Introduction to Economics, Marginal Analysis and Other Bits - YouTube

Live from the International McNeil headquarters in beautiful Baja Tustin

it's Professor Mark McNeil. That's right

beautiful Baja Tustin. These are intro bits.

The first of the intro bits the fallacies - the pitfalls to correct thinking.

They are logical fallacies.

The first is the Association is Causation fallacy.

The correct name is post-hoc ergo propter hoc. This means

after this therefore because of this.

If event A is

is always followed by Event B,

you conclude that A causes

B and in fact sequence doesn't

indicate cause.

It could be some unseen the third thing here

It could be that sequence just isn't relevant.

Every time I have a party I go out and get some beer

two or three hours before I have the party and it

turns out that going and getting beer doesn't cause me (normally)

to have a party. So that's the Post hoc ergo propter hoc fallacy.

The second is the fallacy composition. It says

what's good for the individual is necessarily good for everyone or

conversely it was good for everyone is necessarily good for the individual.

And of course the classic example here is sitting at the stadium,

watching

the angels at the Big A and everybody is seated.

If you stand up, you will get a better view. This is true.

Therefore you conclude that everybody should stand up to get a better view

That's the fallacy of composition and there's a lot of it.

The thirty fallacy is ignoring secondary effects.

In economics there's rule: you can't just do one thing.

That whatever you try and do, there will always be secondary, tertiary,

quaternary effects, etc. So

the point is that when you consider whether you should do something whether

something is

a good idea or rational to do we always have count the marginal

benefits against the marginal costs. We'll talk more about that in a second.

But if if the

the primary effects the marginal benefits exceed the marginal costs

that's not a particularly good indication that should be done

because often times there are secondary effects that would cause

the total cost,

whatever it is, to not be a good idea to do.

There are lots and lots of examples of this.

Economists often make their living kinda going after looking for secondary

effects and demonstrating that

it wasn't such a good idea after all.

The simplest one, is suppose, is

that long ago in good old Irvine, CA,

the police clampdown on kids buying alcohol

and sure enough they stopped kids from buying so much alcohol and

some guy at UCI went to check

and found that because the cost alcohol

had gone up, sure enough, the good effect was that young people

used less alcohol, but then

they asked, "do they smoke more pot?" The answer was yes.

So there's a trade-off a bit between reducing the amount of alcohol

which would have secondary effect of causing people to smoke more pot.

So always consider the secondary effects and tertiary, and so forth when

you consider doing something.

The second bit we're going talk about is positive vs. normative statements.

ositive statements are

attempts to describe what is, in value neutral terms,

whereas normative statements are statements of what

ought to be. These are subjective value judgments.

Subjective: different for each

individual based on their values. So

you have to be clear about which statements are positive

in which are normative. A positive statement

doesn't necessarily have to be right. The test of a positive statement is that

it can be proven or disproved. That's the test.

So if I say the moon is made of green cheese, that can be tested.

we'll send some up there to check and see if it's made of green cheese.

So even if it's wrong, it is still a positive statement

because it can be tested and be proven or disproven.

Whereas a normative statement cannot be proven or disproven

because it depends on individual value judgments.

So, the statement, "long sleeve shirts are better than short sleeved t-shirts;

red is better than blue;

red wine is better than white wine. These are all subjective value judgments that

cannot be proven or disproven.

there is the issue of

opinions. I believe that some opinions can be proven or disproven

and some opinions cannot be proven because they're based on value judgements.

So any opinion that can be proven or disproven

even though it is an opinion is still a positive statement. If you go play on the

freeway on Friday afternoon I'm sure I will get hurt, that's my opinion

But since it can be proven or disproven, it's positive. Go play on the freeway, we'll see if you get hurt or not.

So, that's the second of the intro bits. The first of the pitfalls to correct

thinking. Positive vs. normative was the second ,and the third is marginal analysis.

The word "marginal" means additional,

incremental -- incremental or decremental

additional or subtraction, all a little more a little less.

And when you make decisions you always compare the

added benefits of particular action to the

added costs of that particular action and you only

do it if

the marginal benefits exceed the marginal costs.

and you don't do it if not.

You maximize when you do all of the actions for which the marginal benefit

exceeds the marginal cost and none for which marginal cost exceeds the marginal benefit.

So any particular activity (e.g.)

how many car dealerships should I visit before I buy a car.

Well when you go visit the first car dealership, that's

the quantity of car dealerships - one let's say you get to 125 units have

benefit. You a lot of information very quickly very cheaply

by visiting one. You can get the manual to see

what colors and so forth, and the costs are fairly low in the sense that there's

probably a dealership locally and you don't have to plan it. you can just visit it

on your way

home from work or something. So the costs are only 23 units of cost.

But if you visit the second dealership how many additional units of benefit

do you get?

You are not going to get an additional 225.

You may only get an additional 150

units of benefit. You've already got a good bit of information do not get all that

much more with the second dealership.

But this dealership is further away, it might cost you 40 units of

cost because you have to drive further and plan it more.

The third dealer only gives you 75 units of benefit.

But now there is

60 units of cost because you must drive to the next city and so forth.

The next, the fourth, gives you 50

but the costs may be 75.

You would want to visit this one, this one and this one because the marginal

benefits

exceed the marginal costs but this one you would not do.

You would not do this fourth one because the marginal costs outweigh the

marginal benefits.

It would not be profitable.

This is a very simple look at applying marginal benefits and marginal costs.

You make rational decisions when you do that. How many classes to take

this semester? Every additional class gives you

additional marginal benefits and every additional class

costs you more - in terms of time lost money costs,

the fact that you can't work, you can see friends can't stay home and

watch the Kardashians. So

as you get more and more classes - the first class, the second class, the third, the fourth class,

you get the same sort of pattern: the

the marginal benefits additional classes tend to go down - probably,

whereas the marginal costs tend to go up

and you take it to the balance point.

Marginal costs and marginal benefits are subjective they are different

for each individual person.

So the same person looking at how many

car dealerships to to visit before they buy a car would find the number to be

different depending on their own specific circumstances.

So those are the three intro bits for now.

That's it.