www.econoclass.comAuthor:
Lori Alden, Time required: About 5
minutes per photo
Summary:
This is a series of photos depicting scenes we'll
likely never see in the real world. Explain why.
Take notes on new definitions.
Photo #1:
Concept:
Public good. What's wrong with this picture?
Sunsets are a non-excludable good, in that
non-payers can't be prevented from enjoying them.
Other examples of non-excludable goods are national
defense, fireworks, and lighthouses. Private firms
tend to underproduce non-excludable goods because
customers have little incentive to pay for them.
Public goods are both non-excludable and non-rival.
Photo #2:
Concept:
Opportunity cost
What's wrong with this picture? Most of the
homes on this lakefront are expensive and built
close to each other, so it's likely that the
lakefront lots are highly valued. This, in turn,
suggests that the opportunity cost of living in the
shack is high. We rarely see shacks on expensive
lots because the owners usually conclude that they'd
do better by selling their property and buying a
nicer house on a less desirable lot. (Click on the
photo to download a high resolution version of this
image.)
Photo #3:
Concept:
Economies of scale
What's wrong with this picture? It's hard to
imagine that Mark and Sally will make a profit with
their business. Suppose a customer asks them to
deliver a small package to a city 200 miles away.
Unless they have many other packages going to the
same city, they'd have to charge a lot just to cover
their variable costs--labor, gas, and depreciation.
They wouldn't be able to compete against companies
like UPS and FedEx, which can keep their costs down
by handling a huge volume of parcels. (Click on the
image to download a high resolution version of this
image.)
Photo #4:
Concepts:
Equilibrium, law of one price. What's wrong with
this picture? The more expensive gas station
probably won't get many customers and will be forced
to lower its prices. The Law of One Price says that
identical goods in efficient markets must have only
one price in equilibrium. (Note: Click on the
picture to download a high resolution version of the
image.)
Photo #5:
Concept:
Equilibrium. What's wrong with this picture?
This is too good to be true. Since a business can
get all the inexperienced home typists it wants at a
much lower wage, it makes no sense for it to offer
$40-$100 an hour. (Note: Click on the picture to
download a high resolution version of the image.)
Photo #6:
Concepts:
Incentives, adverse selection and moral hazard.
What's Wrong with this Picture? Adverse
selection suggests that speeders will be more
likely to sign up for this kind of insurance, while
moral hazard suggests they'll have little
incentive to slow down once they're insured. Both of
these problems mean that the insurance company would
have to pay out a lot of claims. The problems of
adverse selection and moral hazard plague many
insurance markets.
Photo #7:
Concept:
Opportunity cost,
comparative advantage What's wrong with this
picture? It's nice of Superman to rescue a
kitten, but has he considered the opportunity cost
of doing so? Rescuing kittens is so easy that
children often do it. With all the accidents,
crimes, and natural disasters that occur in the
world, surely he could spend his time more
productively. The concept of comparative advantage
suggests that Superman should focus on tasks that
others can't do well, like stopping runaway trains
or transporting nuclear weapons into deep space so
they can detonate safely.
Photo #8:
Concepts:
elasticity,
price discrimination What's wrong with this
picture? You'd think that movie theaters would
charge students and children more than adults, since
kids are more likely to spill popcorn and make
noise. But theater owners know they can earn more
revenue by charging students and children less. The
reason is that kids are more price sensitive (in
economic terms, they have a higher price elasticity
of demand), and therefore less likely to come to the
movies if the prices are high. The practice of
charging price sensitive customers less is called
price discrimination.
Photo #9:
Concept:
Law of diminishing marginal
utility (or benefit)
What's wrong with this picture? It's not just
the calories--a Big Mac with supersized fries has
more. The law of diminishing marginal utility says
that as a person increases consumption of a good,
holding consumption of other goods constant, the
marginal utility he or she gets from each additional
unit of that good declines. This suggests that the
marginal utility of the second egg will be smaller
than that of the first, and the marginal utility of
the third will be smaller still. For most people,
the marginal utility of the tenth egg would likely
be negative. (Note: Click on the picture to download
a high resolution version of the image.)
