Okay. Great. So, how
are we feeling ex-post about the exam? Any indications? So, sir? Okay, cool.
So, just a few things on that. I should
have the marks back by tonight, as in I've
got them at the moment. i literally just checked
over to make sure i didn't screw up
any of the scantron results so everything's
correct um i can tell you that the average
overall in the exam was 80 um 80 percent which
is pretty reasonable um i'm yeah pretty
happy with that and one other note is if
you didn't do as well in the exam as you
thought you would do or as you'd like i think
this is more of an opportunity to kind of
rectify that. So when you think about this
course, you have a good foundation of
marks from the homework. You should
probably be getting 15 plus out
of 20 on that. There's the extra
credit as well. Most people should
hopefully, everyone should get one
at least point of extra credit.
You can get every question wrong in
the cahoots and you still get one point
of extra credit. Realistically, most
people, if you come to class, like all
of you are here, You should get two,
potentially three. So that gives you a
really good foundation. And then what
that means is this is probably the
first test to see where you were at
in this course. So come see me in
my office hours if you didn't do as
well as you wanted. You can check in
with me about the answers. Come see me
for help before the second exam, and we
can help rectify those results. So don't
see this as a bad thing. See this as an
opportunity. And at the end of the day,
this exam might not even count towards
your final grade. the only other thing i
really want to mention right now is the
syllabus is kind of like not really tracking
where we are with this course i i kind of
split up topic five and six which was um you
know historically only topic five so the next
homework which will be released on sunday is
going to be both topic five and topic six
um the the consumer optimization and rationality
stuff so i'll keep you up to date with
all that i'll tell you what's on the next exam
as well um but yeah we're a little bit
behind of on what's actually on the syllabus
no big deal though we'll adjust so we finished
up the class on rationality and utility
talking about this idea of indifference curves
and imagine this isn't just three
indifference curves this is every indifference curve
that this person could possibly have at
what point would this person choose to optimize
their utility what bundle of good y and
good x would they choose yeah i3 imagine there's
more than just three here though where
would they choose like the one that's like on
the top yeah the highest up and to the right
so the answer is the real answer is it depends
but as daniel said in this case technically
you choose the indifference curve that
is highest up and to the right which goes
on forever. So as Buzz Lightyear would say to
infinity and beyond. However, in reality
we can't just choose whatever gives us the
highest utility up and to the right because
we have constraints. So the existence of
scarcity simply means we can't have everything.
There's going to be some trade-offs
we need to make. This limits our choices and
the two main reasons we have these constraints
is due to time, limited time. We'll
talk about this later. Actually we'll talk
about on Friday we're speaking about how
people split up their time between labour
and leisure you've got 24 hours in a day
so 168 hours in a week I think that's what
it is you don't have more than that so
that's your constraint there money we all
have limited budgets otherwise you probably
wouldn't be sitting here right now so that
that makes certain decisions different
in terms of where you choose to optimize so
the existence of scarcity creates these
constraints on how we optimise our utility
decisions. And in economics, when we analyse
consumer behaviour, the two main sources
of constraints are the prices of goods
and your income. This is what constrains
your choices. So the budget
constraint consists of two different
conceptually, I guess, slightly
different ideas, the budget set and
the budget line. So people will buy
things based on the prices and income. this
limits what bundles of goods are
affordable so what the budget set tells us is
what actual combinations of goods x and y
are available to you affordable to
you i should say i've uploaded this entire
lecture to brightspace i haven't like
redacted any equations or anything like
that so for this one especially feel free
just to follow along with me take notes if
you you'd prefer as all right so the budget
set is all bundles that are affordable
to you of x and y and the way we
figure out what area that is is the price
of x times how many x you buy plus the
price of y times how many units of y you
buy and that has to be less than or equal
to your income m whereas the budget
line defines all combinations of goods x
and y that exactly exactly exhaust your income.
