YT YouTube2Text

YouTube2Text → Transcripts → EC251 03 Choices and assumptions

EC251 03 Choices and assumptions — Transcript

by MT_econ_GRCC · 7,143 words · 1,260 segments · language en · Watch on YouTube

Open in transcriber Summarize with AI Download SRT/VTT

Full transcript

0:00hello everyone and welcome to our second
0:03lecture video of the semester we are
0:05still in fact in week one
0:07this is also a material that will be
0:09material that we will be discussing this
0:11week
0:11chapter two the whole chapter all right
0:14so chapter two
0:15is all about choices and it starts by
0:18talking about a concept
0:19that is very important in economics it's
0:21arguably the foundation of all economics
0:24because it's connected to scarcity it's
0:26really it's it's a way of thinking about
0:28scarcity and that concept is opportunity
0:42cost
0:45now you remember when we talked about
0:48scarcity in the previous
0:49video we talked about how it is this
0:51concept that it is not possible at least
0:53right now with our current technology to
0:56make it so that everybody can have
0:58what they want everything that they want
0:59we it is not possible to
1:01make it so that all people can have
1:03everything that they want
1:05therefore we have to make choices if if
1:08we did not have scarcity we
1:09wouldn't have to make choices at least
1:11not economic choices
1:13everyone could have everything that they
1:14want and that would be the end of that
1:16but because we have scarcity
1:17then people as an individual level and
1:20also societies
1:22and large groups organizations have to
1:24make
1:25choices and every time you make a choice
1:29you are choosing something at the
1:31expense of
1:32something else you are giving something
1:34up every time you
1:36choose to buy an object or a good or
1:39a service for that matter you are
1:41choosing not to buy anything else that
1:42you could have bought with that money
1:44when you go out and buy a hamburger for
1:47two dollars then you are choosing not to
1:49buy anything else with those two dollars
1:52now this works for money but it also
1:54works for time when you are choosing to
1:55watch this video with your time
1:57you are choosing to not do anything else
1:59with that time
2:00well i mean you might be watching this
2:02minimized with something else but
2:04we won't go into that um so anyway the
2:08point is
2:08when you're choosing to go to college
2:10let's say well if you're choosing to go
2:12to a classroom then you are
2:13not using that time for something else
2:17resources whether they are money
2:19remember money is a resource at an
2:21individual level
2:22or time that's always a resource or
2:25other resources natural resources
2:26perhaps like
2:28like oil when we choose how to use them
2:32then we are giving up any other possible
2:35use
2:36this is where opportunity cost comes in
2:38opportunity cost
2:40well it's called the cost so you might
2:42think of it in terms of money and
2:43sometimes that might be accurate but
2:45it's not
2:46always about money it's about how you
2:48spend anything that can be
2:50spent whether it's time natural
2:52resources
2:53or anything else opportunity cost
2:56the opportunity cost of a choice the
2:59opportunity cost of doing something
3:01is the next best alternative
3:04that you gave up now one way of saying
3:08it is simply the opportunity cost is
3:09what you give up you know the
3:10opportunity cost of eating a burger is
3:12um you know spending those two dollars
3:18on buying something from a vending
3:20machine
3:21let's say the opportunity cost of going
3:24to this class
3:25is
3:29playing a video game or rather not
3:30playing a video game which you could
3:32have done
3:32instead of going to this class you could
3:34put it that way but to be more specific
3:37i say next best alternative it's because
3:39the opportunity cost
3:40of a hamburger isn't everything in the
3:43world that you could buy with those two
3:44dollars
3:45it's specifically what you would have
3:48actually done
3:49the next best thing what the next thing
3:52on your list of preferences you know if
3:54your list of preferences is
3:55one buy a burger two buy a pepsi three
3:58buy
3:59something else then what you're actually
4:01giving up to get that burger is the
4:02number two on your list
4:04if you have a list of preferences and
4:05you're going for your number one choice
4:08uh then what you're giving up is your
4:09number two choice that's why
4:11we say that the opportunity cost is the
4:13next best alternative
4:14that you're giving up you're not giving
4:16up everything on your list because you
4:17couldn't have had everything on the list
4:19you could only have one thing on your
4:20list of possible choices
4:22and if you're going for the top choice
4:24then what you're actually giving up is
4:25the
4:26choice below beyond number two okay so
4:29that's opportunity cost that's what
4:30you're giving up
4:31the opportunity cost uh will often be
4:36represented including in a textbook and
4:38exercises that we do
4:40will be represented in terms of money
4:44in other words you know the opportunity
4:45cost of uh going to college for instance
4:48that's mentioned in a textbook and the
4:49textbook says
4:50the opportunity cost of going to college
4:52is first of all well the amount of
4:55money that you spend to go to college
4:57but there's also
4:58all the amount of money that you could
5:00have earned by having a job instead of
5:02going to college
5:03that you're not earning and that gets at
5:06the nature of the concept of opportunity
5:08cost yes
5:09it's what you're giving up including
5:12potential things that you could have
5:13done with that time like
