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Freakonomics

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Nick McNosky
Econ 250
9-25-14

Freakonomics

If there is one main idea of this book, it is that economics can explain many things. What the authors of the book are trying to do is to promote economic thinking. Chapter one (What do school teachers and sumo wrestlers have in common?) mainly talks about the human nature of cheating. For every clever person who goes to the trouble of creating an incentive scheme, there are many of people who will inevitably spend more time trying to beat it. The first key point I will address would be that incentives are important. People's actions are based on what incentives they face. Incentives are offered to encourage you to act. Some incentives make people better off and reward them for their actions. Other incentives leave people worse off and penalize them for their actions. For example, if your mom says, “ You can watch TV if you clean your room.” Watching TV is the positive incentive offered to encourage you to clean your room. Another example would be, if you dad says, “ You will go to time out if you argue with your sister.” Time out is the negative incentive offered to discourage or stop you from arguing with your sister.
The ten principles of economics are the main points of our economy. People face trade offs. To get one thing, you have to give up something else. The cost of something is what you give up to get it. Decision makers have to consider both the obvious and implicit costs of their actions. Rational people think at the margin. A rational decision maker takes action only if the marginal benefit of the action exceeds the marginal cost. People respond to incentives. Like I was talking about earlier, behavior changes when costs or benefits change. Trade can make everyone better off. Trade allows each person to specialize in the activities they do best. Markets are usually a good way to organize economic activity. Households and Firms that interact in market economies act as if they are guided by “invisible hand” that leads the market to allocate resources efficiently. Governments can sometimes improve market outcomes. When a market fails to allocate resources efficiently, the government can change the outcome through public policy. An example can be regulations against monopolies and pollution. A country’s standard of living depends on its ability to produce goods and services. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Prices rise when the government prints too much money. When the government makes more money the value falls. Society faces a short-run tradeoff between inflation and unemployment. Reducing inflation often causes a temporary rise in unemployment.
This main idea of this chapter “What do school teachers and sumo wrestlers have in common?” is that people face many different obstacles that affect our economy. The economy is based on trade, production, and consumption. We produce goods and services while consuming others. Money is simply an instrument to facilitate this trade.

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