You have zero dollars left if you choose
on that budget line. So this is what the
budget set looks like. So this black line here
is our budget line. Everything in the blue
area are bundles that are available to the
consumer so they can choose you know point
G here. There was a point here on the
line, point F, they can choose that. You can
choose a point on the line but H up here is
unavailable to the consumer and our budget line
here represents what is the maximum amount
that we can get of something so in this case
here if you're buying zero of x the maximum
amount of y you can buy is five if you're
buying zero of y the maximum amount of x
you can buy is 10 and this actually tells
us something really important this tells
us how much of y we can trade-off to get x and
we'll speak more about that on the next page
but the simple idea here is let's say you
want to get one more so let's say you want
to get rid of one unit of y so you want to
go from five to four this means you're going
to have a little bit of money freed up
because you're buying one less than five how
much x can you buy essentially by giving up
one unit of y and as you can see here the trade
-off is you get rid of one unit of y and
you get two units of x so this is known as
the market rate of substitution how much
you're able to trade off of one good for another
so the example here is we have the price
of x multiplied by x plus the price of y
multiplied by y equals income m and let's say
x is loaves of bread and y is x so if the price
of a loaf of bread is one dollar the price
of eggs is two dollars income is 10 then we
have this equation here. So what this
means is, imagine you're spending all
$10, you have $0 left. Every time you give
up one carton of eggs, a carton of eggs cost
$2. That means you now have $2 left in
your pocket when you had $0 before. So if
you want to spend those $2 on bread, you can
buy two loaves of bread because each
loaf of bread costs $1. Vice versa, if you
give up one loaf of bread, you'll now have
an extra dollar of income Romanian and you
can buy like half an egg or half a carton
of eggs depending on how we define it
if that's actually possible so this is
just the market rate of substitution is the
ratio of the prices so minus px divided by py
which is one divided by two if we give
up one unit of x how much py how much y
can we get essentially okay so now we can
look what happens when income and prices change
so first let's look at what happens when
income changes. So let's say income
doubles from 10 to 20. What happens now? What
this will do to the budget line is it's
going to either shift it outwards or inwards.
When it shifts it outwards, you just have
more options available to you. When it shifts
inwards, you have less options available
to you. So in this case, as we can see,
it increases to 20. So this means now you
can buy 10 eggs, zero bread, remember it's
two dollars per egg, or zero eggs
and 20 bread. Opposite occurs if it
decreases. And the key thing to remember
here is if you look at all the lines, the
slope is the exact same. The market rate of
substitution stays the same when only income
changes. So this is our original income line
and we move from M0 to M1, so now you can
see that this has moved further out in the
frontier and all these options now become
available to the consumer if someone's income
decreases it shrinks from m0 to m2 here
and now only this is available to the consumer
they lose out on this area here so this is
quite intuitive hopefully fairly straightforward
now what happens if prices change so
the price changes is where things get in this
case it's still quite intuitive but there's
a bit more that comes to it later so
let's say the price of bread decreases from one
dollar to 50 cents so this is our new occasion
we're back at the old income of ten
dollars now it's 50 cents times the amount of
bread you buy plus two dollars um times the
amount of eggs you buy equals ten dollars
so this is going to change the slope of the
budget line and that's the budget set it
changes the market rate of substitution which
is the slope of our budget line so it's no
longer minus 0.5 but minus px divided by
py so 0.5 divided by 2 and that's minus 0.25
this should be bread so you can get 20
loaves of bread when you buy zero eggs with an
income of ten dollars it's 50 cents per loaf
of bread still if you buy no bread you can
only buy five eggs so you want to see how
this kind of changes the budget line in a second
so this is our old budget line here and
this is our new budget line here so the
slope has changed it's shifted outwards like
this and you can calculate the the points of
origin just by having the income divided by
the price so 10 divided by 0.5 is 20 as we
said before 20 loaves of bread and 10
divided by 2 is 5 5x so when you're buying zero
of one thing it's very easy to calculate.
That's why it has income over PY and income
over PX respectively. So the market rate
of substitution has changed and I'm going to
give you a little like prelude now that it's
not just the market rate of substitution
that's changing here. A person's relative
income or real income is actually increasing
here as well. When you think about it if a price
of one good decreases this person is going
to be better off or at least as good off
let's say they're consuming at this point
here where they're buying like five eggs and zero
bread they can still purchase here and
they'll be just as well off but at any other
point on this line they can now do better
with a new budget line they can get more so this
means they're relatively richer so you do at
least as well and more likely to do better
when a price decreases it changes your
relative income compared to before yeah so here's
a simple example of a budget constraint
in action we have this following budget a
hundred dollars the price of x is one dollar price
of y is five dollars what's the max amount
of x that can be consumed max amount of
y and the market rate of substitution between
x and y so as we said before define the maximum
amount of x we just take the um income
divided by the price of x so 100 divided by 1
gives us 100 the maximum amount of y 100
divided by the price of y 5 20 and the market
rate of substitution is just minus the price
of x divided by the price of y which is 1
divided by 5 that's what it tells us so if we
give up one unit of x we get one fifth unit
of y that's what it's telling us so if we
give up one unit of y we get five units of X.
