Naked Economics Essay

Chapter 1: The Power of Markets †¢What are the two basic assumptions that economists make about individuals and firms? †¢What is the role and significance of prices in the market economy? †¢What’s so great about a market economy anyway? Market allocation 3 / Assume rational utility-maximizers 6 / Opportunity costs 9 / Profit max 11 / Prices allocate resources 12 / Barriers to entry 14 / Market price, pricing decision & price discrimination 15 / Lessons of markets 18 Chapter 2: Incentives Matter †¢Explain how each of the following relates to efficient outcomes in a market economy: -adverse selection -â€Å"perverse incentives† -principal-agent problem, -the prisoner’s dilemma. Wrong incentives lead to undesirable outcomes 23 / Creative destruction 36 / Tax & govt program disincentives 38 Chapter 3: Government and the Economy †¢In your own words, explain what an externality is. †¢Besides addressing externalities, what other important and beneficial roles does government play in our market economy? Externalities 43 / Govt solutions to externalities 48 / Govt makes market economy possible – rights, laws / regulations 51 / Public goods 57 / Redistribution 59 Chapter 4: Government and the Economy II †¢What are the main reasons why government should only take a limited role in a market economy? Govt inefficiency 63 / Govt allocation vs private allocation 67 / Effects of regulation 69 / Effects of taxation 74 / Summary 78 Chapter 5: Economics of Information Wheelan explains that basic economic models assume that all parties have â€Å"perfect information.† How does â€Å"informational asymmetry† undermine our market economy? Adverse selection 81 / Firm screening 89 / Branding provides information 90 / Branding versus commodities 92 / Signaling mechanisms 93 Chapter 6: Productivity and Human Capital †¢After reading Wheelan’s argument, do you agree that Bill Gates should be so much richer than you? †¢Evaluate the following statement from p. 113: â€Å"We should not care about the gap between rich and poor as long as everybody is living better.† Human capital 98 / Job creation 103 / Effects of human capital on standard of living 105 / Productivity 107 / Income inequality 111 Chapter 7: Financial Markets †¢Explain how get-rich-quick schemes violate the most basic principles of economics. †¢What advice about investing in the stock market did you find most interesting and/or useful? Purposes of financial instruments 118 / Efficient markets & index funds 126 / Investment guidelines 132 Chapter 8: The Power of Organized Interests †¢Why have mohair farmers earned a subsidy from the federal government for  decades? Interest groups & politicians’ incentives 137 / Some regulations benefit business 142 / Tyranny of the status quo 144 Chapter 9: Keeping Score †¢Why is a nation’s GDP a good measure of its economic well-being and progress? †¢Why is a nation’s GDP a poor measure of its economic well-being and progress? GDP: importance, real vs nominal, per capita 150 / GDP growth & wage growth 152 / GDP misses social progress 154 / Recessions 156 / Fiscal & monetary policy 158 / Other â€Å"vital signs†: unemployment, poverty, inequality, govt budget, deficit, current acct, national savings, demographics 160 Chapter 10: The Federal Reserve †¢What is the primary role of the Federal Reserve? †¢What is the significance of this role? †¢What is deflation, and why is it worse than inflation? Importance of Fed 168 / Easy money causes inflation 170 / FOMC & monetary policy tools 172/ Difficulty of policy decision-making 175 / Money 176 / Inflation & effects 179 / Political pressure to allow inflation 182 / Deflation 184 Chapter 11: Trade and Globalization †¢What is the â€Å"good news about Asian sweatshops†? Benefits of trade 187 / Comparative advantage & specialization 190 / Losers from trade 191/ Protectionism 193 / Trade raises real incomes 195 / Trade benefits for poor countries 196 / Cultural homogenization 199 / Sweatshops 201 Chapter 12: Development Economics †¢After reading this chapter, what do you believe are the two greatest obstacles preventing poor countries from becoming rich? Importance of policies (vs resources) 206 / Effective development policies 208 / Exchange rates 217 / IMF 225 Epilogue: Life in 2050 †¢What economic question do you have about life in 2050? About today’s economy? About life in general?