Three Key Economic Ideas - Video Tutorials & Practice Problems
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People Are Rational
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So let's go ahead and define some key ideas or what we can think of as assumptions for this course. The first one here is that people are rational and I know some of you already saying whoa brian look I've got my share of crazy ex girlfriends too. It's okay in this class when we define rational we're thinking individuals and firms are attempting to do their best right there trying to do their best with what they have and are best. It's not always perfect, but we do the best with what we have. So the idea here is like we're not intentionally trying to make ourselves worse off, right? We're not intentionally uh self destructive. We'll say not intentionally self destructive. All right. That's the idea of being rational here. So when you take an exam right, you're gonna go into the exam, you're gonna study for the exam, you're gonna use clutch and you know, if there's something on the exam that you don't know, you're gonna do your best guess right? You're gonna try your best to get it right, you're not just gonna go in there and just start bubbling at random and see what happens. Right then? Then why would you even be in the course? Um Another example how about a factory, a manager of a factory? Right? He's gonna he doesn't have unlimited money. He doesn't he's not gonna be wasting resources, right? He's not gonna be just throwing stuff away. He's gonna be trying to maximize his output and minimizing his inputs right? You know minimizing inputs or minimizing waste all these things just to do his best.
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Economic Incentives
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next we have the idea that people respond to economic incentives, right? So incentives. It's people taking advantage of opportunities to make themselves better off. So a lot of times in the in these classes they used the word exploit right? They exploit opportunities to make themselves better off. Um I saw this really funny example um It was about getting an oil change in new york city. So in N. Y. C. Parking for the day when you go you know downtown to to go to your job you could be spending for an all day parking upwards of 40 50. I don't know. Someone from from new york could probably tell us better but parking in new york is no joke. So what people started doing was realizing that they could go to a mechanic and just get an oil change And the oil change random let's say $25 $30 and they ended up being able to leave their car at the mechanic all day. So people started just going to the mechanic and getting an oil change and it's cheaper literally than just parking for the day. It's crazy. And another example something very simple. What about apples? You know when the prices of apples go up people stop buying apples they start buying oranges or they buy something else right? They're gonna exploit opportunities to make themselves better off. Oh apples are gonna be more expensive. The price goes up. Well I'll take my business elsewhere. The quantity of apples it's gonna go down there. People are gonna be buying apples anymore. They're gonna buy something else. So they're gonna take advantage of that opportunity.
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Marginal Analysis
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So let's move on to the last key economic idea here to make the best decisions. We use marginal analysis. So that sounds like a kind of a funky term, but in economics, marginal just means extra or additional. Right? Like the idea of one more right, what is one more, how is it going to change our current situation? Like what happens if we produce one more unit? What happens if I eat one more slice of pizza? Things like that? So I hope you noticed this big green box because I was trying to catch your eye with it. Um And inside we've got a key formula that we're gonna use throughout the entire class. I'm gonna introduce you to it now. It's the idea that marginal benefit equals marginal cost. Okay, we're gonna define those terms in a second, but I just wanted to point out how important this is for the class. It's gonna help us in all sorts of calculations and it's gonna be a key point on a lot of graphs. We're gonna use it when we're defining allocated efficiency. Um Right now I'll have an example for you with op consumption, like how much we should consume, right? The optimum amount to consume or finding the profit maximizing point in different business structures, how do we make the most profit? All of these are related to the marginal benefit equaling the marginal cost, and I promise it's gonna come up quite a bit in this course. So let's define those terms. Um And even before we get to the graph here and you're like, whoa brian, I haven't seen a graph since high school man, I don't know what you're about to do but it's scaring me, I feel your pain. And we're gonna have a graphing review at the end of this section, that's gonna kind of be a refresher for you. It's not gonna go so deep. Um But it is gonna help you have the tools ready to do really well in this course. So when we get to the graph, I'm gonna use blue for our marginal benefit. And let's go ahead and define marginal benefit right now. Um When we think of marginal benefit it's remember marginal is additional, right? So it's kind of like the additional satisfaction that we get from some It's really hard, you know, it's a subjective kind of thing, it's pretty qualitative. It's not so easy to just define how much happiness, you know, does going to the movies bring me oh it brings me 10 happiness, right? It's not so easy. But in this class, you know, they kind of quantify it in that sense and most of the time it's just gonna be given to you can't really be expected to know how to define these benefits in number terms, right? So we're gonna kind of call marginal benefit here, we'll say it's the additional satisfaction, right? Additional satisfaction that you're getting from one more of something, right? And in our example we're gonna be talking about pizza. So it's the additional satisfaction from eating one more slice of pizza, right? And for cost, we're gonna be using