That's the trade-off. So we now, going back
to the previous lecture, know how utility
matters for consumers, and now we've discussed
the budget line. So when we talk about
optimization and maximization, usually
we use calculus for this in intermediate micro.
We're going to do this more graphically here,
but there are two important things for
consumers to consider, or for us to consider,
when analyzing this, when figuring out at
what exact bundle of goods do consumers
optimize their utility? The first is they will
choose the highest possible indifference
curve they can. So if they're
on indifference curve two and they can
move to indifference curve three they
will. If they're on indifference curve
three and can move up to indifference
curve six they will. That's the first thing. The second thing to
keep in mind is the consumer will always
choose a bundle that is on the budget line.
that is on the budget line not within it
on it if they're not choosing a point of the
budget line then there'll always be a point on
the budget line that makes them do better
and this is due to the idea of monotonicity
more is better than less so for example
here this is the budget line we have point
a point a here they consume some amount of
y and some amount of x however if they
consume at point B which is on the budget line
they get the exact same amount of Y as
in A but they get more X so we know they're
better off and this holds for any point that
is not on the budget line there's always
a point on the budget line that dominates
it so even if you drew something like I'm not
going to draw it now but if you drew
something like up here there's always going
to be a point where you do better so it's only
on the budget line that no other points
can dominate it. So that's why we're always
going to end up choosing the highest possible
indifferent curve and this point will
be on the budget line. So the consumer
equilibrium is going to be the consumption
bundle of goods in which the rate the
consumer chooses, so the marginal rate
of substitution, that's our
indifference curve. At different points
the marginal rate of substitution is different.
So they're going to choose at a point
where the marginal rate of substitution
to trade between goods x and y equals the
rate at which these goods are traded in
the market the market rate of substitution
so another way to think about this is
the slope of the budget line the market rate
of substitution is just the tangent of
the indifference curve so the slope of the
indifference curve at that point marginal
the the marginal rate of substitution
equals the market rate of substitution which
is Px divided by Py. So this is what
it looks like. We have three
indifference curves here and we have
our budget line. So you can see on
indifference curve 1 they're consuming here on
the budget line at A but this person can
do better by consuming at any point here on
indifference curve 2. It's higher up and
toward the right and all these options are feasible
so they're choosing B here and as you can
see they can choose C it's on a higher
indifference curve and they're doing better
this point C is really important as you can
see it's the point where the market rate
of substitution the budget line is the
tangential point to the indifference curve this
is the only place that this budget line is
the tangent to this indifference curve this
is a unique point so this is where they're
going to be choosing to optimize at point
c so this person can't choose anywhere else
and do better they try and get to a higher
indifference curve it's going to be above the
budget line and as you can see they're
consuming on the budget line this is any
anywhere else they can always do better by
going to see are we all following this is really
important this part right yeah so as we
saw before the price changes and income
changes change the budget set this changes the
level of utility that can be achieved that
either increases the amount of utility if
income increases or prices decrease or it decreases
utility if income increases and prices
increase so this will lead to changes in
equilibrium so the first simple thing that
we're going to look at is price changes in
equilibrium. So a price increase reduces a
consumer's budget set. The new consumer
equilibrium resulting from a price change depends
on consumer preferences. So we're going back
to our old idea of substitutes and
complements here. So if X and Y are substitutes,
when an increase in the price of X occurs,
this is going to lead to an increase in
the consumption of Y. Increase in consumption
of Y. X is more expensive, people are
going to substitute away from x to y. If they're
complements however, an increase in the
price of x is going to lead to a decrease in
the consumption of y. And we can
show that here. So we are originally consuming here
at point A. So we're originally
consuming x0 and y0. This is our equilibrium.
