OUTLINE

Keywords to help you remember FOUNDATION PRINAPUES

I Incentives People respond to incentives

S scarcity Resources are scarce

R RealValues Real Values Matter
P prices prices reflect relative scarcity
R Returns Returns will eventually diminish

benefits costs
First Principle Peoplerespondto incentive
more activity happens

costssbenefitsidisinantioe Example.si
ladies free before 11PM Target Patrons MEN Formento
cometo partieswomen needtobe
there
Prostitutes Use condoms as an optional feature
Sex without condoms higher risk higher price

Types of Incentives
1 Material
Earnings and costs

2 Social
praise and criticism
Eg Olympians were first running for praise
 3 Moral
right and wrong

4 EmotionalPhysiological
Joy and Pain
Eg Babies trying something new

Why are there so many1much

Amountthe jobcosts
Amount
youearn
I Window washers Have a lot of opportunities
Make on averagein a day 6000
It'slucrative producing a greatdeal of profit
moreuptownthandowntown
Theyrespond to an incentiveNoticetheyare

Thescrapmetalindustry islucrative
2 Cartheft careless owners Becausethecar is insured

Unemployment level ishigh

3 Crime Peer pressure
crimepays
The Observer March21,2018copssayKlansman Gangrakes in 81.8M Weeklyfrom
extortion
Dotheygetcaught NOcopschasethemTheyescapein nearby bushes
corruption inJustice system
DelayedJustice Justice Denied NOEVIDENCE

Second Principle R are Scar many possibleuses

latndtime
money
not just for developing countries Also in Dubai Norway etc
Users are Infinite but resources are finite scarcity
Limited resources unlimited wants central problem for economics

trades
build a house1apartment
Land
raise cattle

Opportunity Cost The best foregone alternative

Opportunity cost is the cost of a choice measured in terms of itsnext
best alternative given sacrificed
up or
CHOICE Option Chosen
GIVEN up Opportunity Cost

Example
1what is the opportunity cost of seeing a movie at the
theatre
Resources Used

MoneyTime

option chosen Opportunity Cost

The Avengers Phone credit
Nails
Basically the cost of the choice against
what else could have done
you
2 what is the opportunity cost of getting a University education
and your degree
Resources used

Tuition
Books
3 years

Option Chosen Opportunity cost

University Education whatever
you gave up
Tuition 1m al m can
Supplies 1004 10Ok phone

Housing 42m 814am 7 business

FREENESS Everything has an opportunity costSomeone has

NOSUCH
THINGiii to do
without Even if not the consumer
Someone HAI to
pay the price

Reserves The Central Bank of the country keeps a fraction of

money received from commercial banks to create stability
in the event of a disaster

Free education healthcare Not SustainableUnlesssomeone

ispumping in
long lines clinics themoney
strain on resources
Third principle Great Values Matted affect decision making

quantity1volume of goods
services

Nominal v Real Values

nominal i reflect both price1 quantity eg salary
real reflect only quantity eg groceries

He cannot make decisions based on nominal valuesThey MUSTbe

based on real values what the money can buy

Any nominal value can be expressed in realterms

the real price of a

What's pepsi
DX 100 nominal
1514 calls
DV 23 minutes of work
can take a taxi

Year Qty X Price GDP

increase
Nominal GDP Reflects BOTH Quantityand Price Inflation
Shows
Real GDP Quantities of both Goods 1 Services growth

Growth is measured by the amount of goods and services a

country Ination can produce

Growth is based on real Values GDPNominal
Values have a number of different componentsso it may be misleading
Decisions arelmade based on Real Value

Quantify money based on what the money can donot how muchmoney
it is Real Values

Why do people keep buying Pepsi even though theprice is going

up
they can still afford itThe nominal price keepsgoingup but
Because

the real price has not changed

Fourth Principle reflect relativescarcityGap between supply

anddemand
whateveryou're willing to
giveup

December
24,2014 St Catherine farmers experiencing an oversupply of
crops prices fall
Agrimoney.com Ecuador setbacks sell banana prices rise Fyffe i5thSep2013

It is relative because
Demand canexceed supply AND
Supply can exceed demand

If demand exceeds supply i e a relativescarcity situation known as a

SHORTAGE excess demand
If supply exceeds demand ie a relativescarcitysituationknown as a
SURPLUS Excess supply

Prices emerge from markets

A market is any meeting of buyers and sellers not characterized bytime

space or geographical space

OnlineShopping Virtual Market
The price must be mutually beneficial
Demand 1
Supply interacts to make a price

Prices riseFau to reflect relative scarcity situations

Raise Price cut off poor people
Prices must rise to eliminate
shortage

Harbour view 2008 Bridge collapsed

Crossing scarce commodity Previously it wasfree
Market People carried people across on their backs for 100
Bigger the person higher the price

A market will emerge wherever there is a relativescarcitysituation In

other words wherever there is money to be made a market willemerge
Fourth foundation principle Prices Reflect Relative Scarcity cont'd

