Summary in haiku form
From among all your choices.
What’s hard about that?
Summary in one paragraph
Optimizing individuals look at all their options and pick the best one. We can learn about individual optimization by using decision trees to see, e.g., that sunk costs—which appear in all the outcome boxes—cannot be the sole basis for a decision. Although companies are actually collections of individuals, each with their own goals, economists often assume that companies act like individuals whose goal is profit-maximization.
Notes on specific pages
Page 21: Marginal analysis
“Marginal” means thinking about one more or one less, so the “marginal benefit” from a few more minutes of fishing is the extra benefit from those few additional minutes; the “marginal utility” of one more dollar’s worth of apples is the extra utility (i.e., pleasure) from spending $13 on apples instead of $12; and the “value of the marginal product of labor” is the extra amount of revenue a firm can get from hiring one more unit of labor (e.g., one more hour’s worth of labor).
Page 22: Pirate economics
The expert on pirate economics is Peter Leeson, author of The Invisible Hook: The Hidden Economics of Pirates (2009) as well as papers such as “”Pirational choice: The economics of infamous pirate practices” and “this interview he argues that pirates were (and are) “economic actors, businessmen really” and that this explains why real pirates didn’t make people walk the plank (!).
Principal-agent theory looks at the incentives involved when an employer (the principal) is dealing with an employee (the agent), or similarly when stockholders are dealing with company managers. Since the incentives of the agent may not match those of the principal, the challenge is for the principal to design an incentive structure that gives the agent appropriate incentives to act in accordance with the principal’s goals. (For example, an employer could pay an employee on commission.)
Page 26: “Higher prices don’t always lead to higher profits”
In 2009 tech columnist David Pogue wrote about the Apple “App Store Effect“, claiming that “if you cut a software program’s price in half, you sell far more than twice as many copies. If you cut it to one-tenth, you sell far more than 10 times as many. And so on.”