This is the tangential point. A tangent is
kind of just when something like
touches the curve. And what's happening here
is the price of x decreases so as the
price of x decreases we move out from m divided
by p0x to m divided by p1x this is a smaller
number now so you can consume more the
slope of the budget line has changed and
now the tangential point is going to
change as well so we're now at b and just by
looking at the points a and b we can see
that a decrease in the price of x leads to
obviously an increase in consumption of x
but leads to a decrease the consumption of
y so y and x must be substitutes here they
must be substitutes when x and y
are complements when the same
thing happens as you can see
we're moving from mp1x to mp2x so it's
becoming cheaper here as we go from a to
b you can now see that there's more of
X and more of Y being consumed. So as X
becomes cheaper we're also consuming more
of Y now similar to more of X. So this
will depend on like the slope of your own
difference curves whether they're steeper or
flatter that will determine the trade
-offs between the two. So when income increases
this expands it should say expands
this expands a consumer's budget set
and the new consumer equilibrium resulting
from an income change depends once again on
consumer preferences. It's something a
normal good or an inferior good. We know
if income increases, demand will
increase, consumption will increase. If
it's a normal good, it will decrease if it's
an inferior good. So this is an example
of that. So we're moving from M0 here
to M1. So our original point of equilibrium
is here at A, but now we have more
money. So our budget shifts outlets.
outlets. The budget line has the exact same
slope as you can see, so we just move from
point A to point B. Both are normal
goods in this situation. You're
consuming both more X and more Y at point
B than point A. Alright, so this is where
there's a lot going on, so I'm going to go
a little bit slower here. So when
income changes, it's fairly straightforward.
The relative prices, the market rate of
substitution remains the same so the
only effect here is an income effect you're
richer as a result of more income how
do you choose to optimize your good
selection however when prices change there are
two things going on the first thing is that
the market rate of substitution is changed
one good is now less or more expensive than
the other depending on what's so there's going
to be some substitution between the goods
because of this but also as I kind of mentioned
before this also changes your relative
slash real income if a good is cheaper than
before this increases your real income but
if it's more expensive than before it decreases
your real income so when prices change we
can break down these equilibrium changes to
two effects the first is the substitution effect
this is the movement along a given
indifference curve that results from a change in
the relative prices of goods when we hold the
real income constant when we hold the real
income constant the second is the income
effect the movement from one indifference
curve to another that results from the
change in real income which is caused by a
price change caused by a price change
remember price changes will make you richer
or poorer relatively. Okay, so there's a lot
going on here, but I'm going to take you
through it slowly. So our original budget line is this line here, FG, and here we
choose point A. Point A here is the
tangential point when the market rate of
substitution is equal to the marginal rate of
substitution on the different scope point
now what's happening here is it's saying that the
price of x increases so when the price of
x increases this is going to shift our
budget line so this point here's going to remain
the same f because you can still buy the
same amount of y with the same income the
price of y doesn't change but now you can
buy less x here so f h is our new budget
line right so to find the substitution effect
what we need to do because the slope of
these two lines are different is take the
slope of the new budget line fh and move it
up until it's the tangential point of the
original indifference curve so our original
indifference curve is is here where point
a is and as you can see as we move this
slope up we get j is that l or i i can't
tell ji yeah ji so ji is this point here the
new slope of the new budget line as the
tangential point of this indifference curve so
we're at point B here what this does is this
holds the relative income constant and
only focuses on the relative price changes
so this moving from a to b captures how
people change consumption because of the
substitution effect which is a decrease in X
and an increase in Y. So comparing
point B to A, this person's consuming
more of Y and less of X. That's the
substitution effect. Then we can move from
point B to point C. Remember this is a new
budget line, so the new tangential point or
the indifference scope is where this person
will optimize now. This is equilibrium. B to
C captures this just change in income, nothing
else. Remember the change in income is
when the slopes are the same and you just move
it down like that so that captures a change
in the real income effect and as you can
see due to real income due to the income
effect they're consuming both less of x and less
of y so when we put all this together when
we move from a to c we can say hey a person
is consuming less x and more y and the reason
why they're consuming more y than before is
because the substitution effect dominates the
income effect. So the increase from A
to B on Y is greater than the decrease from
B to C. So that's why this person's consuming
more Y now than before even though their
real income is smaller than before due to the
substitution effect. There's a lot going
on here. I'll probably come back to the
next class and give a couple more examples.
