Recall: Consumption is destruction of utility.  How does this work in the public good context?  Consider a piece of artwork.  If I look at the art, that doesn’t destroy the utility that others viewing the product after me would get from the painting.

We need the concepts of public and private goods to explain how this works.  As with many things in theory, there are two pure cases which are relevant and then there are necessarily things which lay between.  A pure private good is a good for which the total of this good is the sum of all of the good that is consumed.  Each person who consumes a portion of this good will reduce the total amount of the good (destroying the ability for someone else to create utility from that same unit of the good).  A pure public good does not have this property.  One person who enjoys a public good leaves as much for the consumption of others which was available before they consumed.  If I decide to view a sunset, then I do not reduce the amount of sunset which is available for all other people to view.  We refer to this property as non-rival in consumption.  The cup of coffee that Dr. Williams consumes is rival in nature because if he enjoys it, then I can no longer enjoy it.  This is also true of national defense, it is non-excludable.  I cannot prevent someone who refuses to pay taxes from being subject to the same protection which national defense provides.  If I have more, you have more, we have the same amount.  It is very seldom for which you can find a pure public good.  My hot rod car is enjoyed by everyone who sees me drive by, I am very unlikely to have the opportunity to collect rents from the people who have benefited from viewing by hot rod.  Dr. William’s neighbor looks at Mrs. Williams garden and all of the pretty flowers that she has planted.  This same neighbor has not contributed to the upkeep costs associated with these flowers. 

Should Blackmail be illegal?  Dr. Williams builds a case which says no, it should be perfectly legal.  In this way we can eliminate people extorting others.  If you promise to withhold information for a certain price, then you have an enforceable contract which would ensure that the person did not break the “gag order.”  Mrs. Williams would be for legal blackmail because this would create many people wishing to monitor Dr. Williams actions to prevent him from doing anything “fishy.”  The cost of bad behavior has now risen because of the increased expected value of getting caught. 

Say there is an auction for steak.  Bill Gates wants steak, and I want steak.  Bill Gates has 40 billion, and I have $11.  I can always outbid Bill Gates for steak.  For example, say Bill Gates offers $20 for the 1 lb of steak.  I can offer $11 for half, thereby beating Gates bid on that section of the meat.  Further, if he raises his price, I can bid all my money for the quarter of the steak.  In this way the market system assures that I can always get some steak, no matter how small that piece turns out to be.  In poor neighborhoods we see the effect of the market.  There are always some nice cars.  There are always some nice booze.  There are seldom nice schools.  The provision of these other consumption goods reflects the way in which the market is efficient at providing them.  The poor school is poor because no one can afford to move to the school district they would otherwise want to send their children.  An implication of these theme is that Emminem always outsells Pavarotti. 

We went over Q12 from A-A: E&P

Specialization is possible with unequal endowments.  It is possible to enjoy higher living standards with specialization than was possible under autarky (people do what they are better at doing and assuming they have a skill others want, their consumption will increase).  A person specializes in something when they have the lowest opportunity costs of specialization in that good.  We can go from a relatively inefficient outcome of autarky and increase everyone’s consumption of one good without lowering the consumption of the other good, than we can assume we are moving toward the Production Possibility Boundary.  In the example from class (A=30W and 20C; B=20W and 10C; 1/3 time and 2/3 time each), One unit of corn costs “Anderson” 3 units of wheat.  The same unit of corn would have cost “Brooks” 4 units of wheat, therefore “Anderson” should specialize in corn.  For specialization to make sense trade opportunity must exist.  Anderson needs 30 W to trade 10 corn; Brooks offers up to 40 W to trade 10 corn.   Assuming equal bargaining power the result will be b 35W for the 10 corn.  Exchange conserves social totals. 

Money Distinct from barter) *Is a good which facilitates exchange* (WW: money is a man-made innovation) Money must pass the test of sellers and buyers, it serves important functions

1)      standard of value – what are commodities worth in this Base or specie

2)      Money acts as a store of value – stores value over time allows people to take advantage of money to consume over time. 

3)      Facilitates Exchange

Good money is useful (cheap) – Gold and Silver emerged as money because of several properties that they contained.

1)      Portability (relative):  This is a high value / weight

2)      Durability (lasts over time): Keeps value during relevant time period

3)      Divisible/ Fusible:  Previous commodity moneys may had a divisibility component, but the fusibility of cattle as a payment methods is limited.

4)      Recognizable/ Assayable: Gold and silver have desirable qualities in being about to pass certain purity tests in a relatively quick fashion.  Experts in gold metallurgy can certify the purity of a metal. 

Gresham’s law is misleading (according to Dr. Williams) in the following way:  A money starts of as “pure monetary gold” A king then devalues the money by recalling and debasing the money as a alloy of lead.  The pure gold coins then become “bad to give away”  the debased alloy becomes “good to use in exchange.”  Since money’s value in Dr. Williams definition derives its usefulness by contributing to exchange this is the correct way to see the Gresham’s law.  A restatement might be “Good money drives out bad.” 