5:14having a job and earning money from that
5:16job
5:17but it's expressing the opportunity cost
5:19in terms of money and that's not
5:22really specific that's not entirely
5:25accurate because what you're giving up
5:26is not so much the money but what you
5:29would have bought
5:30with that money right so like for
5:32example the money that you spend on
5:33going to college
5:34well yes you could think of opportunity
5:36costs in terms of
5:38i'm spending this many dollars that's
5:40the opportunity cost but really the
5:42opportunity cost
5:43is the other stuff that you would have
5:45bought
5:46with that money so for example maybe you
5:48would have made a down payment on a car
5:50so then the opportunity cost of going to
5:52college is
5:54that car
5:57or maybe you would have paid rent with
6:00that money so then the opportunity cost
6:01of college is
6:02being able to live in the sort of place
6:04where you would have paid
6:06rent with the money that you would have
6:08spent on rent if you hadn't
6:09gone to college so that's the
6:12opportunity cost of anything it's what
6:14you give up specifically it's the good
6:15or service that you give up
6:17in order to obtain the thing that you
6:20have actually obtained
6:23we express it in terms of money not
6:26entirely accurate it's not really about
6:27money it's about what you would have
6:28spent that money on if you hadn't spent
6:30it on
6:31during what you're actually buying
6:34and also opportunity cost can be like i
6:37said a matter of
6:38time it you know the thing that you're
6:40spending doesn't have to be money it can
6:42be time
6:43so the opportunity cost of going to
6:46college
6:46is not just the money that you spent on
6:48college is also but it
6:50is also the time that you spent on
6:52college and
6:53specifically what you could what else
6:55you could have done what else you would
6:57have done
6:57with that time now why is opportunity
7:01cost
7:02important it is important because
7:05because it helps us think about concepts
7:07like
7:08budget constraints and production
7:10possibilities frontiers
7:12which are presented in this chapter in
7:13the textbook so
7:15let me redraw the budget constraint that
7:18was in the textbook
7:21okay here it is this was presented
7:24in your textbook the idea is that
7:27there is a person called alfonso who can
7:31choose to spend his ten dollar budget on
7:34either
7:35burgers that cost two dollars each each
7:37or bus tickets that cost
7:3950 cents each so uh he has
7:42he he has the option of buying any
7:45combination of burgers and bus tickets
7:47with
7:47this money and so that can be
7:49represented in on this two-dimensional
7:51graph
7:52with burgers on one axis and bus tickets
7:55on the other axis
7:56by the way it doesn't matter which is
7:57horizontal which is vertical you could
7:58flip this around
7:59and it would still be the same graph the
8:02maximum amount of burgers that he can
8:04buy with his ten dollars is of course
8:06five because they cost two dollars each
8:09and the maximum amount of bus tickets
8:11that he could buy with his 10 dollars is
8:13of course 20 because they cost half a
8:15dollar each
8:16and then he also has all these options
8:18in between
8:20which are represented with this straight
8:22line now
8:25this is a very very simplified view it's
8:27a model right like that's my
8:29face from the last video it's a model of
8:32how you could not how mainstream
8:34economics think
8:36thinks people make choices i was about
8:37to say it's a model of how people make
8:39choices
8:40but it's actually a model of how
8:42mainstream economics says that there are
8:44things that people
8:45make choices based on their utility
8:49based on their budget constraints okay
8:52so
8:52the opportunity cost here well how does
8:54that work well the opportunity cost
8:56of a burger a burger costs two dollars
8:59right
8:59so if you are going to represe if you're
9:01going to speak of opportunity cost
9:03inaccurately in terms of money you'd say
9:06well the opportunity cost of a burger is
9:07two dollars but no
9:09the opportunity cost is actually the
9:12physical stuff that you get
9:13give up in order to get a burger in this
9:15case so if your options are burgers or
9:17bus tickets
9:18then the opportunity cost of a burger is
9:21four bus tickets
9:22right a burger is two dollars a bus
9:25ticket is half a dollar so
9:26for every one burger you could have four
9:29bus tickets so the opportunity cost of a
9:30burger what you're giving up
9:32for a burger is for bus tickets
9:35and likewise to do it the other way
9:37around you could say that the
9:38opportunity cost of a
9:39bus ticket is a quarter of a burger
9:44okay so so far so good
9:48and this is a straight line and we are
9:51talking about a single individual so
9:53that's kind of a microeconomic thing
9:56even though we're in this macroeconomic
9:59macroeconomics course that's right
10:03if we were to take this to the level of
10:05a whole society if we're going to make
10:07this a
10:08social choice or a government choice a
10:10more macro level choice
10:12then we shouldn't be talking about
10:13budget constraints we shouldn't be
10:14talking about burgers and bus tickets
10:16whether we should be talking about
10:18something at the level of policy for the
10:20whole society like
10:21healthcare and education which is a
10:23thing that the
10:24textbook talks about and that's going to
10:26be the next thing i will put up here on
10:28the board
10:30all right now this is a production
10:33possibilities frontier
10:35it's basically like a budget constraint
10:36but for the whole of society
10:38and again i'm just starting by giving
