have lasted longer than his business efforts (General Motors). Is this just by chance, or are there reasons why charity lasts longer than business? Feel free to revisit the issue of the interplay between the free market and charity. | + | 13. The greater the number of substitutes for a good, is it more or less price elastic? Explain briefly. |
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| − | 14. The greater the number of substitutes for a good, is it more or less price elastic? Explain briefly.
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| − | 15. The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic? Explain briefly.
| + | 14. The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic? Explain briefly. |
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| − | 16. Would government prefer taxing a good that is price elastic or price inelastic? Explain briefly.
| + | 15. Would government prefer taxing a good that is price elastic or price inelastic? Explain briefly. |
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| − | 17. Suppose french fries cost $1 and ketchup 10 cents. When the price of ketchup goes up to 20 cents, the quantity demanded for french fries falls by 10%. What is the cross elasticity of demand for french fries with respect to ketchup? Show your work and state whether these goods are complements or substitutes.
| + | 16. Suppose french fries cost $1 and ketchup 10 cents. When the price of ketchup goes up to 20 cents, the quantity demanded for french fries falls by 10%. What is the cross elasticity of demand for french fries with respect to ketchup? Show your work and state whether these goods are complements or substitutes. |
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| | === Extra Credit for Anyone === | | === Extra Credit for Anyone === |
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| − | 14. The most efficient "division of labor" in the world is ... traditional marriage between a man and woman.
| + | 17. The most efficient "division of labor" in the world is ... traditional marriage between a man and woman. |
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| | == References == | | == References == |