Demand:  A market is any place of institution which enables people to negotiate exchange.  Cities, for example, emerged primarily to facilitate exchange.  This is why the major historical cities were close to ports or along rivers, natural places to set up a market.  Ex: Until relatively recently it was cheaper to ship goods from Philadelphia to London than it would have been to transport goods over land to Lancaster, PA from the same original point. 

The rate of consumption of any good depends on it price.  Any given demand schedule depends on the time period under consideration to derive the change in price and the resulting change in demanded quantities.  Quantity demanded in a time period is a function of price.  At each market price there is a definite amount people choose to demand at this price.  There is an inverse relationship between price and quantity.  The first fundamental law of demand states that a price exists whereby people can be induced to take more (less) of something.

WW: “If I lower my wage enough I can get a job as a quarterback for the Philadelphia eagles.”  This implies that Dr. Williams could come up with a negative wage sufficient to induce the management to hire him as a back-up quarterback (The Philadelphia eagles are a profitable enterprise). 

Economists don’t like to say that people “need” something.  The concept of need is a refutation of the first fundamental law of demand (the word need is useful in tricking someone, but not useful in economics). 

Time component:  If the price of filet mignon fell from $9.25 to $3, how much more would you buy?  This is a meaningless question w/o the time requirement.  A demand graph has to have a time period implicit, or explicit. 

Determinants of Demand:  Things demanded depend on more than price.  These shift the curve “changes in demand” which is distinctive from “a change in the quantity of demand.” 

1)      Income

2)      Taste

3)      Price of all other goods (POAG)

4)      Expectations – This weeks price or plywood prices are low relative to next weeks if we expect a storm.

Speculators buy oil before a storm because they see that prices might rise after the same storm, they increase the price before hand, due to activity, and lower the price afterwards do to activity, which averages the price over time (eliminating extremes), they are doing society a favor strictly as a result of their self-interest. 

We impound the determinants of demand by assuming “Ceteris Paribus,” any time we talk about the demand schedule (curve). 

Elasticity of demand: Consumers are more responsive (in terms of change in quantity demanded) to a change in price with a higher elasticity of demand.  *This is the ratio of the % change in the quantity demand to the % change in price is a measure of the elasticity of demand for a good.

General: ratio of % change in dependant variable to the % change in the independent variable. 

Elasticity of Demand depends on the definition (excluding or not – substitutes) Elasticity depends on substitutes.  It is possible to define the quantity demanded of a the underlying good, where the good is broad enough not to have any substitutes. 

Concept of elasticity is important: It is this reason that we have the second fundamental law of demand.   “The longer any price change exists the greater will be the elasticity of demand (or supply) (greater in the long vs. the short-run).  If WW beats his wife how many additional lashes will it take to reduce her bad behavior one unit?  Another example, how does the effect of one additional year in prison effect the behavior of criminals. 

Adjustments to demand in price are cheaper in long-run than short-run.  Ergo, I could unload my Cadillac tomorrow if I were willing to accept a much lower price than I would if I actually was selective of many buyers.  The 2^nd law – with less haste things approach the median price. 

Friedman Article:  CR of neo-classical economics and the basic underlying assumptions out not or cannot be realistic.  The relevant criteria is predictive power.  **Does not have to be forward looking.  Makes assumptions because there is an infinite amount of information which would be needed otherwise.  The most important and significant theories have the least realistic assumptions, and the most dramatic assumptions.   WW: asked for examples (the gravity, the tree) Falseafiability vs. verifiability – can tentatively be accepted until it is proven wrong.  This follows because there are many theories that are consistent with any set of facts.  How can you get people that are honest w/ no agenda advocating policies that are total opposites?  Friedman seems to posit that the longer research goes on the more positive questions will be answered and the less room for dispute.  This is a theory of progress that will advance the economic science. 

WW: If you and I were in 12^th century Spain and one of us says that the world is flat, it would be valid to conclude that you could not sail to India by sailing west.  Valid but false conclusions are consistent with Friedman’s thesis.  We learn that we test these conclusions with the predictive and explanatory powers of theory in reality.  Reality contradicts that the world was flat, so the premise is no longer known as true, therefore the conclusions based on that premise are no longer made.  Economics would be better served if people were forced to be explicit about their initial premise.  There are different assumptions for different purposes.  We require different models to deal with different circumstances and research problems.

Nagel:  There are two linked spheres – theory and policy.  These are necessarily linked with reality.  Which tool best gives us facilitating ability can be better understood with this essay. 

WW: Assumptions (theory): Should have descriptive as well as predictive capability.  EX: Entrepreneurs should act “As if” they are maximizing profits.   This entrepreneur doesn’t have to know a damn thing, if he acts as if he does.  Nagel gives us the insight to know that Friedman’s essay should have the requirement of survival to understand why actors are assumed to act in a theoretical way, the ones that don’t, cease to exist. 

WW: Friedman did heavy lifting.  If Freidman is defending unrealistic assumptions that the distinction is irrelevant, if they are useful he has to redefine empiricism to render conclusive.  If economics as a profession is going to generalize there is work to be done, to get theory to this useful state.