Changes

That dilemma presented itself to the Portland Trailblazers at a time when it had good guards, but needed a center.  The best player available at the time of its selection was Michael Jordan, a guard, but the team felt it needed to pick a center to fill the bigger need of the team.  It decided not to pick Michael Jordan and selected a center/power forward named Sam Bowie instead.  The next team in the draft, the Chicago Bulls, then selected Michael Jordan and he eventually led it to six NBA championships.  Sam Bowie struggled in the NBA and never attained the level of success of Michael Jordan, who many feel was the greatest NBA player ever.

That dilemma presented itself to the Portland Trailblazers at a time when it had good guards, but needed a center.  The best player available at the time of its selection was Michael Jordan, a guard, but the team felt it needed to pick a center to fill the bigger need of the team.  It decided not to pick Michael Jordan and selected a center/power forward named Sam Bowie instead.  The next team in the draft, the Chicago Bulls, then selected Michael Jordan and he eventually led it to six NBA championships.  Sam Bowie struggled in the NBA and never attained the level of success of Michael Jordan, who many feel was the greatest NBA player ever.

What does economics teach us about the decision by the Portland Trailblazers?  At the time of its decision, the team knew that there was a greater "market" demand for Michael Jordan than for Sam Bowie.  Had the team used economic analysis, it would have realized that Michael Jordan's "value" was higher due to the greater market demand for him, regardless of what the Portland Trailblazers' specific needs were.  Portland could have picked Michael Jordan and traded him for Sam Bowie '''''plus another good player''''', or Portland could have "traded down" in the draft and obtained value in addition to still drafting Sam Bowie later in the draft (because he would still likely be available).  But the Portland team leaders did not view the selection in terms of the "market", but rather in terms of the team's own particular needs.  This choice became what some call "the single most colossal blunder in the history of basketball."<ref>http://www.bigbluehistory.net/bb/bowie.html</ref>

What does economics teach us about the decision by the Portland Trailblazers?  At the time of its decision, the team knew that there was a greater "market" demand for Michael Jordan than for Sam Bowie.  Had the team used economic analysis, it would have realized that Michael Jordan's "value" was higher due to the greater market demand for him, regardless of what the Portland Trailblazers' specific needs were.  Portland could have picked Michael Jordan and traded him for Sam Bowie '''''plus another good player''''', or Portland could have "traded down" in the draft and obtained value in addition to still drafting Sam Bowie later in the draft (because he would still likely have been available).  But the Portland team leaders did not view the selection in terms of the "market", but rather in terms of the team's own particular needs.  This choice became what some call "the single most colossal blunder in the history of basketball."<ref>http://www.bigbluehistory.net/bb/bowie.html</ref>

The moral of this story:  learn to look beyond your own situation when making buying and selling decisions.  You may think a particular house is the best thing in the world, but if the market values that house less than you do, then you'll lose money if you buy it based on your personal preferences rather than market demand.

The moral of this story:  learn to look beyond your own situation when making buying and selling decisions.  You may think a particular house is the best thing in the world, but if the market values that house less than you do, then you'll lose money if you buy it based on your personal preferences rather than market demand.

'''''Postscript''''':  Sam Bowie himself had the most selfless and free market attitude of all.  "If I had known that Michael was going to become the greatest player of all-time, I'd have chosen Michael over myself, too. That's hindsight. ...  I have a wife of 21 years and children ages 17, 11 and 8 ..., and to say that every day's a holiday is an understatement."<ref>http://sports.espn.go.com/nba/columns/story?columnist=stein_marc&id=3019727</ref>  Meanwhile, Michael Jordan has had marital problems caused by his stardom, and he was unsuccessful himself after he switched teams late in his career.