10:40you the example
10:41the same one that is in the textbook
10:43here we have
10:44a trade-off we have a choice we as a
10:47society as a country
10:48in this example we have a choice between
10:50health care and education
10:52and without numbers without putting any
10:55numbers on it because
10:56there's a whole debate like how exactly
10:58would you measure
10:59more health care versus less health care
11:01how exactly would you measure more
11:02education versus less education
11:04but without putting any numbers on them
11:06the idea is that there's a trade-off
11:08between the two
11:10the more we spend the more time money
11:12resources again
11:14now it's for the whole society so it's
11:15not just a matter of dollars it's not
11:17just money
11:18it's also time it's also resources it's
11:20also how many people are employed in
11:21each field
11:22so the more we dedicate ourselves to one
11:25thing
11:26the less we dedicate ourselves to the
11:28other thing as a society
11:30in this case the choices are between
11:31healthcare and education but you could
11:33do this with any two items of
11:35government spending or even general
11:38consumption you could do
11:39healthcare versus military spending uh
11:42you could do
11:43education versus social security
11:46um you could even do you know the level
11:49of
11:50consumers this doesn't just have to be
11:52about government policy
11:54the decisions made for society are also
11:56made not just by the government
11:58but also by consumers workers
12:02uh organizations businesses and so on so
12:05you could even
12:06make a production possibilities frontier
12:08uh where the choice is between
12:10um energy drinks
12:14and cars let's say you know the more
12:16energy drink society has
12:18the less cars it has at least in the
12:21extreme of course you know if we
12:22dedicate ourselves
12:24solely to the production of energy
12:25drinks then we're not going to be able
12:27to make as many cars because there will
12:29be more people
12:30working in factories making those things
12:32rather than the other
12:34that's a silly example but you get the
12:36idea with two things
12:39we have a trade-off between those two
12:43uh at the level of the whole society the
12:45more society has of one
12:47then the less society has of the other
12:49as long as there's only two things now
12:51in reality of course we don't have just
12:54two things we have
12:56thousands millions of possible products
12:58goods and services
13:00so in reality this would have to be like
13:03a super complex higher dimensional graph
13:05with like not just
13:06two axes but like you know a million
13:09axes
13:10that you couldn't really put on the
13:11board you'd have health care versus
13:13education versus military spending
13:15versus
13:15cars versus
13:19movies versus
13:22corn you know crops and other things
13:25like that
13:26lots and lots so you have many many many
13:28many different
13:30things that society could dedicate
13:31itself to that you can choose from
13:33so this is again a model like the smiley
13:35face this is a model in which society
13:37only has to choose between two
13:38things as opposed to all of the things
13:42and this represents the choices
13:44available to society does it represent
13:48that well basically it goes like this
13:52if we choose if we as a society choose a
13:55point
13:56on this curved line that is the ppf the
13:59production possibilities frontier
14:02here then
14:06that is what we call an efficient choice
14:09we are using up
14:10all of the resources available to
14:13society
14:14to produce these two things healthcare
14:16and education
14:18as compared to a choice that we're in
14:19here
14:21that would be a productively inefficient
14:23choice
14:24why is that well because
14:31here at this point let's call it a
14:34we have a certain quantity of healthcare
14:39and a certain quantity of education
14:42but we could get more of both by moving
14:45to point b
14:50that increases education
14:55and that increases health care too so
14:57why would you ever want to be at point a
14:58well basically the answer is you
15:00wouldn't
15:01if this is the production possibilities
15:03frontier you oh as a society you always
15:05want to be on it
15:06you always want to not be inside the
15:08curve not be at point a because
15:10it's productively inefficient there's no
15:12point you can get more of everything
15:14by moving to point b or i suppose you
15:16could get just more healthcare by moving
15:18from point a
15:19to point c you could get more of
15:23something in any case
15:26so any point that's inside this
15:29line inside this graph is productively
15:32inefficient that is to say
15:34we could do better at uh without
15:37sacrificing anything
15:38so why wouldn't we well we should we
15:41should move to the line
15:43what about any point outside the line
15:45like here let's call that
15:47point x well
15:50that is impossible to achieve any point
15:53outside the line would cost us more
15:56resources
15:57maybe more manpower more electricity
16:01more whatever more resources than we
16:03currently have
16:04why well because because we defined it
16:06that way that's what this
16:07graph represents that's what this line
16:09the production possibilities frontier
16:11represents it is the frontier the limit
16:14of our possibilities so anything beyond
16:16that
16:17is beyond our possibilities that's
16:19that's what the graph is supposed to
16:20represent
16:21so any point outside of the line beyond
16:25the line is impossible because it's
16:26beyond our possibilities
16:28any point inside of the line is within
16:30our possibilities but inefficient
