What is Economics? Lecture 2 Manove 9/5
Principles of Economic Thinking
Last time, we covered four useful principles of economic
o 1. Think about the goods (not the money).
o 2. Everything has a cost.
o 3. Making rational choices.
o 4. When deciding “how many,” think at the margin.
Now we will add three more principles.
5. People respond to incentives—sometimes in unexpected ways.
EX: Protecting the Elderly
o A town ordinance prohibits eviction of the elderly for
nonpayment of rent.
o How would the ordinance affect housing for the elderly?
This law would make it more difficult to collect
rent from the elderly…
So landlords would have an incentive not to rent
EX: Protecting trees.
o Suppose the U.S. Congress passes a tough law that
limits the use of paper.
o What would happen to the number of trees?
o Suppose Congress made it illegal to eat chicken or
eggs. What would happen to the number of chickens?
Chickens would lose their value.
Farmers would have a strong incentive to get out
of the chicken business.
Almost all chickens would be destroyed.
Trees and Chickens
o Are trees used for paper similar to chickens use food?
All chickens are farmed—there are no wild
But there are both wild trees and farmed trees,
and most people think that wild trees are nicer.
o If people stopped using paper, would there be fewer
Fewer farmed trees? Probably yes!
More wild trees? Hard to know.
Conclusion: If people use less paper, we would
probably have fewer farmed trees, but the effect
on wild trees would be uncertain without a careful
analysis of the data.
6. Prices that reflect ALL opportunity costs provide the best incentives. Should drivers have to pay tolls for using highways?
Should universities be free?
o We will discuss the cost of attending university later in
EX: Highway Tolls
o Are highway tolls necessary for good highway
Taxes can be used for funding highway
maintenance and law enforcement.
But tolls are the best way to reduce highway
Highway tolls (the prices) should cover the cost of
Who is willing to pay high tolls? Who isn’t?
EX: Price of Gasoline
o What is the economic cost of using gasoline?
The expense of extracting petroleum, shipping it,
But that is only the beginning.
Losses from increasing the scarcity of gasoline