It takes a while to get used to it but the
key thing to remember is how these slopes
of the budget lines change. so with an
income effect if I go back here you can see
at both axis origins both of them are
shifting but when it's a price effect it's
only if I go back here it's only for
one of them only for one of them if the
price of X changes the origin point on
Y stays the same it's just for X that's
changing and when that happens as you can see
when the slope changes the market rate of
substitution change and the relative income
changes. So just by moving it out to our
Ji line here that's how we can find the
substitution effect when that is tangential to
the original indifference curve. That's how
we get point B here. That's the key
thing to remember. So now we can look at
a few applications. So indifference curve
analysis is like really useful, really useful.
We usually do it more based on equations
but this is more about the intuition it can
tell us why consumers like do things like
adhere to buy one get one free deals but also why
companies offer them beyond just the
marketing why it can be useful of them we'll
finish up today by talking about gift giving
which is an interesting phenomena when you
break it down and then next class we'll talk
a bit more about things like the the labor
leisure trade-off so a common promotion by
restaurants such as pizza companies is buy one
large pizza get a second free so they could
sell small medium and large and then they have
a sale on large pizzas so looking at it like
before is this simply a 50% reduction on
the price of pizza and the answer is no since
this only impacts every second unit so
the first unit is still full price it's the
second unit that's free in this case furthermore
this might not apply to every you know second
pizza it could just be once per customer
so it's only the second pizza that's priced
differently pizzas one three four five six
forever could be the same price so how do we
analyze it we have this weird looking budget
line of budget set like this so ignore this
for now the blue line let's start on the black
line so this person's original budget is
the line AB where good X is pizza and the
other good is a good Y. So they're currently
maximizing where the budget line is tangential
to the indifference curve and that's here
at point C. So at point C they're consuming
some amount of Y and half a large pizza
or one medium pizza. So we know that they
can afford to buy one large pizza because
point D when they buy one large pizza within
their budget set but this consumer won't
choose this originally because if we drew out
the indifference curve here where this is
tangential it's below indifference curve one
there so they've got to consume it C however
if a company puts in this buy one get
one free deal it's gonna change this
person's budget set rather than being A to B it's
going to go A to D to E to F essentially
what this is doing is as soon as this
person buys one pizza it's going to shift
out horizontally on the x-axis and always give
them an extra pizza so they buy one pizza
they get two if they buy two they get three
etc so as you can see there's a horizontal
move here of one pizza from d to e and
then it returns back to the original slope
so before if they bought one pizza they
end up here but now they're here before
they bought two pizzas they'd be here but now
they're here so they get an extra pizza
essentially so that's why the budget line
has shifted in this way so now if we drew out
all the indifference curves we see that
there's a tangential point now on a higher
indifference curve here at point a at point a
so this person is better off when they have
two pizzas and less Y and they can get to
that point by buying one large pizza which
is within their feasible budget set as we said
so as a result due to this promotion this
person is better off when they buy one
large pizza compared to the medium pizza they
now end up and eat they buy less of Y and
more of X so clearly this is good for the
consumer they get more utility but think about
it from the business's point of view, it's
really interesting. Using this promotion,
they were able to, through this
rational model, get a person to
go from buying a medium pizza
to a large pizza. Now, it's got a cost
of making two large pizzas, but if the cost
of making two large pizzas and minus the
cost of making one medium pizza, if
you get more revenue based on selling one
large, based on that, then this is a
good deal for you. You're making
more profit. Furthermore, there's
like the promotional aspects, the marketing
stuff as well. But beyond just
the marketing of letting people know
about your business, retaining customers,
et cetera, this can actually
be a way to make more of a profit
depending on the prices that you sell
your pizzas with. Any questions on this? All right, let's talk
about gift giving. Gift giving
is like really interesting when
you break it down. Economists have some
very weird things to say about giving
gifts. and we'll get into that a little bit
today and then next class I'll kind of
like debunk it a little bit because I think
that's important. But I want you
to take a moment to think about
a few questions. I had some
great, you know, examples in the
previous class, hoping to get that again. Think about the
following things. What is the
best gift you've ever received
from someone? And the thing that
I'm probably more interested in
because I think it's funnier, what
is the worst gift you've ever received
from someone? if you can't think
of any of those I have a more simple
one what's the most recent gift you
received and also I know some people are
creative and I'd love to hear what's the
best gift you think you've given to
someone as well so take a few moments and
then I'll ask around I've prepared my
own answers as well yeah so more in the back
of the classroom sorry what was
your name again? Andrea anything come
to mind for you? pretty great gift
who gave that to you? Who did you see? It's a year of New York. Awesome, awesome.
