Thursday, August 26, 2010

Intro Econ Class

I've been busy with the start of the semester, so I haven't had time to write anything to post.  So to keep some content up, here are the class notes from my last class.  I have a rule that if you bring a laptop to my class, you have to send me notes or lose points, and you can get bonus points for good notes.  These are not perfect, but they are still pretty good.

The notes help me because they tell me what I did not communicate well.  For example, I am trying to teach how important it is to distinguish between levels and rates.  Even though the standard of living has grown at an exponential rate over the last century, it is not proper to say that the standard of living in 2010 is exponentially higher than it was in 1910, as many did on their homework.  I'll have to clarify that next class.




Mr. AW is not a Doctor of Professor. Refer to him as just Mr. AW.

For the extra credit game, just put a number. You do not have to give an explanation unless it is specifically asked for. People are still putting too high numbers. Other people are over-estimating the rationality of their classmates and giving numbers that are too low.

There are no office hours on Wednesday, any more.

Do not expect Mr. AW to e-mail you back on Sunday. He might, but it's not likely. If you send it Saturday you are guaranteed a response.

For peer grading: Mr. AW will send the assignment out in an e-mail. To submit your response, click "reply" to the e-mail. Mr. AW's e-mail will appear in the To: field. You will copy your graders in the CC field. To find your graders, look at the numbered list Mr. AW is going to send out. Find your own name. For the next assignment, your graders are the three people following you in the list. If you are number N, your graders are N+1, N+2, and N+3.

If you want to submit a draft, only send it to Mr. AW. The final must be sent to all four by 8:00 AM Monday.

The grade on an assignment is an average of the 3 grades given by your peers.

When Mr. AW sends out the answer key, you will reply to that e-mail three different times, once for each person you are grading. Make sure you copy the person you are grading for each e-mail. Do not edit the subject line of the e-mail. In the email, write:

Name: Total

Grade Breakdown.

Grades are due Wednesday at 8:00 AM.

You do not earn points for grading, but you do lose points for not grading assignments sent to you.


Regarding the first homework assignment:

While technology does increase at an exponential growth, standard of living does not. However, it is not correct to say our standard of living is exponentially higher than it was 100 years ago. Exponential growth is a rate of change, while our standard of living is a level, not a rate. Standard of living is not a matter of desire. Desire is always infinite. Standard of living is based on how well you are able to provide for your wants and needs in a society.

Remember marginal cost versus total cost.


1. Do you play fantasy football? Do you think it could be compared to the stock market?

                Mr. AW does not, but he knows how it works. Yes, Fantasy football works much like the stock market. The value of players fluctuates with real-world activity, and people are always trying to make the most points by creating the best team. While the fantasy football "market" does not change as quickly or as much as the real stock market, it reflects the Efficient Market Hypothesis and other stock market theories.


2. Monsento (sp?) created a soy bean seed that monopolized the soy bean market. How do monopolies work?

                Mr. AW used the example of an oil company. There is a demand curve based on how much people want a good. As the demand goes up, prices go up.  The curve does not change, normally, just the position on the curve. Normally, the supply curve is the cost of producing something. The price is usually where the demand curve meets the supply curve. If you have a monopoly, you get to pick where on the demand curve you want your price. By increasing your price, you increase your profit, but you end up selling less. Generally, a monopoly likes to sell at just a little higher price than where the demand curve meets the supply curve. They sell a little less, but they make enough money. Monsento only has a monopoly on round-up ready seeds, which increases choices for farmers and could eventually be bad for the company.


3. When will the government interfere in monopolies?

                All monopolies are illegal in the United States. It is not allowed to set prices like that in our market system. Foreign companies, such as oil companies, are monopolies or cartels, and there isn't anything we can do about it.


4. Why does the US have such strict restrictions on monopolies?

                The other governments may not be powerful enough to control monopolies. Other times, they may be "in cahoots" with the monopolies to make more money.


5. Monopolies are illegal. Are there no monopolies in the United States?

                Monopolies are illegal except when you create something new. A patent or copyright is a legal monopoly. For example, Apple has a monopoly on the iPod, because they created it. However, Apple does not have a monopoly on portable music players. Having monopolies on older products is bad for consumers.


6. Apple has a monopoly on the iPod. Is that illegal?

                The patent on the iPod gives Apple the monopoly rights on the iPod. Therefore, as a reward for creating the iPod, Apple is the only one allowed to produce it. That does not mean that Apple controls the market by selling the only MP3 player in existence. There are many other portable music players.


