SubstitutionWhat motivates individual behavior?Examples.Substitution (cont’d)Other things about SubstitutionObjection!PowerPoint PresentationEveryone has their price… and that price is surprisingly low!Other ImplicationsGood ownership by households in poverty (Census 2010)Other Implications (cont’d)Consider the followingEffective Marginal Tax RatesCoincidental or causal?SummarySubstitutionPRINCIPLE #2.What motivates individual behavior?PRINCIPLE #2. Substitution: Everyone has their price – nothing is sacred.Examples.•Buy text book or not•Attend class or not•Buy nice car or buy fuel efficient car•Work vs. leisure•Date somebody or hang out with friends•Play video games or study•Choice of soft drinkSubstitution (cont’d)Our willingness to substitute or TRADEOFF is•Voluntary•Universal•Not without sacrificeOther things about Substitution•There may be social sanctions to substitution•Sometimes we bind ourselves not to substituteObjection!Surely we won’t substitute when it comes to important things!•Gas•Safety•Healthcare•Pharmaceuticals•Other people’s lives•Our livesEveryone has their price… and that price is surprisingly low!Other Implications•“Need” is not an economic concept only wants•No “priority of consumption”•People consume a variety of goods even at low incomeGood ownership by households in poverty (Census 2010)92807350433331140102030405060708090100Microwave AirConditioningVehicle PersonalComputerInternet Plasma TV 2+ Vehicles 2+ ComputersOther Implications (cont’d)•Willingness to substitute is the only observable measure of value•“Ability” vs. “Willingness” to pay•Marginal Value (MV) is one’s maximum willingness to payConsider the followingEvery country in the western world has some type of safety net system to help the poor. In creating such laws it is necessary to define who the poor are. In an effort to obtain the money in such plans, what types of substitutions (if any) do you think will be made by some individuals if the poor are defined as: 1. those with an income less than $13,000 2. single parents3. blind peopleEffective Marginal Tax RatesCoincidental or causal?Summary•People are constantly faced with tradeoffs•Substitution is voluntary and is our only true measure of value•This proposition is universal – no
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