MaximizationWhat motivates individual behavior?Maximization (cont’d)Good and BadsGood and Bads (cont’d)Slide 6Will this motivation survive?Universality of MaximizationImplication:Why Maximization?Implication #1Scarcity (cont’d)Implication #2Examples.Implication of EquilibriumSlide 16Consider the following:Maybe we should get a different first principle!What do we maximize?SummaryMaximizationPRINCIPLE #1.What motivates individual behavior?PRINCIPLE #1. Maximization: All individuals are always motivated by GREEDMaximization (cont’d)•No exceptions - all behavior is interpreted through this principle•Maximization is not the same as “non-satiation” … but sometimes it’s helpful to think of it that wayGood and Bads•A good is something that maximizers want•UTILITY – pleasure, happiness, etc.•“Utility Maximization”Example. Cars, houses, vacations, spouses, etc.Another way of thinking about utility is VALUE – things that we are willing to pay forGood and Bads (cont’d)•A bad is something that maximizers will not want Example. Hard work, obsolete goods, pollution, traffic congestion, health hazards…Maximization (cont’d)•Maximization does not imply -people are always correct-people are always cold and calculating•Maximization is the only motivation that survivesWill this motivation survive?Universality of Maximization•We will try to understand everything through this principle•No other motivations allowed•Culture•Stupidity•Charity•PsychicImplication:•In and of itself greed is not an explanation for historic eventsWhy Maximization?It is consistent with what we observe:(1) SCARCITY (2) EQUILIBRIUMImplication #1SCARCITY:Something is scarce if, when the good is free, people will demand more than what is available.Scarcity (cont’d)•Since the amount of goods is relatively fixed maximizers will need to compete for things•Violence, sports, markets•Winners and losers with every choiceImplication #2EQUILIBRIUM:A state where no one wants to change their behavior, no money left on the table, and all gains from trade are exploitedExamples.•Traffic patterns•Prices equalized across markets•Lines at the super market, amusement park, restaurant•Boy bandsImplication of EquilibriumImplication #1. No Economic Profits. PROFIT:Profit (π) = Total Revenue – Total Cost = 0•Profits mean “easy money” or an above normal return – changes behaviorImplication of EquilibriumImplication #2. No Economic Policy.•“Magical” policy solutions do not exist•The world around us is optimalConsider the following:Certain professions are very attractive to their members and very badly paid. Consider the stereotype of the starving artist. Is the association between job attractiveness and low pay accidental, or is there a logical connection?Maybe we should get a different first principle!•Maximization isn’t good or right, it just worksWhat do we maximize?•Consumers maximize utility •Firms maximize profitsSummary•People are greedy•No other explanations allowed•Maximizers want things of value (goods)•Maximization leads to scarcity and
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