16:31we're not using everything that we could
16:33be using we're not
16:34as efficient as we could be any point on
16:37the line
16:39is productively efficient that is to say
16:41we are producing as much as we can
16:43but of course as you may have noticed
16:46there isn't just one point on the line
16:47there's
16:48lots of them let's call this one point
16:51d and this one e
16:54and this one f so okay point a
16:58is bad because it's wasteful it's
17:00inefficient we're not doing
17:01everything that we could point x is
17:03impossible but between points b
17:05c d e f which one should we choose
17:09well all of those are efficient all of
17:11those are equally efficient
17:13e has the most healthcare d
17:16has the most education and the other
17:19three are
17:19somewhere in between so in this example
17:23we have these options
17:27that are all productively efficient they
17:29all involve
17:30using every available resource for
17:32health care and education
17:34just just that some give us more health
17:36care other gives others
17:38give us more education as for which one
17:41we pick
17:41as a society that becomes a value
17:43judgment that becomes a matter of uh
17:46what the textbook calls
17:48allocative efficiency rather than
17:50productive in other words it's not about
17:52how much we can make it's about it's not
17:55about the fact that we could make more
17:57it's about what do we prefer what do we
18:00as a society
18:01choose to do with the resources that we
18:03have do we want more healthcare or do we
18:04want more education or do we want
18:05somewhere in between
18:06that's what the choice between these
18:08different points on the line represents
18:12all right now i have cleared that graph
18:14i've cleared the
18:15ppf of all those points and labels to
18:18draw your attention to a very simple
18:20basic fact and that is the fact that a
18:22production possibilities frontier as you
18:24can see
18:24is curved it's it's a curved line this
18:27is unlike
18:28the budget constraint that we had
18:29earlier remember alfonso and his burgers
18:32and tickets
18:38that's basically the individual version
18:40of rppf
18:42or ppf is the social version of a budget
18:44constraint i guess you could say
18:53okay so the budget constraint
18:56was a straight line the ppf is a curved
18:59line
19:01is there any meaning to that is there
19:03any reason for that yes there is
19:05and the reason for it is something
19:07called diminishing returns
19:09specifically diminishing returns for
19:12society for the production possibilities
19:15frontier what do i mean by by
19:16diminishing returns
19:18well think of it think of a society that
19:21has a choice between
19:22two things in this case healthcare and
19:24education
19:27and think of what it means to be
19:30in the middle where you're sort of
19:33having half and half you know
19:35half of your people are working in
19:37healthcare half of your people are
19:38working in
19:39education versus somewhere in the
19:42extremes where
19:42where you know you're you're so focused
19:44on healthcare that you're throwing
19:46everything you've got it you're
19:47throwing all of your resources all of
19:50your
19:51productive employees young people
19:53machinery
19:54everything you've got is dedicated to
19:56healthcare versus everything
19:58so that's one extreme and the other
20:00extreme in this case of course would be
20:02education if you're throwing everything
20:03you've got at
20:04education your people your resources
20:08your machinery everything is dedicated
20:09to education
20:10not entirely sure how machinery but i
20:12guess sure you know building schools for
20:14example
20:16okay now the thing about the extremes is
20:20as you get closer to an extreme here in
20:22other words as you get closer to
20:23dedicating all of your society's
20:25resources to a single thing
20:27you are starting to hit diminishing
20:30returns
20:31as you throw more stuff at getting more
20:34and more education
20:36the stuff that you're throwing at it
20:37isn't having as much of an effect you're
20:39getting less bang for your buck
20:41as it were simply put let's think about
20:44human resources let's think about people
20:46if you start from somewhere in the
20:48middle when you know
20:49half of people are working in health
20:51care and half are working in education
20:53and then you're moving towards an
20:54extreme of education in this case
20:56what that means is more and more people
20:59are getting jobs as educators as
21:01instructors as teachers
21:03including people who are not
21:04particularly good at it
21:07so for that reason the line
21:11starts to curve and doesn't go like this
21:13if it were a straight line it would go
21:15like that
21:20in other words if it were a straight
21:21line like the budget constraint
21:23then in the extreme case where you're
21:25throwing everything you've got at
21:27education
21:27you'd be able to get more education but
21:30as it stands
21:31in reality in a more realistic
21:33production possibilities frontier
21:34as you're throwing everything you've got
21:36in education you only get
21:38this much it's less than if it were a
21:41straight line
21:43why is it less again because in the
21:45extreme case
21:46you are throwing everything you've got
21:47at a single industry
21:49including things and people that are not
21:51very good at that industry
21:52in the case of education you are making
21:54everyone an educator including people
21:56who
21:57are really not very good at teaching at
22:00all
22:01and likewise in the healthcare extreme
22:03if you make everyone a nurse including
22:05people who are not very good at nursing