'''''Postscript''''':  Sam Bowie himself displayed a selfless and free market attitude about this.  "If I had known that Michael was going to become the greatest player of all-time, I'd have chosen Michael over myself, too. That's hindsight. ...  I have a wife of 21 years and children ages 17, 11 and 8 ..., and to say that every day's a holiday is an understatement."<ref>http://sports.espn.go.com/nba/columns/story?columnist=stein_marc&id=3019727</ref>  Meanwhile, Michael Jordan has had marital problems caused by his stardom, and he was unsuccessful himself after he switched teams late in his career.

== The Income and Substitution Effects==

== The Income and Substitution Effects==

Both the “income effect” and the “substitution effect” give you an incentive to buy more of the good that decreased in price.  The overall increase in quantity demanded for a good that cut its price is the sum of the income effect and the substitution effect.  For a normal good, a decrease in its price causes an increase in real income (the income effect) and an increase in substitution for other goods (the substitution effect), which add together to cause an overall increase in demand.  This is typical.

Both the “income effect” and the “substitution effect” give you an incentive to buy more of the good that decreased in price.  The overall increase in quantity demanded for a good that cut its price is the sum of the income effect and the substitution effect.  For a normal good, a decrease in its price causes an increase in real income (the income effect) and an increase in substitution for other goods (the substitution effect), which add together to cause an overall increase in demand.  This is typical.

Learn these two important concepts well -- the income effect and substitution effect.  In understanding concepts, it helps to restate them slightly differently until there is a full appreciation of them.  The “income effect” is the change in your wealth (income) due to a change in price of something you buy, AND how that change effects what you buy.  If the price of milk decreases, then the “income effect” is to make you feel like you have more income AND enable you to buy more milk and other goods.  If the price of milk increases, then the “income effect” is to make you feel like you have less income because you had to spend more on buying the milk, leaving you less money to spend on other things.  Understand this?  Reread it again if necessary, and think about how a change in the price of milk affects your decisions about how much milk and other things you can buy.

Learn these two important concepts well -- the income effect and substitution effect.  In understanding concepts, it helps to restate them slightly differently until there is a full appreciation of them.  The “income effect” is the change in your wealth (income) due to a change in price of something you buy, AND how that change effects what you buy.  If the price of milk decreases, then the “income effect” is to make you feel like you have more income AND enable you to buy more milk.  If the price of milk increases, then the “income effect” is to make you feel like you have less income because you had to spend more on buying the milk, leaving you less money to spend on other things.  Understand this?  Reread it again if necessary, and think about how a change in the price of milk affects your decisions about how much milk and other things you can buy.

The “substitution effect” is the change in substitution (one good for another) due to the change in price of one of the two goods.  If the price of a good decreases, then that price change makes it more attractive to be used as a substitute for another good.  If, for example, chicken sandwiches are on sale at half-price at McDonalds, then more customers are going to choose chicken sandwiches as a substitute for hamburgers.  The decrease in price of chicken sandwiches has a “substitution effect” of causing more people to buy them as they move from eating hamburgers to eating the cheaper chicken sandwiches.

The “substitution effect” is the change in substitution (one good for another) due to the change in price of one of the two goods.  If the price of a good decreases, then that price change makes it more attractive to be used as a substitute for another good.  If, for example, chicken sandwiches are on sale at half-price at McDonalds, then more customers are going to choose chicken sandwiches as a substitute for hamburgers.  The decrease in price of chicken sandwiches has a “substitution effect” of causing more people to buy them as they move from eating hamburgers to eating the cheaper chicken sandwiches.

Giffen goods are exceptions to the Law of Demand ... if Giffen goods really exist!  Many, including your teacher, are skeptical that there really is such a thing as a Giffen good.

Giffen goods are exceptions to the Law of Demand ... if Giffen goods really exist!  Many, including your teacher, are skeptical that there really is such a thing as a Giffen good.

==Utility and Diminishing Returns==

==Utility and Diminishing Marginal Utility==

Money isn’t everything.  We have many expressions for this concept.  “There’s more to life than money.”  “It’s only money.”  “What’s your job satisfaction?” The basic point is that dollars and cents do not capture our overall happiness or satisfaction as a consumer.  You may buy the most expensive music CD on the market, or watch the most popular movie, or buy the fanciest clothes, but that does not mean you will like those items the best.  Often our favorite goods are not the most expensive ones.

