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Naked Economics. Undressing the Dismal Science. Who feeds Paris?. What is GDP?. Why is it a good measure? Why is it NOT a good measure? . What is price discrimination?. Airplane ticket prices. Do incentives matter?. What is the “superstar phenomenon”?. What is creative destruction?.

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naked economics

Naked Economics

Undressing the Dismal Science

what is gdp
What is GDP?
  • Why is it a good measure?
  • Why is it NOT a good measure?
what is price discrimination
What is price discrimination?
  • Airplane ticket prices
what is creative destruction
What is creative destruction?
  • Who loses out most often?
what are the two basic assumptions that economists make about individuals and firms
What are the two basic assumptions that economists make about individuals and firms?
  • Self-interested
  • Rational
role of prices in the market economy
Role of prices in the market economy?
  • determining an efficient distribution of resources in a market system.
  • signal for shortages and surpluses which help firms respond to changing market conditions
advantage of market economy
Advantage of market economy?
  • Allocative efficiency
  • The best available model
  • BUT . . . (market failures)
adverse selection
Adverse selection
  • When you do business with people you would be better off avoiding. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer
  • “What you don’t know CAN hurt you”?
informational asymmetry
Informational asymmetry
  • transactions where one party has more or better information than the other.
  • E.g. – buying a used car, life insurance (adverse selection)
perverse incentives
Perverse incentives
  • an unintended and undesirable result which is contrary to the interests of the incentive makers
  • E.g. car seats on airplanes
principal agent problem
Principal-Agent problem
  • principal–agent problem or agency dilemma concerns the difficulties in motivating one party (the "agent"), to act on behalf of another (the "principal").
  • E.g. corporate management (agent) and shareholders (principal), fast food employees
prisoner s dilemma
prisoner's dilemma
  • example of a game that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so
  • Ac, Bc – 1 year, 1 year
  • Ac, Bs – 0 , 2 years
  • As, Bc – 2 years, 0
  • As, Bs – 3 months, 3 months
what is an externality
What is an externality?
  • is a cost or benefit that is not transmitted through prices, and is incurred by a party who was not involved in the transaction.
  • negative externality – pollution from a factory
  • positive externality – fire department
role of government
Role of Government
  • Stability
  • legal framework
  • Protection of property rights
  • Protection of contracts