22:07then your your results are not going to
22:09be
22:10as great as you might expect
22:14that is why the ppf is curved
22:17in the case of alfonso and his budget
22:19constraint his resource
22:21is not people or
22:24a complex
22:27set of natural resources his resource is
22:30just money
22:30and money is money money is equally good
22:32you know money is equally good for
22:34burgers
22:34as it is for bus tickets money
22:38you know sure you can you can buy things
22:40with money you're not going to be able
22:41to buy
22:42less burgers with money the the more
22:44burgers you buy that's that's not how
22:46that works but if society dedicates
22:47itself to
22:48producing burgers and nothing else then
22:51yeah after a while
22:52you won't get much burger for your
22:56resources after a while the amount of
22:59extra burgers that you're able to
23:00produce once you get people like me
23:02working in farming is is not going to be
23:05it's not going to be very much
23:07i'm i'm not going to be able to raise
23:09cattle
23:12so that's why the the ppf is curved
23:15and therefore the extremes in other
23:17words are not as
23:19um they're they're further in they're
23:21not as out there as they would be
23:23for the budget constraint because of
23:25diminishing returns because the more you
23:26throw
23:27at a single industry the less useful the
23:30stuff that you throw at it
23:31is all right now let's
23:34switch gears a little bit move to
23:36another topic that is mentioned in
23:38chapter two
23:39but that is connected and you will see
23:40how specifically
23:42this is also a very foundational concept
23:45in economics
23:46division of grape actually the original
23:48labor one was mentioned in
23:49chapter one as well when the textbook
23:52talked about adam smith
23:54because the vision of labor is this idea
23:57that you can you as a society you as a
24:00group of people
24:01can get more stuff done can produce more
24:04can be more efficient more productively
24:05efficient if people
24:07specialize in what they are good at if
24:09one person
24:10is good at farming and another person is
24:13good at fishing
24:14then the person that's good at farming
24:16should farm and the person that's good
24:17at fishing should fish rather than
24:19both of them trying to do both things
24:22society as a whole in this case that
24:24group of two people
24:25will have more stuff if each person does
24:28what they're best at and specializes in
24:31that
24:32rather than everyone trying to do
24:33everything that's the vision of labor
24:36you know different people specializing
24:38in what they're good at
24:39will result in a society that has more
24:41things that is more efficient
24:43than uh if each person tried to
24:46do everything by themselves okay so far
24:49so good
24:50and in the example that i just gave you
24:52you know if one person is better at
24:53farming of course that person should
24:54farm
24:55if one's person if the other is better
24:57at fishing of course that person that
24:58person
24:59should fish simple
25:02but what happens
25:06if one person is actually better at
25:08everything
25:09well what happens if one person is just
25:11terrible at everything
25:12what happens if you've got this super
25:15farmer
25:16fisherman construction worker
25:20miner who is just good at everything
25:23and another person who is just really
25:25bad at everything
25:27does that mean that division of labor
25:30no longer makes sense does that mean
25:32that there's no reason to specialize
25:33anymore
25:35no it doesn't this is where comparative
25:37advantage comes in
25:38it's easy to see why specialization
25:40makes sense if different people are good
25:41at different things
25:42but the concept of comparative advantage
25:44tells us that even if one person is good
25:45at everything
25:46and another person is terrible even then
25:49division of labor and specialization
25:51still makes sense and that is because of
25:53opportunity cost
25:59what about opportunity cost well a
26:01person might be best at everything
26:03better at everything
26:04another person might be terrible at
26:06everything but they're still not going
26:07to have the same opportunity cost
26:11we will do some numerical examples some
26:14stuff with tables and math next week
26:18but for now suffice it to say i'm just
26:20going to say this
26:22that the person who is
26:25terrible at everything might still have
26:27a lower opportunity cost
26:30what do i mean by that well suppose
26:32again we have the
26:33super farmer
26:37fisherman construction worker who's just
26:39good at everything okay
26:41sure he's good at everything but
26:42nevertheless that person
26:44is still better at one thing than the
26:46other things that he can do
26:48he's still a better farmer than he is a
26:51construction worker let's say
26:55in that case if he's
26:58good at everything but he's still a
27:00better farmer then he's a construction
27:02worker
27:03then if he were to go for construction
27:06work if he were to go for the thing that
27:08he's
27:08still better at than everyone else but
27:10is not his like top skill
27:12then he would be giving up doing
27:17engaging in the activity that is his top
27:19skill the person who's better than
27:21everyone else and everything
27:22still has a top skill still has a thing
27:24that they are best at
27:26and they should specialize in that thing
27:28that they are best at because if they
27:29specialize in something else
27:31if this person is an amazing farmer and
27:33a slightly less amazing construction
27:34worker
27:35and they specialize in being a
27:36construction worker if they specialize
27:38in their number two skill