7. How long do patents last?

                Patents usually last for about 20 years. For drugs, the patent is given when the drug is tested, and testing takes about 10 years, and therefore it is an effective patent of 10 years.


8. Does Apple get a new patent for every new iPod they make?

                Apple gets a new patent for every new thing they create, like a new computer chip, new design, new interface. It must be innovative and fairly specific. The idea of a patent is that others cannot copy what you make.


9. Could we say, then, that patents hurt conceptual thought?

                That argument does exist. There are a lot of tradeoffs. However, when a patent is published, you release all of the technical details of the product, meaning others could duplicate your product if you had the means. It is just illegal to do so. So in the terms that patens stop others from getting the same information, no. It does not limit growth in that form.


10. How do day traders make money?

                A day trader is someone who plays around in the stock market. Most stock market investors just buy and hold. Day traders normally don't make money. They usually lose money. The stock market fluctuates a lot. A day trader tries to use this to buy low and sell high. They try to profit minute-to-minute or hour-to-hour.  They do not know if they are going to make money at all. The stock market takes a "random walk." Whatever patterns it has had in the past are generally irrelevant. It is impossible to predict what will happen merely by watching stock prices.


11. Isn't knowing insider information illegal?

                Yes, it is illegal, normally. If you are in the position to change the price of the stock and stand to profit from it, you could run into trouble. If you know something no one else knows, and you cannot affect the price of the stock and you aren't in the company, you normally would not get into trouble.


12. If a company gives you stock options in your 401k, how is that not insider trading?

                You are not allowed to chose when exactly to use your stock option, so it cannot be considered insider trading. Say you are given the option to buy a stock at $5. If the stock is worth $3, you don't want to buy. However, if the price goes up to $10, you could buy the stock from the company at $5 and sell it for $10, if you wanted. There are limits on stock options so this program is not exploited. You should announce using stock options weeks in advance.


13. Can you talk about the arms trade? Where do countries get their weapons?

                Usually the weapons come from the former Soviet Union. The AK-47 was designed to be cheaply mass-produced. When the Soviet Union dissolved, the factories still existed. The new leaders used these factories to sell weapons to the highest bidder.


14. Does the local economy suffer for countries buying weapons?

                Owning a lot of weapons in a chaotic system is just bad in general. The US has good rules for using weapons only for defense, and strict consequences. In other countries, the large amount of money spent on weapons is the least of your worries.


15. Is it true that if drugs and the black market are made legal, would that fund drug lords in other countries?

                No. Profits would go to companies specializing in these areas, and they would be taxed. Criminals and drug lords would have to compete with companies operating under the rule of law, and they would not be able to do so.


16. Somalia is ruled by different fighting factions. How does that area have an economy?

                An economy is just buying at selling. Somalia has much less of an economy, because they don't trust each other. They would have almost no international trade.


17. If making drugs legal would be bad for criminals, why not make Marijuana legal?

                It should be legal, but many people misunderstand its effects. It should be taxed based on the amount of damage it could cause. Drug usage would probably increase a little, but there would be few other negative side effects.


18. If you increase the price of drugs, would that not promote buying from criminals?

                Not really, no. People do not like to deal with criminals. If they get a problem with a criminal, they can't really complain. If a rule of law company messed up, they could complain and it would be legal to do so. People like and are encouraged to buy from regular companies.


19. Doesn't the government want to protect people from bad drugs?

                The FDA wants to test drugs extensively to make sure its safe. Because there are so many tests, it usually takes 10 years for a drug to reach the market. By keeping a drug off the market for 10 years, you make sure it is safe, but many people lose 10 years of potential drug usage that could help them.

To make sure that drugs are completely beneficial, we could stop producing new drugs and only use drugs that have been tried and tested. Other extremists believe in much shorter testing. That increases the likelihood of bad drugs entering the market and having to be removed and compensated for.


20. You identified the housing industry as one of the main causes of the current recession. Will housing help fix the recession?

                The housing market likely will not help fix the recession. We built enough houses for many years to come, and that means the housing market will not pick up for quite a few years. This isn't true for every region, but the national average for the housing market will continue to be down for a while.


21. In the BP oil spill, why didn't they have a plan and why didn't they implement the plan more quickly?

                The plan they had failed, because so many things happened at once. Several different safety features failed at the same time, and there were other human error factors that played a part.


22. I heard that BP had something like 200 safety problems in a year, where Exxon had only 1.

                That's true, because BP subcontracts to other companies, and does not pay them for safety. When a company is being paid solely on output, they will cut corners when it comes to safety restrictions


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