Class Notes 3

Hello class,

Thanks to everyone who could make it to class this morning despite the awful weather.

About the news articles: I have set up forums in Blackboard for you to post your articles and summaries for everyone to see. I think that you could find one another's articles interesting. With each summary, please include:
  1. Title of article
  2. Author (if available)
  3. Publication
  4. Date
  5. Link (if possible)
Please post the summaries by the day they are due (Wednesdays), although I would prefer to see them earlier so I can discuss them in class. If Blackboard is down or if you prefer you can email them to me, and you are not required to use a address.

For those of you who missed class, we went over the news articles (which I hope people will go back and post in the forum I just set up). We also reviewed the McMillan reading: his main point was that markets do work very well IF certain conditions are in place, namely:
  1. Information flows smoothly and everyone has as much as anyone else
  2. Property rights are reasonably secure
  3. Contracts hold (you can generally trust people to stick to the agreements they make)
  4. Externalities are kept to a minimum (effects, especially bad effects, on third parties are taken into account and addressed)
  5. competition is fostered (this gives people more choices and makes bargaining more fair)

Take-home point: "Markets are good servants (if set up well), bad masters, and worse religion."

Then the class derived supply and demand curves for Reese's peanut butter cups in terms of lollipops. We saw that people want more when the price is low and less when the price is high, but people are willing to sell more when the price is high and less when the price is low. Trades happen at the price where the two trends meet. Positive externalities cause some to benefit when there are trades they are not involved in, while negative externalities cause harm to certain parties that are not involved in the trades. The role of government is to impose a tax that raises the cost of trades with negative externalities (so that fewer trades happen), and to provide subsidies to lower the cost of trades with positive externalities (so that more trades happen). Examples would be a carbon tax that raises the cost of emitting carbon-containing greenhouse gases and grants and low-cost loans to students so that it's easier for them to obtain an education.

We discussed how some markets are very sensitive to price--if it goes up or down a little, people demand a lot less or a lot more. An example the class came up with would be add-on services for cell phones. This is called having a high price-elasticity of demand.

Some markets on the other hand are not very sensitive to price. Even if the price goes way up or down, people still want to buy (or sell) about the same amount. Examples are milk, stamps, or real estate. People just want a certain amount and it takes a lot to make them look for alternatives. At the same time in the case of real estate in particular it is hard change the available quantity. With inelastic demand and supply, we are not surprised to see big fluctuations (jumps) up and down of the price in the market.

At about this time Jessica asked about poverty traps. For a really good overview of all the different kinds of poverty traps, please see this page: The one(s) we talked about most in class are covered well in number 4 on that page.

We also talked about the value of getting a master's degree in, say, education, especially when having a degree does not mean you are a better teacher. (For a really interesting article about the difficulty of hiring teachers and how it is similar to picking NFL quarterbacks, see this article by Malcolm Gladwell in the New Yorker, "Most Likely to Succeed".) We brought up the concept of "sending a signal" about yourself by going through with something that is costly (in terms of money, time, and effort) and would be too expensive for someone who is not very capable. Thus, people who are generally bright and hard-working can complete a degree at a lower cost to themselves than people who are less bright and not very focused. Obtaining a degree thus signals credibly that you are a bright, hard-working person, even if it might not directly make you better at doing a job. Of course some degrees DO prepare you for a certain job (e.g. master's in special education).

The discussion on master's degrees and signaling was not as off-topic as it sounds. The basic point about signaling is that what looks a little irrational at first glance sometimes is happening for a pretty good reason, if you look more closely at it. This is one of the things that studying economics is good for: starting with the assumption that people do generally respond to incentives and try to do what's best for themselves given the circumstances can lead to some good insights into why people behave the way they do.

Take-home point: incentives matter! Just not always in the way we expect.

In the last two minutes we once again visited the idea of Dani Rodrik's trilemma: Josh pointed out that when the United States was just forming, there was a lot of controversy about what structure it should have--how much power should the individual states have versus the central government. The result was a federated structure, with a certain level of autonomy at the state level, but "supreme" authority (on some matters) at the country (federal) level. If we wanted democratic politics AND deep integration among countries, we would need to have a similar structure going all the way up to the global level, which does not currently exist and would be resisted by nation-states that want to keep their sovereignty. That explains part of the trilemma. Maybe we'll talk about it some more in the last two minutes of another class!

See you Monday.

Prof. Giszpenc