Money isn’t everything.  We have many expressions for this concept.  “There’s more to life than money.”  “It’s only money.”  “What’s your job satisfaction?” The basic point is that dollars and cents do not capture our overall happiness or satisfaction as a consumer.  You may buy the most expensive music CD on the market, or watch the most popular movie, or buy the fanciest clothes, but that does not mean you will like those items the best.  Often our favorite goods are not the most expensive ones.

When you arrive, you run in and order its famous french fries.  You’re famished.  When the food arrives, you take your first handful of french fries.  Wow, it is really satisfying to to eat that first bunch of french fries with an empty stomach.  Your marginal utility is extremely high.  You might have even been willing to pay $5 for that first mouthful of french fries because you are so hungry.  Then you eat your second handful of french fries.  Your marginal utility is still high, but not quite as high as the first one.  You wouldn’t have paid as much for the second handful either.  By the time you finish all the french fries, the last few bites were not so satisfying.  In fact, you’ve gotten sick to your stomach.  The marginal utility of that last french fry was very low.  Perhaps even less than zero!

When you arrive, you run in and order its famous french fries.  You’re famished.  When the food arrives, you take your first handful of french fries.  Wow, it is really satisfying to to eat that first bunch of french fries with an empty stomach.  Your marginal utility is extremely high.  You might have even been willing to pay $5 for that first mouthful of french fries because you are so hungry.  Then you eat your second handful of french fries.  Your marginal utility is still high, but not quite as high as the first one.  You wouldn’t have paid as much for the second handful either.  By the time you finish all the french fries, the last few bites were not so satisfying.  In fact, you’ve gotten sick to your stomach.  The marginal utility of that last french fry was very low.  Perhaps even less than zero!

You have just experienced the '''''Law of Diminishing Marginal Utility''''': the marginal utility of each additional unit (e.g., french fry) always declines (in a given period).  Sometimes this is simply called "Diminishing Returns," where "returns" refers to the value received by you.

You have just experienced the '''''Law of Diminishing Marginal Utility''''': the marginal utility of each additional unit (e.g., french fry) always declines (in a given period).  This is similar to the "Diminishing Returns" experienced by a '''''producer''''' of goods.

In general, the rational consumer will always try to maximize his or her total utility.  How is this done?  The consumer always purchases the good with the highest marginal utility in order to maximize the total utility.

In general, the rational consumer will always try to maximize his or her total utility.  How is this done?  The consumer always purchases the good with the highest marginal utility in order to maximize the total utility.

The economic concept of utility is helpful in combating distractions and minimizing time wasted on alarmism and anxiety.  Occasionally ask yourself, what utility was achieved in the last hour of my time?  Did I maximize my utility during that hour?

The economic concept of utility is helpful in combating distractions and minimizing time wasted on alarmism and anxiety.  Occasionally ask yourself, what utility was achieved in the last hour of my time?  Did I maximize my utility during that hour?

==Indifference Curve==

==Indifference Curves==

Now that we understand the important concept of utility, we can graph it by using an "indifference curve."  In a simple case, consider having separate utilities for two different goods.  The goods could be food (like two types of candy), or they could be websites (like Conservapedia and Facebook), or they could be modes of transportation (like a car or a bicycle).  The point is that there is a trade-off in utility when you substitute one good for the other.  Your overall utility will increase, remain the same, or decrease, when you give up some of one of the good in exchange for more of the other good.

Now that we understand the important concept of utility, we can graph it by using an "indifference curve."  In a simple case, consider having separate utilities for two different goods.  The goods could be food (like two types of candy), or they could be websites (like Conservapedia and Facebook), or they could be modes of transportation (like a car or a bicycle).  The point is that there is a trade-off in utility when you substitute one good for the other.  Your overall utility will increase, remain the same, or decrease, when you give up some of one of the good in exchange for more of the other good.