ECON 221 1st Edition Lecture 1 Outline of Last Lecture I. N/AOutline of Current Lecture I. Big Ideasa. Incentives Matterb. Good Institutions Align Self-Interest when they respond to incentivesc. Trade-Offs are everywhered. Thinking on the MarginCurrent LectureChapter 1: Big Ideas- Incentives Mattero Incentives: rewards and penalties that motivate behavior Ex: taxes on gas, cigarette taxes Ex: imagine a $19.95 oil change each day with free all day parking vs. $30/day parking- Good institutions align self-interest when they respond to incentives aligns self-interest with social interesto Adam Smith’s invisible hand If everyone acts in own self-interest social interest will take care of itself Supermarket exampleo Market economies have proven to be more successful compared to centrally planned economies Centrally planned economy: government decides prices, taxes and controls economy (can control what businesses produces products, the price of products, and how much of that product is produced)- Not based on self-interesto Information gaps, externalities Externalities: if someone else gets a negative output/affect from you own actions of self-interest- Ex: someone’s actions are hurting someone else but both people are acting in their own self-interest (i.e. pollution, smoking, etc.)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.- Only way to control externalities are to put a price on them (i.e. taxes on smoking)o Taxes, rent control- Trade-Offs are Everywhereo Trade-offs: if you’re doing something, you’re giving up/not able to do something else Ex: going to a party or to study during that time? Ex: working overtime to buy new iPhone (less time to spend with friends but will have iPhone eventually)o Society faces a trade-off between guns and butter Butter = spending $ on domestic goods/productso Opportunity cost: what you give up to obtain something Ex: Opportunity cost of going to college: not able to work, sacrificing some income Ex: College enrollment during a recessionvalue of college degree increases during a recession so opportunity cost decreases- Likelihood of getting a job and having a high income without a college degree is low so the value of a degree is greater- Diagram on page 5 (figure 1.5) Ex: LeBron James: had to sacrifice a college degree to get a huge income so the opportunity of going into the NBA and getting a huge salary was to give up a college education- Thinking on the Margino Examples: At dinner time, whether to eat the extra spoonful of mashed potatoes or not? When exams roll around, whether to spend an extra hour reviewing notesor watching tv?o Whether to do something or not/which thing to do?o Marginal Changes: incremental adjustments to an existing plano Marginal Costs and Marginal Benefits (Revenue) Airline