That's an amazing gift actually. That's the front
runner for best gift. I don't know if that
one will be beaten. What about over here? College tuition. That's a pretty
good gift. College tuition. I think
that trumps US Open. Amazing. Anyone with a worst
gift that they want to share?
If they come to mind, anyone in the
back room? Yeah. oh no okay which fire
okay let's not get into all of that then
yeah okay so yeah okay that's that one's
interesting okay DK what about you any
good or bad gifts oh which game you go into
I was lucky enough to get tickets as
well so I'm I'm going to see the
Australia game up in Vancouver, so I'm
looking forward to that. Isabel, is it? Yeah,
Isabel, what about you? Any good or bad gifts
that come to mind? Okay, I'm going to
put that in the really good gift
category, I guess. Okay, what about
on the other side, in terms of gift
giving? First I want to ask, sorry,
what was your name? I'm here. Okay, can you tell
me, when you have to get a gift with someone,
are you excited, are you anxious? What
are your thoughts in that regard? I'm
excited, but obviously I'm just because I
don't know if you like it. Yeah, exactly.
It's stressful. Have you given
any gifts that you remember that your
friends or family either liked or disliked,
hopefully liked? Well, the last
thing we give... What's your
first language? Spanish. Can you
say it in Spanish and maybe someone
can translate? No, quite a
little bit. Does anyone know
what that means? Oh, yeah. Gold clubs. Okay,
cool. Amazing. That's a great
gift. Nice. He likes golf, I'm
guessing. Okay. That's important as well. Anyone else want to share at all before we move on? So I came prepared with a couple of
answers as well. So these are some of
my best gifts and a weird gift as well.
So this is a breakfast bowl my grandmother
bought for me in 1998. I haven't brought it
with me to America yet, because this is how
precious it is to me. I'm worried, like,
what happens if I move again soon? but I've eaten
breakfast out of this bowl pretty much
every day for the past what is like 27 years
so this bowl is older than most people if not
everyone in this room for my people from
the subcontinent here you can see
that this is cricket themed so cricket was
my favourite sport growing up still is
one of my favourite sports and I don't
really care about earthly possession so
much but when I was living with my best
friends back in 2019 I told them you can
use any of my stuff but don't you dare
touch my bowl So this is like my most
important possession, the breakfast bowl my
grandmother got me. This was for my
12th birthday. My parents bought me like
this, this tracksuit, which just doesn't
look good on me at all. I don't know if
it's a good or a bad gift, but I thought
I'd show you a photo of what young Professor
Grodek looked like. And finally, oh yeah,
we can speak about worst gifts now. I
actually asked all my friends and family,
say on WhatsApp, like what are the best or
worst gifts you've received. I was
thinking a lot about this. and my mum told
me that for my brother's 10th birthday, in
some context here, I speak a lot, I'm
loud, my brother's 10 times louder and speaks
10 times more than me. My aunt bought him
a T-shirt for his 10th birthday that
says, I love talking. So I don't know. Yeah, I know. In
hindsight, it's hilarious, but
apparently at the time, my brother
was very upset. And speaking of worst
gifts, does anyone know what's going
on in this photo? Does anyone know? Has anyone seen the
film Love Actually? Yeah. Does this
trigger any memories now that you've
seen the photo and know it's from
Love Actually? Love Actually, for
those who haven't seen it, you should watch
it. It's an anthology of a bunch of stories
about relationships, love, some good, some
bad. This is probably the saddest one of the
lot. so Alan Rickman Severus Snape is married
so he's not Snape in this but yeah he's
married to Emma Thompson and Emma Thompson sees
Alan Rickman buying like a really expensive
necklace at the store and she expects that's
what she's getting for Christmas but he's
actually bought it for his mistress so
as you can see she's excited to open her present
and it's a Nora Jones CD and because of
like she's figured all this out in the final
scene here there's a famous you know scene
of her crying in the bedroom and and a meme
online is like you know frickin Alan Rickman
made Emma Thompson cry so that's what
that's from I also have a couple of YouTube
videos I can't remember which is which but
this kind of drives the point home about some
gifts can be really bad Okay so I don't know
you can see because of the quality but this
says Homer on it so he bought a bowling
ball with his name inscribed on it for
Marge with obviously the intention she won't
use it so he uses it himself this is a very
famous episode of the Simpsons back in
season 2 it's like old school Simpsons and
Marge ends up spying Homer Goes bowling and
meets a guy they're called yuck and they
nearly have an affair. So it's a really
interesting episode But this is an example of
a really bad present. I Also crowdsourced
from my friends last night I asked them like
what sitcoms movies are there situations
where people give bad gifts and one of
my friends sent me this and I Thought
it was really funny. So I wanted to share