Photo #10:
Concept:
comparative advantage, absolute advantage What's
wrong with this picture? The man and the boy
would probably get done more quickly if they
switched chores. This isn't because the father can
mow the lawn faster, since it's likely that he can
mow AND sweep faster (i.e., he has an absolute
advantage in both chores). They should switch since
the boy likely has a comparative advantage in
sweeping the driveway, while the man has one in
mowing the lawn. (Note: Click on the picture to
download a high resolution version of the image.)
Photo #11:
Concept:
Opportunity cost
What's wrong with this picture? The
opportunity cost of getting the rebate includes the
cost of the stamp and envelope, plus the time it
takes to fill out the form, cut out the UPC code,
get a copy of the receipt, address an envelope, and
mail it off. For most of us, that cost is greater
than $1. (Click on the picture to download a high
resolution version of the image.)
Photo #12:
Concepts:
incentives, equilibrium, efficiency What's wrong
with this picture? Equilibrium is defined as a
state in which there is no tendency to change. In
economics, this usually occurs when everyone is
doing the best he or she can. The lanes in this
picture aren't in equilibrium because some drivers
could do better by moving into the relatively empty
lane. Note that achieving equilibrium -- with cars
distributed more evenly among the lanes -- would
promote efficiency in that it would help all drivers
reach their destinations faster. In a similar way,
the efforts of producers and consumers to promote
their interests can result in an efficient market
outcome. (Note: Click on the photo to view a
higher-resolution version of this image.)
Photo #13:
Concepts:
risk, opportunity cost What's wrong with this
picture? People often profess outrage when
corporations put profits ahead of safety, as
evidenced by a jury's
$4.9 billion verdict
against General Motors after a design economy led to
a fiery crash. But ordinary people cut corners on
safety, too. We could make ourselves safer, for
example, by wearing helmets when we drive. But
almost nobody takes this precaution except for race
car drivers. It appears that most of us are quite
willing to sacrifice safety in order to keep our
hair looking nice.
Photo #14:
Concepts:
Incentives,
externalities,
law and economics What's wrong with this picture?
We rarely see banana peels on the floor at
grocery stores, and it's not because of government
regulation. It's because stores understand that they
could be sued for damages if anyone were injured on
their property. Lawsuits can improve economic
efficiency by causing firms to internalize some of
their external costs. (Click on the picture to
download a high-resolution version of the image.)
Photo #15:
Concepts:
opportunity cost,
substitutes, demand What's wrong with this
picture? People offer this service in less
developed countries, but they don't in richer
countries. Most Americans have scales at home (a
substitute for public scales), so the demand for
this service is small. It's unlikely that this man
would get enough customers to cover the opportunity
cost of his time. (Note: Click on the picture to
download a high resolution version of the image.)
Photo #16:
Concepts:
There's no such thing as a free lunch, incentives,
equilibrium. What's Wrong with this Picture?
According to a popular economist joke, two
economists are walking down the street when one sees
a dollar on the sidewalk and says so. "Obviously
not," says the other. "If there were, someone would
have picked it up!" Though the joke intends to mock
economists, it's rare to find dollars on the ground
because, well, other people have already picked them
up. (Note: Click on the picture to download a high
resolution version of the image.)
Photo #17:
Concepts:
Externalities,
opportunity cost
What's wrong with this picture? Freeway
accidents, even if they're off on the side of the
road, usually cause traffic jams. These jams occur
because drivers don't take the external cost of
their actions into account when they slow down to
take a look. For example, if a driver slows to take
a two-second look at an accident, it costs that
driver just two seconds of time. But that one look
delays everyone in the lane behind him by two
seconds as well. If there are 1,000 people who are
held up in the lane behind the driver, the external
cost to society of that one driver's look is about
33 minutes. (Note: Click on the picture to download
a high resolution version of the image.)
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The Beverly Hillbillies Explain
Economics
