Class summary 10/5

Broken Window Fallacy:

                                                Replacement wealth

before the storm: money & roof

after the storm: no money & roof

What people see is the result after the storm; they fail to see what storm destroys and what would happen if storm did not hit the house.

Government provides the money to reduce the unemployment rate for creating more jobs.  (good economists will ask where does the money come from?)

3 sources:

Tax

Borrow(tax tomorrow, trade jobs today for jobs in the future)

Print money

Certain situation we get free lunch: what if roofers were idle/unemployed/We’re in a recession?   Micro economists say: don’t follow the $, follow the REAL RESOUCES.

Measured income got high, GDP increased, living standards did not improved.

Costs are Subjective

MARGINAL (a little bit more or less) THINKING, Reference Point

Water & Diamonds: thing valued high with lower price---Paradox

Marginal cost: the change in cost when you make a decision

Marginal cost: the change in benefit you get when you make a decision

Plane seats 200 people, total cost--$100000, average cost: $500

If there are only 180 people now, it costs NOTHING to let one more in

If there are 200 people already, it costs 100000 for one more person to get in( he needs to get into another plane)