it with all of you, etc. Um Yeah, so like gift
giving is weird gift giving can
be hard. It can be stressful You think
of good gifts, but there's a lot of
bad gifts as well. Oh at so what should
you give as a present if your friend's
birthday is coming up what should you
get them a present such as a fruitcake
worth $10 or should you just give them $10
in cash the economist answer is give them
the $10 cash and this is the reason why
cash gifts always do better than actual
gifts and we can model that within different
scurfs so we have two goods here a fruitcake
good X and any other good which is good Y
so the fruitcake good X and good Y here so your
friend their current budget line is here
and they're currently consuming at point A so
some amount of fruitcake and some amount of
other goods so if you give them a fruitcake
a fruitcake is worth $10 let's say so this
moves them from point A to point B from point
A to point B so the amount of Y doesn't
change because you haven't given them any Y
you've just given them a fruitcake worth $10
so this moves them to this indifference curve
here which is above the original one so
they're better off than before you've made them
happy in some respect but you could have
done better so instead if you'd given your
friend ten dollars what this would have done
is shifted their budget line out from here to
here shifted out from here to here so m plus
ten dollars m plus ten dollars and at this
new budget line they can choose how much
fruitcake and how much of other goods they
want to consume and the tangential point of
this new budget line on the indifference curve
is here at point c and this indifference
curve is higher and up more up and to the right
than the indifference curve if you just bought
them the fruit cake so they're better off
they're better off so in terms of
optimization and happiness economists like to say
two a few things actually the first is cash
gifts always do better than actual gifts but
they also say that actual gifts can create
dead weight loss when you get something that
you don't want for example this makes you
worse off than you would have been based on the
money that's spent. So there's a number
of papers that measure this. I'll
try and find some of the next class but
economists estimate around Christmas
time when there are millions if not
billions of dollars spent on presents, 30
% of the money spent is dead weight loss,
is inefficient. Now I'm going to push
back on this in the in the next class
because like giving cash is weird and I think
we can all recognize that but this also kind
of brings the point home of of why some
gifts can be dead weight loss as well so
this is the final video i'll show today this
is the 1400 hours a year you waste on
your phone with purdue global you can turn
that time what is this That I picked out, but that's cool. Here's the thing,
man, I got a little suspicious when you
slipped out earlier, and so I followed
you into the store, and I saw that you
were about to make a really bad choice,
and then you did make that choice, and you
bought that other shirt, and it was
a bad shirt. It was an ugly shirt. It
was hideous, really. So I grabbed that
shirt out of the bag when you weren't
looking, and I returned it, and I bought
myself this shirt, which isn't hideous.
And so, surprise, that was a good shirt. This brings me no
joy at all. I feel nothing. I feel
like you just stole money from me and
then you bought yourself a shirt
with your money. So there's a lot going
on here. At first, I kind of illustrate
what we talked about before in a way, that
by buying a gift, you constrain someone's
choices. So while it might make them slightly
better off, in this case, Dennis hated the
shirt Mac originally bought for him. If they
can return it, they will do that and can
make themselves better off. so the idea of people
being able to return gifts and get something
else is good for the consumer because
like we said before if I sorry if I get back
up to here they can move themselves from
B to C which is higher and up to the right
however if you're a store you don't want you know
millions of dollars of gifts being
returned to you around Christmas time and other
times of the year so the question is what
policies can you put in place not to entirely
prevent it but to try and mitigate these
issues and we're gonna actually leave it here
and in the next class we'll speak about how
stores should respond then I'll give you
the normal way sorry oh amazing thank you
so much all good yeah all good man you too
appreciate it sorry oh yeah Were you not
here at the start? I came three minutes
later. Oh, yeah, so the average on
the exam was 80%. Oh, nice. That's good. Yeah, yeah. Yeah, I'll release
the marks tonight. Oh, okay. Thank you
so much. No worries. DK. Who are you playing? Do you know yet? Yeah, we're
playing... They were, uh... They were,
like... They were, like... They extended
to... to... to... to... to... 18s,
didn't they, or 42? Yeah, because
I know on the schedule, they have
some games, like, you don't even
know the score. Yeah, yeah, yeah,
so I don't know who Australia
is playing yet. It's either Turkey,
Romania, Slovenia, or one of the
European teams. Really? Yeah,
no, I actually won these tickets
off of Liza. Oh, Liza. Yeah, like,
I guess, like, with my plan, I guess.