TheDiamond
waterparadoin
Water Necessary but cheap BUT abundant
Diamonds optional but expensive BUT scarce

why is something you can do without expensive white water which

is necessary for life is so cheap
water is abundant
Diamonds are scarce

The real price is what counts

Prices anticipate flag events this means that it will move
before or after relative scarcity events
Example
Gas prices riseagain as
Syria worries boosts oil Sep09,2013 NBCNews
Demand
goes up relative to supply shortage
iraise prices inanticipation
Example
Price Gouging and Hurricane Irma what Happened and Whatto Do
Sept 17,2017 By Justin Sab
Prices
Lag go up after an event

Local Example
 Price Gouging on the rise after Hurricane Sandy RTRNews Nov
05,2012 afterthe scarcity event

Supermarkets are also likely to slightly raise prices

Price Gouging take advantage of the fact that CAI raisethe

you
prices

Price movements can be disguised hidden

Examples Marketing strategy

Change the package from more to less

Giving less for the same pricebut changing the
package to hide price increases
Example Gas Stations pumping more air than gas
it is impossibleto controlprices
Price movements are irrepressiblemarket will repressitselfsomewaysomehow
Example Chile 1973 bread price control
maximum price bread cannot
go

f
marketreasserting bake smaller bread
itself minimum
weight for bread
gave raw dough instead

Example Taxi
Carry only 3 passengers I front 2 back
 Blacktint taxi windowsCHidefrom police
Threaten to remove tints
Assurgence of 7 and 9 seatervehicles No

legislation in place yet about 7 and 9 seaters

vehicle
pack more people inroutes
Shorter
Break uptrips to make moremoney
Raise prices

You cannot restrict or restrain prices if

youdothe marketfindswaysand
Means to recompensate itself

Why is executive pay in

Jamaica so high
Lesspeople
goto get their
masters higher education

They're in short supply onsome because of braindrain

Fifth Principle R Eventually Diminish Thebenefit is still

positivebut it gets
Bethe
fits of an activityincentive smaller

Example Jenifer Lettuce Plot

Fertilizer Increased yield but by less with each bag
Diminishing Returns

But marginal returns don't always diminish

marginal additional or incremental or small change

Example hotel maid hired to make beds

more maids moreefficient
more people less workgets done
Bbzeds 4 beds 2 beds 1bed
total output 7 a io
maid1 Maid2 maid 3 Maid 4
marginaloutput 4 2 I
DO NOT ADD 2 AmountsHowmuchmore is the worker adding totheproduct
CUT OFF POINT where it stops increasing

Marginal Product Theaddition to total outputthat arisesfrom employing

one additional unit of an input
Examples employing one or more worker or using one
more bag of fertilizer

Law of Diminishing Returns

holding all other factors constant increments to an output eventually yield
a diminishing marginal product

Economists like to hold all otherthings constant Cateris paribas

If you don't hold other staff constant youcan't properly analyze stuff

Diminishing returns in consumption

eating until your stomach is sick

Marginal Utility theadditional satisfaction that results from consuming

onemore unit of a commodity

Satisfaction is measured in utils

to studying
Diminishing Returns
The first 20 Minutes brain records info
Keep going without break don'tlearn
keep going Push out stuff
you do know
longer you go Less you retain

whatever youdo do it to the best of your ability absolute

youcould do bad stuff

Youcan't do everythingto your best ability

Diminishing Returns in wealth

Why do most people refuse a fair bet
wager 50000 Everything you own is 50000
don't have control over income
Humans attach more value to losses than
pesubjective
equal equal
gain 50000
you gain is less than what you already own
People are loss Averse no losses are more valued than equal
or Risk Averse gains

The Foundation Principles

The Invisible Hand of the Marketplace was developed by Adam
Smith He is considered the founding father of Economics Leave
themarket alone Market forces of supply and demand will interact
to determine a pricethat will equate demand andsupply

When demand is equal to supply it is called an equilibrium or

it can be said the market dears or the market is in a state of
balance
This is associated with principle 4 Prices Reflect Relative
Scarcity The Prices rise and fall to reflect market
until demand is equal to the supply

The Real World

How did a frost in Brazil raise roofing prices in Kenya
Brazil largest producer of coffee
temperate climate
disruption in coffee market crop was destroyed
world price of coffee will change limited supply

Kenya 2nd largest producer of coffee

 they can sell coffee at a higher world price
higher income
the farmers used money they got to upgrade theirroofs
The demand for roofing material went up sothe prices
went up

Markets are interconnected regardless of physical location or the

actual produce

Why are there more girls in school

men like fast money
parents are more willingto invest ingirls
parents pressure girls more

Apparently In the love Market

violence shrinks the male population scarcely
so men become more valuable PRICE
making women more competitive INCENTIVES

A Man equally qualified as a woman is likely to getthejob

Why maternity leave
She's emotional

female Mn Company more RIGID than a male run company They

 have to work extra hard to provethemselves

Women are incentivized to do this Apparently it will lookbad for

peopleto pass up a more qualified woman than a less qualified
man

over28000 Jamaican men missing Jamaica Observer

Aug 27,2017
why premature death
running off
organ harvesting stronger organs

slave trade still exists manual labour

You can use a foundation principle to answer in

any problem
economics