27:39not in their number one skill then they
27:42are giving up their number one skill in
27:43other words the opportunity cost
27:45is high a person who's good at
27:47everything is going to have pretty high
27:48opportunity costs because remember an
27:50opportunity
27:51the opportunity cost of something is
27:52what you're giving up
27:54in order to do that thing and if you're
27:56good at everything
27:57then no matter what you give up you're
27:59going to be giving up a lot
28:00because you're good at everything so
28:04the opportunity cost can be quite high
28:07if a person is an amazing farmer and
28:08construction worker
28:10but their number one skill is farming
28:12they should specialize in their number
28:14one skill
28:17and not give that up not not give that
28:19up as the opportunity cost
28:21so then the other person who is
28:24bad at everything uh that person can
28:27pick up
28:28you know the uh the activity that the uh
28:31superhero didn't choose to do
28:34the superhero person can be a farmer
28:37because
28:38that's what he's best at and the person
28:40who's terrible at everything
28:42can do construction because while the
28:44superhero could do construction better
28:45the superhero is specializing in farming
28:48i'll put numbers on this and perhaps
28:50that will help next week but for now
28:54just know this concept that
28:57because of opportunity cost even when
28:59you have a situation where
29:01a person or a country for that matter
29:03this works for countries too
29:05a country is better at everything than
29:07another country
29:09nevertheless the person or country or
29:11organization or entity that is better at
29:12everything
29:14still shouldn't try to do everything on
29:16their own
29:17it is it still makes sense to have the
29:19vision of labor
29:20and to have the personal country that's
29:22best that's better at everything
29:24specialize in their
29:25top skill while their the other
29:28activities are done by
29:29other people or other countries even if
29:32they're not as good as those other
29:33activities
29:35all right one last topic which is
29:37addressed in
29:38section 2.3 of chapter 2 in the textbook
29:42is something they call objections to the
29:44economic approach or objections to the
29:46economic
29:46way of thinking and these are
29:50i mean this is about how
29:54everything that we've talked about but
29:55even more so a lot of the things that we
29:57are going to talk about in the rest of
29:59this course and the rest of the textbook
30:00and the rest of the readings
30:02a lot of these things you will have
30:04noticed
30:06rely on a certain way of thinking a
30:08certain
30:10model of human behavior that may be
30:14highly unrealistic and you will run into
30:18the unrealistic aspects of it
30:19more and more as we as we continue and
30:22i'm going to draw your attention to some
30:24of the unrealistic aspects of some of
30:25the models that we're going to look at
30:27and some of the
30:28concepts that we'll be dealing with what
30:30the textbook calls the economic way of
30:32thinking
30:33also called mainstream economics it's
30:35some of the some of the generally
30:36accepted
30:37uh assumptions and models and approaches
30:40in in the um
30:41field of economics often strike people
30:44as
30:45completely at odds with the way that
30:46peop that humans actually behave because
30:49they are the textbook talks about how
30:52the economic approach
30:53assumes that people are self-interested
30:56and
30:57always seeking to maximize utility
31:01and trying to get the most that they can
31:03out of
31:05every kind of activity that they do
31:07trying to you know
31:08get maximum utility from their money
31:10spend their money in the way that
31:11benefits them the most
31:13make choices in life in a way that
31:14benefits them the most and so on
31:16so in other words economics or
31:18mainstream economics at least
31:20this school of thought tends to present
31:22humans as being very self-interested
31:24and that's one of the most striking
31:26things about it and that's one of the
31:28first things that people see and go well
31:30wait a minute that's not how it works
31:32people humans are often altruistic they
31:34help each other they're not
31:36necessarily utility maximizing machines
31:38and that's true
31:40and the book tries a little too hard in
31:43my opinion
31:44to counter those objections
31:47uh by saying that well you know
31:51yes people don't really act in this way
31:54generally but
31:55this is a good model you know this is a
31:57good representation it's like that
31:58smiley face from the previous video
32:00yeah of course of course people don't
32:02always act in in this way in this
32:04utility maximizing
32:06um a completely self-interested way
32:10but nevertheless for our purposes
32:13for the things that we're talking about
32:15uh people do act in those ways like if
32:17you go to a supermarket
32:19you're going to shop for the objects
32:22the items that uh give you uh the most
32:26benefit according to your
32:28your opinion you know if you're going
32:29you're going to buy
32:31things from a supermarket in a
32:32self-interested way in the sense that
32:34you're going to buy the things that you
32:35want
32:36and that is true certainly when we talk
32:39about
32:40human behavior in very specific
32:42circumstances like going to a
32:43supermarket or
32:44running a business trying to make a
32:46profit from the stock market
32:48in those specific instances people do
32:51tend to act very self-interestedly
32:53even if in other aspects of their lives
32:55they don't
32:58and that's all true but i did say that i
33:01think the textbook
