ECON 260 1st Edition Lecture 2Outline of Last Lecture1. Class Introduction2. Syllabus Reviewa. Class Toolsb. Class Creditc. EconocoinOutline of Current Lecture 1-13-151. Pre-Lecture Video 0001, “Intro”– Key Concepts2. 10 Basic Principles of Economicsa. Principle 1: Agents respond to incentives.b. Principle 2: Good institutions can align self and social interest.c. Principle 3: Tradeoffs are EVERYWHERE.d. Principle 4: Rational People Think at the Margin.e. Principle 5: Trade can make everyone better off.f. Principle 6: Wealth and Economic Growth are related.g. Principle 7: Institutions Matterh. Principle 8: Booms and Busts can not be controlled, only mitigated.i. Principle 9: Prices rise when governments print too much money.j. Principle 10.Central Banking is a Hard JobCurrent LecturePre-Lecture Video 0001 – Key ConceptsEconomics is the study of how individuals, firms or societies allocate scarce resources among competing and unlimited wants and needs.Economics answers several questions:- What will people choose?- What are the consequences of those choices?These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- How can we influence those choices?There are some underlying assumptions in economics:1. People will act in their own self-interest.2. All resources are scarce. Resources are the things we use to consume or produce what we want. We always face tradeoffs and measure them in opportunity costs. 3. We always make decisions at the margin. 10 Basic Principles of EconomicsPrinciple 1: Agents respond to incentives.*Note* “Agents” isused interchangeably with “consumers”and is used as an umbrella term forindividuals, firms or societies.Economics is about decisions. Determining incentives is the way to understand how decisions are made.Want to understand how compromise works in Washington? Look at the incentives. Why does a dollar matter? What is the incentive to care about green paper? A dollar is important because it is a medium of exchange - it gives us a comparison point for things that are not alike.You make decisions that make you better off. Some benefits are indirect results of your choices.Example: you dislike romantic dramas, but sit and watch The Notebook to make your significant other happy. You are not made happy by the movie, but you choose to watch because when your significant other is happy, you are happy.Knowing all this, it then makes sense that if you want to change behaviors, you need to change the incentives. This is how economics functions.Examples: - A politician who is concerned about climate change and wants to reduce vehicle emissions needs to know that most purchases of electric or hybrid cars are not driven byconcern for the environment, but by high gas prices. When the price of oil falls, sales of SUVs and other vehicles with poor fuel efficiency rise again – once the consumer is not worried about the price at the pump, other incentives, such as spaciousness, safety and style, become the determining factors. Therefore, in order to continue to promote fuel efficient vehicles, the politician could propose a new gasoline tax, removing the incentive of cheap gas. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- The Chinese village of Xiaogang (http://en.wikipedia.org/wiki/Xiaogang,_Anhui), facing starvation because of poor crop yield during a famine, secretly broke the law and dividedtheir communal farming plot into smaller family plots. Each family would be able to takeenough for themselves to eat from their own crops rather than turning everything over to the collective and the government. When the villagers knew their work would go to feed their own families, the crop yield in the village was multiplied 5 times. - Mutually assured destruction, the threat of total nuclear annihilation, incentivizes countries to get along rather than attack each other. Failure to understand incentives leads to unintended consequences. Car insurance would not work if only people who like to crash cars bought it, because every policy would have to pay out.Examples: - Early legislation aimed at reducing acid rain required all new power plants to be built with expensive air scrubbers, but grandfathered old plants. This incentivized the power companies to reactivate older plants rather than building new ones with the expensive scrubbers, and for a time the air pollution was not reduced and may actually have increased.The Acid Rain Program became extremely successful once the loophole in the law was closed, and incentives to comply took effect – for example, if a plant was under its allowance, the company could use that extra margin for another plant, save it for a later measurement period, or even sell it, creating a market for sulfur dioxide emissions allowances. We no longer hear about acid rain as an environmental concern. (http://en.wikipedia.org/wiki/Acid_Rain_Program)- When banks are considered “too big to fail,” in practical terms this means that the government will step in and prevent a collapse. While this is intended to protect the economy and bank customers, it de-incentivizes the conservative decision-making that was once standard for bankers, because failure no longer carries a risk. Principle 2: Good institutions can align self and social interest.Institutions can be considered “the rules of the game.” The good rules allow self-care and care for othersboth to happen in the same act. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” ― Adam SmithWe don’t value our economics professors for their ability to butcher deer. Each of us is free to go out andstart a business, offering the things that others would value. We demonize profit-seeking, being “out for a buck,” but profit is what makes us work. There is no such thing as “corporate responsibility” - actions by companies that appear altruistic are taken because they will benefit the company through PR or otherreasons. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.*Side note* This is not applicable in all