August 30 - September 17

Q1: Do economists ever create models where every consumer is cold and calculated?

R: The assumption that many economists make in price theory models is that consumers are rational calculators of costs and benefits at the margin. Few graduate students in economics are ever taught to challenge this assumption, since their real purpose is to generate elegant mathematical models. In order to generate those models it's necessary to simplify the human actor who makes decisions. When we conducted the double oral auction every one was given instructions which bounded their decision contexts, i.e., it forced you to act as if you knew the highest price you were willing to pay for the next unit of a product. The resulting equilibrium around which product prices would settle could easily be predicted from the model. That was a simple example of the strait jacket conventional economic theory places around their "economic man and woman".

Q2: Can you please explain why the short essay questions (Homework #1 essay questions) were relevant to microeconomics?

R: It's important to consider the kinds of things that we are willing to become commodities. Conventional economics (as well as the media, advertising and even schools) gives students the impression that it would be better for society if everything were for sale. Price fluctuations through the forces of supply and demand would bring an equilibrium to each market, so everyone would get the exact quantity and quality of what he or she wanted based upon willingness and ability to pay. In fact, we are moving closer to this model -- schools, prisons, expensive organ transplants, and many of our national parks, for example are becoming a part of the private market sector. So, the questions on the homework assignment ask you to consider whether one's freedom (the person willing to sell themselves to a very rich person), one's body (the prostitute), or even one's life (the person in line for a life-saving operation) should be allowed to be for sale.  A famous philosopher (Spinoza, I believe) once said that some things no man has a right to sell. In our society slavery is illegal, prostitution (with the exception of Nevada) is illegal and we discourage an open market for surgical procedures (however, there is no question that prescription drugs and access to medical care are not considered rights in our society -- the British and Canadians, among others, offer everyone free access to basic medical care).

Q3: Why isn't there a larger change in an inelastic situation?

R: Inelastic demand simply means that consumers are reluctant to change the amount they buy in response to changes in price. One of the reasons we're so concerned about the price of crude oil is that our society is so dependent upon this energy source. When crude oil prices rise we don't have sufficiently good alternatives to substitute, so the amount we buy doesn't change significantly which means we shift our expenditures from other things (medicine, housing, transportation) so we can heat our homes and run our factories.

Q4: Do you have an example of a product that shifts between being elastic and inelastic?

R: Although this is simply a characteristic of a linear demand curve there are undoubtedly examples of cases in which a good has shifted between ranges of elasticity, particularly if a good became a necessity while once having been a relative luxury. An example would be the personal computer -- while not actually a necessity, it has become increasingly essential to modern life and, as a consequence, we purchase them whether prices change or not.

Q5: When will we need to use the production possibility curve?

R: This was used to demonstrate the fact that resources are finite and so we must choose how to allocate them. We cannot produce everything, so we must sacrifice some commodities in order to increase the output of other commodities. The example was between public and private goods, but it could have also been between capital goods (means of production --machinery, tools etc) and consumer goods. The prod. poss. curve is used more in macroeconomics since the concept is more appropriate for the economy as a whole.