red. And I guess I'll take this moment to point out that in this class we're gonna be using a lot of colors, especially when it comes to graphs. And I really suggest that you do the same thing. Even on the exams, I would suggest bringing a couple of different color pens. It just makes it so much easier to keep your work separate and just keep track of everything. I really suggest using at least two colors, maybe even three when you're when you're taking this class. So we're gonna use red for marginal cost. And this is basically, well, it's the additional cost, right? I'm using cost again, but it doesn't have to be a monetary cost, right? It could be a cost, an emotional cost. The psychological cost could even be like a time cost, right? The time you spend doing something is part of the cost. So, I'm just gonna put additional cost here. It's a little easier to understand than marginal benefit. And let's go ahead and dive into the graph. Okay, I'm not gonna use so many numbers here. We're just gonna gonna use the graph as a tool. Um So let's start with our marginal benefit. And let's think about eating slices of pepperoni pizza, right? The goal here is to find out what is the optimum amount of pizza that I should eat. So, you know, it's almost lunchtime here and man, that first slice of pizza is sounding really good right now, I'm pretty hungry and I think that if I were to eat a slice of pizza right now, probably bring me quite a bit of happiness, I'm just gonna put it way up here. No numbers, right? We're just saying that there's a lot of happiness with that first slice of pizza and the second slice, Yeah, you know, still sounds delicious, still sounds cheesy and Oh yeah, that sounds good. But that first bite that I got from that first slice of pizza, I'm not getting it back again, right, I'm still eating delicious pizza, but that first slice was extra delicious. So it's still bringing me quite a bit of happiness but not as much as that first slice, the third slice, I'm still hungry, still feeling pretty good, I'm gonna eat another slice of pizza and I'm still gonna feel pretty good about it by that fourth slice. Well now I'm getting full but um I was still hungry so you know, still bringing me happiness. So it seems okay. How about once I get to that fifth slice of pizza now, you know, I'm starting to like question myself, I don't know if I should be eating this much pizza at once, but you know if I did it anyways I'd probably still get some benefit from it, maybe, you know, even if it's like a I'm not gonna starve today, right Or tomorrow. I guess if I ate five slices of pizza and buy the six pizza, you know, I'm not getting much happiness out of it at all. It's just a lot of pizza at this point. So now let's talk about the marginal cost here in the same sense and let's not even think about money. Let's say this pizza is already here and it's already delicious. We're just gonna talk about like emotional benefits and emotional cost here, right? Um psychological or like, you know, nutritional cost, nothing, nothing monetary. So that first slice of pizza, I'm really hungry. There's not a high cost here. I'm hungry. Um I want the pizza. So there's not really much cost. How about that second slice? Well, I'm not as hungry anymore. And now I might start thinking about my health, right? The third slice, it's starting to come up four slice now, I'm not even hungry anymore. Right? I ate that that four slice of pizza. And now I feel satiated that fifth slice of pizza, it's gonna come at a cost right now, I'm bloated, right? I can't even like get up after lunch. I'm gonna need a 30 minute break. Probably, you know, it's a little much and that's six pizza slice of pizza. Now, I'm just, you know, I'm I just got a stomachache now, it just wasn't worth it, right? So the idea, I think you might see at this fourth slice of pizza, they're kind of overlapping here. But the idea, I think you'll see what's gonna be happening here? Why don't we go ahead and connect our lines? So here we're gonna have what's called the marginal benefit line. Okay. And let's draw our marginal cost line this way, and you can see that the marginal cost is increasing the more pizza I eat. Okay. So, what do we find here? I think it's pretty obvious on the graph that there's one point that seems to stand out right here in the middle, and that is when our marginal benefit equals our marginal cost. And just like we defined right up here, marginal benefit equals marginal cost at our optimum consumption. Right? So, here, at four slices of pizza, that is how much pizza I should eat, and I'll be most satisfied. So, let's think about some different situations. What if I had only eaten three slices of pizza, what would have happened? Right, let's say I'm at this point, right here, I ate three slices of pizza. Well, you could see that the marginal benefit at three slices of pizza, if I were to eat one more, I'd be bringing in, you know, still some happiness, right? I'm still hungry, and the marginal cost is still down here is less than the marginal benefit. So, the idea is I should keep eating pizza because the marginal benefit is greater than the marginal cost of that next slice of pizza. So, when I have three slices of pizza, I should have another one. But what if I'm here at five slices of pizza, right? That fifth slice of pizza now, the marginal cost is greater than the marginal benefit. I'm not even hungry anymore. I'm starting to question myself right? Like, why am I eating so much pizza? Um And I find that that's too much pizza. So for me right here, we're gonna find that four slices of pizza is the correct amount. And um what you could think is like, you know, maybe for you four isn't the right amount. Maybe you love pizza even more than I do, which I'm gonna have to fight you on that. That's gonna be difficult. But it's possible that maybe you want five slices of pizza, six slices of pizza. Your marginal Ben. It might not decrease as fast as mine based on how much pizza you eat. Right? So, the point here is that everyone's curve is gonna be a little different. Mine happens to find that four slices is the optimum amount, which actually might sound like a little much now, but the idea is that everyone's gonna have their optimum amount of pizza. All right. So, why don't we move on to the next video