That's awesome. Yeah, like, they just, they
were like, oh. Do you know, like, tickets
right now, like, the base price is expensive,
but on the second -hand market they're
going to be so expensive. Yeah, I
wanted to go like Brazil, like Ivory Coast, and
then just one day, if you sign up, I don't
know if you've seen, but over winter break,
you can go on the website for Verizon,
you can get a plan, you just have to click
this. I didn't see that. Yeah, you got
free will. I went to the Eurofinal last
year, the Spain-England. my parents bought a byd
car back in australia and they had like
a raffle similar to that they got tickets
to the euro final and they were like i'm
not going to come to europe you can just
use it i was living in england at the time
so me and my mate went to berlin to watch it
yeah it was insane yeah my roommate's from
luvai yeah like he's a huge like chelsea
fan yeah so like every saturday like he goes
to the chelsea games like he travels like
during the school year like he just goes to
Chelsea games like like goes to London
yeah yeah yeah I wish I was from Dubai yeah I
was like oh yeah like I watch games on a
Sunday here as well I don't think it's worth
it honestly like I when I was living in
England I was down in Exeter and it's a two
-hour train to London yeah I go to Arsenal
games every now and again I'm a big Arsenal
man but even then I'm like to commute so
a long way so I can't imagine commuting
like seven hours there and seven and now he's
back every weekend. Yeah, I mean, he's
in engineering, too. Like, we're both in engineering, but
he's in Nike, and I don't know how
he has time, but I have no idea. Yeah, well,
I assume if he's fine that much, he probably
is fine in comfort. Yeah, he said his dad
has some, like, great, like, some, like, I
think it's like the platinum, like, whatever
car, so, like, he needs to, like, buy those
tickets, but, like, his dad doesn't want to go
anywhere, so he sends his son to go, like,
use, like, those airplane miles, so
he gets it back.
Oh, interesting, yeah, so if he's in,
like, first, like you can probably easily
work and stuff there so oh yeah yeah yeah
exactly all right congrats on getting tickets
it's so exciting man go in yeah going well
going well happy with how the exam went I
think so yeah cool that's good what about
attending class do you think that paid off
or I think it did okay that's good that's good
that's what I'm aiming for what I'm aiming
for oh yeah and I love coming to you last
night. Oh, that's good. That's very kind of you. Yeah. I got to say, you're
definitely one of my favorite professional
I've had. I'll take that. I don't know
how high I'll load the bar is, but very
kind of you to say. I think that's a pretty
good professional. Definitely not better. I won't lie. I don't
think the content has helped me much
in this course. Like, this is why
I'm doing more on the consumer side. I think
it's more interesting than the producer
side. But we'll have to tackle that.
It's kind of good. Yeah. Yeah,
because I'm just interested in how
people buy it. Yeah, like those micro,
like micro concepts. Yeah, yeah, yeah,
like why do people make the choices? I
do, I mean, that's what's always
interesting. That's how I, like, realized, like,
this is my third econ class I've taken,
and, like, without fail, it's like the
first exam is, like, always micro concepts. So it's like, it's one
of those, like, it's, you know, I've got
study boards still, but it's one of those
things where now it's like I didn't take
an econ class last year. Yeah. So it's
like for this, it's like it's coming back. That's
the thing, I didn't want to go too
quickly, because I knew there was a bunch of
people here who haven't taken Econ in 40s
since AP in high school, and I'm like,
oh my god, like, yeah, it's... Is there really
no, like, program?