Notes on "The Economic Naturalist" by Robert H. Frank (ISBN 978-0-465-00217-7)

page 4: opportunity cost

The opportunity cost of something is the value of what you have to give up to get it.

An example is the opportunity cost of seeing Eric Clapton in concert:

1. You have a free ticket to see Eric Clapton.

2. Bob Dylan is performing tonight.

3. Dylan costs $40, but you'd be willing to pay up to $50 to see him.

For the sake of simplicity, there are no other costs, and nothing else you're considering doing, you can't resell the Clapton ticket, etc.

The opportunity cost is calculated as follows:

  $50.00 (you miss seeing Dylan, worth $50 to you)
- $40.00 (you save $40 that you would have paid to see Dylan)
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  $10.00 is the opportunity cost of going to the Clapton concert

If the Clapton concert is worth $10 to you, you should go.

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page 9: narrative theory of learning

If we learn something in story form, we remember it much better. In teaching a subject, use stories as examples.

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page 10: cost-benefit principle

"You should take an action if and only if the extra benefit from taking it is greater than the extra cost."

We have a tendency to think that it's better to save $10 on a $15 item than on a more expensive item. Consequently, we tend to make unwise choices.

Specifically, when I am driving on the highway, I buy sandwiches and other food at the rest areas, even though it costs me twice as much as it would if I purchased it at the grocery store before leaving.

I rationalize: I am already spending 75 on the trip, so spending 10 on lunch instead of 5 doesn't matter.

Saving 10 is saving 10, whether it is on a 15 steak or a 5000 car.

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page 15: added features

Don't add a feature unless customers woud pay at least the cost of implementing it. The example given is six-speed transmissions, which were not implemented until people were willing to pay more for cars.

Note: in web design, this principal may help to decide which features are worth adding to a site, versus which features are better abandoned.

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page 29: no cash on the table

"Freely available money seldom sits unclaimed for long." This means that if you see what looks like freely available money, there is probably a hidden factor making it less available.

The real consequence is simply that making money requires a combintion of talent, thrift, hard work, and luck.

"People who think they can spot cash on the table offer confident explanations for why the usual constraints do not apply."

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page 30: productivity gains lead to windfall profits followed by low prices

The first few companies that can increase productivity can continue to charge old (higher) prices, resulting in windfall profits.

However, it will be relatively easy for competing companies to undercut these higher prices, leading to lower prices long term.

This principle provides a concrete and simple way to understand the current situation confronting record companies.

Record companies are faced with a situation where they have realized massive productivity gains through selling zero cost MP3's, while trying to continue to charge the higher prices associated with their previous production costs.

The result is a struggle to prevent the market from becoming competitive. The record companies have fiercely pursued all alternative routes to music distribution in their quest to keep their prices from being undercut.

In principle, the record companies cannot win without artifically enforcing monopoly conditions.

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page 31: the price of a product can not exceed costs of production in long run or rivals will enter the market

This is another way of describing the previous point, and continues to apply to the situation faced by record companies.

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page 31: the law of one price

The price in City A = the price in City B + costs of transportation.

Otherwise, there would be cash on the table in the form of products that could simply be resold elsewhere.

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page 32: marginal cost

The cost of producing the last unit supplied

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-the low-hanging fruit principle

It is always best to exploit one's best opportunities first.

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-supply and demand

Supply and demand explain the forces which decide how many of which products get produced at what price.

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-demand

Demand is a summary of the benefits people feel they are receiving from a product.

Generally, as price rises, demand falls because the percentage of people who feel that the benefits are worth the price falls.

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-supply

Producers will continue to produce a product as long as they can sell it for at least the marginal cost.

In the short run, marginal cost tends to rise with the number of units produced, because of the low-hanging fruit principle.

generally: as the price of a good keeps rising, sellers are willing to sell more units.

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-market clearing price

The price at which consumers want to buy exactly as much as suppliers wish to sell.

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page 41: the more competitive a market is, the less likely it is to discriminate against customers

If there is a real price difference, there is probably a cost difference. If dry cleaners charge more for women's shirts, there is a reason.

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page 44: the best use of a resource is not necessarily profitable

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page 45: hallmark -- train clients to new uses

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page 48: (my client) use most popular items to draw customers, then present them with the higher-margin items

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page 50: Harvard needs students as much as they need it

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page 51: workers are paid by how much they contribute to the bottom line.

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page 53: models must be recognizable, not just beautiful

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page 55: ceo's earn more beacuse the markets are broader

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page 55 bottom: wages higher for risk, arduousness, smell or ugly

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page 57: ceo's are highly paid to lie

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page 59: better employees are paid less because they get satisfaction. necessary to pay worse employees more so they'll stay (in a range between best-worse employees)

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page 62: workers are paid less than they are worth in the beginning to discourage theft and laziness.

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page 66: taxis working shorter hours when it's raining becuase they make their goals faster -- something to avoid, better to strike while the iron is hot.

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page 72: hurdles

Why would you want to charge different prices for the same product?

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page 73: a hurdle is effective if potential buyers who are price sensitive (and would not have bought) find the hurdle easy to jump but others find it hard or not worth it (scratching washing machines on purpose)

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page 73: hotel minibar=indirect discount on room price

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page 74: to offer discount, hotel must find other revenues from other guests
for my client -- offer expensive fast shipping to make revenue? other higher margin offers?

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page 75: waiting for a check to clear is a hurdle to avoid paying wire fees.

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page 75: a producer can increase profit with every sale at more than marginal cost, as long as that doesn't require cutting prices to other buyers.

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page 75-76: hurdles are indispensable or economies of scale

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page 78: the true goal of (need to re-read this)

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page 80: below average cost, above marginal cost

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page 80-81: bundled concert tickets -- like kits?

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page 86-87: resto charges $2 for soda, but the cost is effectively zero. If only a small number of people order drink because of free refill, it's worth it.

Offer some thing free at a price, with free refills!

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page 88: In a perfectly competitive market, the no cash on the table principle predits that customers who get extra services will pay for them.

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page 89 top: the more competitive a market is, the closer the price will be to marginal cost. Obviously the recording industry is NOT competitive.

What happens if marginal cost is zero?

Lxury hotel not price sensitive can offer extras.

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page 90: economists do not expect regular long lines like at Disney's Space Mountain. When you see regular lines there must be mitigating factors.

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page 95: Smart for one, dumb for all.

Individual actions that generate benefits or costs to others. (means that when laws are good, regulation is good)

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page 96: tragedy of the commons

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page 99: a small extra benefit can create regular customers -- open 1 hour more etc. my client, find extras same as competitors, but +help, +choice, +service, for example.

"the only stable outcome is to be open 24 hours a day", or to eat ALL the fish.

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page 102: check splitting results in higher prices. This has the same results for taxes/redistribution of wealth, and is a good argument for not redistributing wealth.

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page 103: Slow down for an accident. Pay the cost BEFORE you make the choice to slow down. It's just a type of situation to recognize, a useful metaphor.

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more to come; I haven't yet finished...
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