The two

1
The two things about economics

• Incentives matter
• Nick Leeson and Barings Bank
• Marginal not Average
• Continental Airlines
• Fly-or-ground the plane
• Selling the last seat
• Buying a new plane

The two things web-site was written by Glen
Whitman and may be found at http//www.csun.edu/d
gw61315/thetwothings.html
2
Alternative Models of Behavior

• The Economists view of behavior
• Only Money Matters
• Happy is productive
• Good Citizen Model
• Product of the Environment

3
Economic Choice

• Unlimited wants, but limited time and resources
• Marginal decision making
• Opportunity costs are critical
• Implicit costs
• Explicit costs
• Creativity and street smarts

4
The Hawthorne Experiments

• Productivity Experiments at Western Electrics
  Hawthorne plant
• Changed aspects of work environment
• Productivity increased for nearly all changes.
• What happened?
• Happy is productive theory
• Economic study by Parsons

5
Sears Auto Center

• June 1992 California filed charges against Sears
  Auto Center
• Average overcharge 230
• Sears settled out of court for 20 million and
  its stock fell by 6

6
Discussion Question

• 2-9 Employees in a plant in Minnesota are
  observed to be industrious and productive.
  Employees in a similar plant in Los Angeles are
  lazy and unproductive. Use alternative theories
  of human behavior to discuss what might be going
  on.

7
Discussion Question

• 2-13 A company recently increased pay of its
  employees by 20. Employee productivity remained
  the same. The CEO was quoted as saying It just
  goes to show that money doesnt motivate people.
  Provide a critical discussion of this statement.

8
Discussion Question

• 2-19. People give to charity. Is this
  consistent with the economic view of behavior?
  If charitable giving declines while per capita
  income and total employment stay the same, what
  might be going on?

9
Discussion Question

• 2-24. Accounting problems at Enron ultimately
  led to the collapse of the large accounting firm
  Arthur Andersen. When the Enron scandal first
  became public, Andersens top management blamed
  one rogue partner in the Houston office who
  they claimed was less honest than other partners
  at the firm. They fired the partner and asked
  that others not hold the firm responsible for
  one bad apple. What model of economic behavior
  was used here? What would the economic view of
  behavior suggest here?

10
Discussion Question

• 2-10 Employees at a department store are
  observed engaging in the following behavior (a)
  they hide items that are on sale from the
  customers, and (b) they exert little effort in
  designing merchandise displays. They are also
  uncooperative with one another. What do you
  think might be causing this behavior, and what
  might you do to improve the situation?