33:02goes a little too far in trying to
33:04defend the
33:05approach of mainstream economics and
33:07here's why
33:09well i'm going to tell you a joke which
33:11is completely unfunny like all economic
33:13jokes are
33:14but that's fine because it's not really
33:17a joke it's meant to illustrate a point
33:19about economics it goes like this an
33:22economist and a normal person
33:24are walking down the street and the
33:25normal person sees a 10
33:27bill on the ground and tells his friend
33:30hey hey hey there's a there's 10 bucks
33:32on the ground pick it up and the
33:34economist doesn't even look and says no
33:35that's not possible
33:36i don't believe that there's a 10 bill
33:38on the ground
33:40and his friend the normal person asks
33:43what do you mean it's right there why
33:44won't you look at it and the economist
33:45says
33:46it can't be there because if it were
33:48there somebody else would have already
33:50picked it up
33:52yeah there's no laughing i told you it's
33:54a bad joke but
33:56it illustrates an important point
33:59if it was really there somebody else
34:02would have already
34:03picked it up in other words
34:07if there is an opportunity somebody will
34:09take it
34:11that's an assumption that's a more
34:13subtle assumption than the one that says
34:14people are self-interested
34:16it's more difficult to see but that is
34:18an assumption that is at the basis of a
34:21lot of mainstream economics and we're
34:23going to see that in a lot of the models
34:25and the other things that we'll be
34:26discussing for the rest of this course
34:28there's this assumption that if an
34:30opportunity exists if there's a way to
34:33be more efficient or to make more money
34:35or to to do something that benefits you
34:37in some way people are going to take it
34:40if an opportunity exists
34:41it will be it will be gone somebody will
34:43have taken it if there's money on the
34:44ground they won't be there for long
34:46someone will pick it up quickly
34:50we'll see that when we do supply and
34:52demand we'll see that in other things as
34:54well
34:56and this assumption like i said it's
34:58it's
34:59unrealistic of course it's more subtle
35:01than the selfishness one
35:03but perhaps it's a bigger objection
35:06to the economic way of thinking namely
35:08the fact that
35:10people don't always take opportunities
35:11people sometimes don't notice them
35:13you might not notice the money that's on
35:14the ground you may not know
35:16you may not realize that you could apply
35:18for a job
35:19and get it and that would launch your
35:21career
35:22into you know that would give you a
35:24great career well maybe it would but
35:26you don't know that maybe you don't even
35:28know that the job exists
35:31people don't always take opportunities
35:34immediately or very quickly as they
35:36arise
35:37and that has an impact as we will see
35:41also another
35:44assumption that mainstream economics
35:45often makes is that people are rational
35:48what do we mean by rational uh we don't
35:51mean that
35:52um you know they're good scientists or
35:55they're
35:56good with math we mean that they
35:58rational means they make consistent
36:00choices if somebody likes ice cream
36:02and they have the money to afford it
36:04then they're going to buy ice cream
36:06if somebody likes popcorn they're going
36:09to buy popcorn people like things and
36:12they are trying to get the things that
36:13they like
36:14that's what we mean when we say that
36:16economics makes the assumption that
36:17people are rational which again
36:19might sound perfectly reasonable at
36:22first sight
36:23but there's a subtle bit of um
36:27inaccuracy in there we have actually
36:30very good evidence that people are
36:31irrational
36:32even when it comes to their own their
36:35own benefit
36:36we all know friends we all probably have
36:39been in our lives
36:41in situations where we made decisions
36:43that didn't even make sense
36:45like decisions that were bad for us not
36:46just decisions that were
36:48um bad for other people but decisions
36:50that were bad for
36:51us we have all made those decisions and
36:54sometimes even while knowing that
36:56they're bad decisions
36:58people make decisions that are bad for
36:59themselves all the time
37:02and not just bad decisions but also
37:05random decisions can be easily swayed
37:09you know i just mentioned a few minutes
37:10ago about
37:11ice cream that you know mainstream
37:13economics assumes that
37:15if you like ice cream you're going to
37:16buy ice cream or something you can
37:17afford it and it's within your budget
37:18constraint
37:19if you like popcorn you're going to buy
37:20popcorn well
37:22maybe but we also know that you know if
37:26anybody who's been a manager in the
37:27supermarket knows
37:28that depending on where you position
37:30things in the supermarket depending on
37:32where you position things on
37:33shelves people make different decisions
37:35they'll buy different things
37:37based on whether those things are higher
37:39or lower or closer to the exit
37:40or in some other part of the supermarket
37:43so
37:44there's a certain amount of fickleness
37:46or or people can be influenced
37:48to make decisions um based on on
37:51on very small things such as
37:53presentation the presentation of a
37:54product and maybe
37:55we will you can say that it doesn't
37:57matter if people buy ice cream or not
37:59that doesn't affect the macro economy
38:01well no but how about cars
38:04car salesmen and um
38:08all you know car display lots anybody
38:11who who runs those
38:12knows that depending on how you present
38:14the cars where you put them
