Topic: Economics
The Economics of Random Stuff The Beginning of a Series of the economics of random stuff.by Jeff Peters
(conservative)
Sunday, July 6, 2008
Neoclassical economics has one very important model that predicts, quite well, human responses to everyday situations. It's the relationship between quantity consumed and price. Assuming a person faces some consumption constraint in a specified situation, when price increases consumption of the good in question decreases.
The Analogy of Price and Quantity
To understand how to apply this economic model in everyday life, we must look deeper into the two variables in question. Price doesn't have to relate to money. Economists ultimately look at price as an opportunity cost - what you give up to consume another good. If you spend three hours a day with your wife, you lose three hours a day at the office. Thus, we see the price measured in units of hours at work.
Going along with this example, let's start off by saying that you have a constraint of 24 hours in one day. If for some reason you have to spend more time at work then the price of spending time with your wife increases. Thus, you will consume less time with your wife because of the price increase. This example illustrates the law of demand. It's important to note that the italicized words in this paragraph have great significance. The consumer has no control over prices and therefore has to spend more to consume the same amount.
Another way to look at price on the demand schedule is marginal cost and marginal benefit. At each price and quantity coordinate, we assume that this individual already maximized utility given some constraint. Thus, at each point of price and quantity, marginal benefit equals marginal cost but at different levels of utility for normal goods. We will have the incentive to consume more of each good if the price is relatively lower. We do this because we want to achieve higher levels of utility. Utility levels increase as the price decreases. Assuming strong monoticity, we will always want to consume more of each good.
To conclude for the preliminaries, if marginal utility and marginal costs aren't equal, we will continue "trading" until we get to that point. Trading is just another way of saying that we will do a little more until we feel we balanced or "just right."
Finding our Preferences
For your purposes, the second most important aspect is information. Our preferences, or the options of goods that give us or that little gut feeling of comfort (utility), is determined by information. We have experience with the world and we continue to gain wisdom from it. Our wisdom is simply a collection of information. It's not always perfect but you can learn something about yourself, improve your consumption, and achieve a higher level of utility when you get more information about goods.
The Economics of Marriage
When engaging in marriage with another person, it almost always concludes from a series of experimental stages. We are seeking and learning information about our loved ones and clearing out any information asymmetries. If this person fits our preferences, marginal cost will equal marginal benefit and we will feel "just right."
However, this marginal cost and marginal benefit exists for only one level of utility. Perhaps, you meet another person that has some additional quality that you admire plus everything exhibited by the current spouse; this person will give you a higher level of utility. It turns out that now marginal benefit and marginal cost for the current spouse are no longer balanced. If we seek more comfort and happiness, then we will pursue that individual who will give us more utility - if available. Just remember, that this assumes one has just enough information about this newcomer and that there aren't any constraints (like your wife will murder you if you cheat on her).
This presents the issue of risk. We have preferences that aren't as stable if we are uncertain about something. There's a probability that some person will have certain qualities and costs. For example - "I sure hope that this woman is always this funny and charming." It turns out that we may be wrong and then we will no longer have the privilege of enjoying our former state of equilibrium. Depending on the preference or utility function in question, some people may or may not want to take that risk. Others may want security so they will require insurance to take a risk. Insurance may be some compensation that will assure they keep their current relationship or that their wives won't find out.
It's important to note that preferences change over time as one continues to uncover more information. This may cause a disruption in equilibrium with a loved one. What if you feel you don't have enough information and you suffer the irritable information asymmetry syndrome? Pay a detective to follow your spouse around for a greater understanding of his or her preferences. This can help minimize deadweight losses from a relationship with a well disguised skank.
Last but not least, as a person consumes more of one good over time, they will experience diminishing marginal utility with respect to other goods. It turns out, that one can simply get sick of their spouse and would want to appreciate other aspects of his or her life!
Being Anti-Social
A person who is anti-social basically lacks skills in making friends in situations with few or many folks. They fail at starting conversations, attracting people around them, and just do nothing to make friends. It seems that there is a cost to making friends for these individuals. For the most part these folks are probably unhappy to some degree. They wish they had more active lives with more people to hang out.
Although they pursue their lives in equilibrium they may need to discover a new aspect of themselves that will change their utility preferences. This is a problem of information - about oneself. What one must do is go out in the world and try new things. After this person figures out what they appreciate, they should surround themselves around people that enjoy the same activities. There is an intrinsic efficiency with conformity to a group. Anti-social people should take advantage of this. Since anti-social people don't necessarily know what to talk about they can start off with interests they share with other people.
If they change their utility preferences, so do the costs associated with living a particular lifestyle. These changes aren't necessarily going to be huge but they can be improvements.
The reason I assume that these people live their lives in equilibrium is because they don't really do much to change their lives. However, there is an important component to their lives that must be discussed. It is the concept of risk. Their utility functions are formulated in such a way that they are risk averse. They fear being rejected in social situations. They believe that they have a large probability of being rejected.
A person of this future preference function would require a huge compensation to take risks - in other words insurance. In my judgment, the best way to deal with this is to simply lower that probability of rejection by meeting people through interest groups. Join the local tennis, poker, and salsa club, if that's what you appreciate. It may lower the perceived probabilities of rejection. Remember, conformity is simply a way of achieving social efficiency - which means it's less costly on life than being weird.
More to Come:
I want to do a series of random economics applications. If you think that these economic interpretations of life are interesting post an idea in the comment section!
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