38:16what other cars are next to them that
38:17will influence people's decisions about
38:19what kind of car to buy and of course a
38:21car is a much bigger decision than
38:23ice cream or popcorn or for that matter
38:27what about houses there's a huge
38:29potential there
38:31for the same house to be bought
38:34or not depending on how it is presented
38:38and sometimes depending on small
38:40apparently relevant details about the
38:42presentation
38:43so we assume in mainstream economics
38:45that people make
38:46rational decisions in the sense that
38:48they like certain things they want
38:50certain things and they will try to get
38:51them
38:52if they have enough money if they have
38:54enough resources and so on
38:55but oftentimes what people like tends to
38:57be a very sort of random fickle thing
39:00that that changes depending on the
39:01weather well
39:02not literally depending on the weather
39:03but depending on such things as
39:06where things are positioned uh whether
39:09the consumer feels good or bad that day
39:12and so on so what people like and what
39:14they want
39:15isn't as simple as as economics assumes
39:18economics assumes that people's desires
39:20are very simple
39:21and in reality of course people are a
39:23lot more complicated than that
39:26by the way if you want a macroeconomic
39:28example a good example would be
39:30in polls in political polls that ask
39:33people
39:34uh what they what they support on
39:36various issues
39:37oftentimes you can get people to give
39:38you different answers just depending on
39:41not only how you ask the questions but
39:42even by asking the same questions in a
39:44different order
39:46you can sometimes get people to give you
39:47different answers not all people of
39:48course people who are very strong
39:50political opinions will always give you
39:52the same answer no matter how you ask
39:53the question or what order you put them
39:55in but people who
39:56are not as involved will sometimes
39:59change their answers depending on
40:01what order the questions are presented
40:03in so again
40:04what people want is not as simple as as
40:07we sometimes assume it to be in
40:09economics
40:10so you have to watch out for that
40:14whenever we do economics whenever i
40:16present a theory or a model
40:18of course it is always going to be
40:21unrealistic to some degree we talked
40:22about that in the previous video
40:23remember the smiley face
40:25uh you know every model every theory is
40:28like a smiley face it's not a fully
40:29accurate representation of reality just
40:31like
40:32an emoji is not a fully accurate
40:33representation of a human face and
40:35that's
40:35fine as long as
40:39the things that we leave out are not
40:41very important things
40:43so every time i present to you a theory
40:45or anytime anybody presents to you an
40:47economic theory or a model or anything
40:50you should ask yourself first of all
40:52what
40:53unrealistic assumptions about people is
40:57this model
40:57making there will always be some and
41:00that's fine but number two
41:03is it important that this model weaves
41:05out some things about
41:06how people really act like this model
41:08assumes that the people are rational
41:10okay um does that matter or not
41:13i mean are people close enough to
41:15rational in the context that this model
41:17is talking about
41:19or are people actually super irrational
41:21in the context that this model is
41:22talking about so
41:23the fact that it's not taking that into
41:25account is a problem is it a problem or
41:27is it not a problem
41:28that this model ignores irrationality in
41:31people
41:32depending on the model depending on what
41:33we're talking about they may or may not
41:34be a problem again
41:35if we're talking about supermarkets and
41:37ice cream then maybe
41:38who cares that people aren't actually
41:41rational in their buying habits
41:43if we're talking about houses in the
41:46housing market
41:47or about political decisions then it
41:49might actually matter
41:50it depends on what we're talking about
41:53all right so that was my little
41:58disagreement a little bit with what the
42:00book says when it comes
42:02to objections to the economic way of
42:03thinking because the book basically says
42:05the economic way of thinking is always
42:08good enough for its purposes and
42:10we don't need to worry about unrealistic
42:11assumptions
42:13i would say we do need to worry about
42:15unrealistic assumptions
42:17not always only when they matter so be
42:20careful
42:21watch out for that so that's it
42:24for chapter two and week one of our
42:27course
42:28a bit of a whirlwind tour through some
42:30very important foundational concepts in
42:32economics
42:33i will see you next week

About this transcript

This page contains the full transcript of EC251 03 Choices and assumptions by MT_econ_GRCC, generated from the public captions YouTube serves with the video. The transcript has 7,143 words across 1,260 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

What you can do with it

Use the transcript to take notes, quote the speaker, build a study guide, generate a summary with ChatGPT or Claude via the YouTube Summary tool, or export it as a timed subtitle file with YouTube to SRT. You can also re-open it in the transcriber to translate the transcript into 100+ languages.

Free YouTube transcript tool

YouTube2Text is a free YouTube transcript generator — no signup, no daily limit. Paste any YouTube link and get the full transcript instantly, with timestamps, click-to-jump, translation to 100+ languages, AI prompts for ChatGPT, Claude, and Gemini, and exports to TXT, SRT, VTT, or Markdown.