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UNIT 1 READING  The Economic Problem
UNIT 1 READING  Skills Resource





















































Prisoners' Dilemma Decision Matrix

















































THE FUNDAMENTAL ECONOMIC PROBLEM OF RESOURCE SCARCITY












































































































































































































































































































































































































3 TRUTH / FALLACIES & MANY ASSUMPTIONS













Jeff Rubin on 2008 Financial Crisis CBC Ideas Podcast 07 September 2012.
Moses Znaimer's ideacity, Part 1
Ideas from CBC Radio (Highlights) (Ideas from CBC Radio (Highlights))
0:00/54:39









































































































Rubin's Story in Broad Strokes

ENRICHMENT RESOURCES

The Growth Imperative? Capitalism vs. Climate
CBC The Sunday Edition 12 September 2014.

The Degrowth Paradigm (Encore December 20, 2013)
Ideas from CBC Radio (Highlights) (Ideas from CBC Radio (Highlights))
0:00/54:45

Commentary Article "Let's Abolish Social Sciences" by Michael Lind




























































































































PUT ANOTHER WAY → Maximizing Economic Freedom Maximizes Human Outcomes



































































































































































































































































































VALUING HUMAN A LIFE










































































































































































































































































"EXTEND & PRETEND"
Yanis Varoufakis TED Talk on Economics & Freedom

Unit 1     Economic Problems & Principles


Approaching Economics Through Problem Based Learning

GAME 1           Can We Trust the Game?


GAME 2           Can We Trust Each Other?

Competitive Pricing Strategy
Consider the two dominant firms in the global smartphone market, Samsung and Apple.  Now compare their respective premium smartphone series, Samsung Galaxy S21 Ultra and the iPhone 12.  Each must decide on a spring 2021 pricing strategy.  Your small group will represent one of these companies.


Assume you and your competitor have a commanding share in the N. American market (i.e., Apple approx. 50% and Samsung 35 %) and currently enjoy relatively high prices with healthy profit margins. Should you lower your price?


Pricing Strategy Choices / Outcomes — 2 Strategies, 4 Possible Outcomes, Decide Your Strategy

STRATEGY 1 — High Price

OUTCOME a) Cooperative Higher Price Strategy  →  profit of $1 billion USD per week IF your competitor follows the same strategy.

OUTCOME b) Cooperative Higher Price Strategy  →  profit of $0.2 billion USD per week IF your competitor does NOT follow the same strategy.

STRATEGY 2 — Low Price

OUTCOME a) Competitive Lower Price Strategy  →  profit of $0.5 billion USD per week IF your competitor follows a low price strategy.

OUTCOME b) Competitive Lower Price Strategy  →  profit of $1.3 billion USD per week IF your competitor does NOT follow the same strategy.


TASK

 

1.  Develop a Strategy  (15 min.) -- As a group, take your time to discuss and decide on the pricing strategy you will make for your company.  You MUST keep this decision confidential from ALL OTHER GROUPS be it a Apple or Samsung group. 


Hint 1 -- Discuss what decision is most rational and what decision maximizes your company's interests.  You may need to discuss what your company's interests actually are.


Hint 2 -- Discuss what decision is most likely from your competitor given your own company's strategy.


2.  Test Your Strategy (15 min.) -- your group will be paired with a group representing your competitor.  Join together and each group will write out the name of the pricing strategy (either higher or lower) they chose on a blank paper, fold it over and exchange it with your competitor.  Each company will open the other company's paper at the same time and see how much each company will profit given your strategy choices.  Discuss which company won / profited and why each company chose the strategy they did.  Did non-price information factor into your decision?  If so, what types of non-price information did you consider? Do you notice any patterns or necessary assumptions in your strategy?  How does cooperation and competition play into this activity?  Can you place the 4 profit scenarios in a decision matrix (Hint -- think quadrants)?  Can you relate your outcome to any economic principles you know about?  What is the bottom line statement that this case teaches us about price competition, self-interest, profit motive or individual behaviour in a market?


3. 
Large Group Debrief -- making links to economic principles, assumptions, and the social sciences discipline.



Major Incites about GAME THEORY to Take Away From PROBLEM 1
PROBLEM 1 Full Debrief


GAME 3      CAN  I  REMAIN  COMPETITIVE ?
How Do We Create Stability & Order in Society Under Resource Scarcity?
Simulation Debrief     THOUGHTS AND OBSERVATIONS 


♦ The simulation can be described as a competitive approach to the condition of scarcity where self-interest went unchecked.

♦ A re-think of the simulation and the hypothetical "second chance" could be described as a collective approach to the condition

   of scarcity where self-interest is restrained by cooperation, or "explicit collusion".

♦ Unrestrained self-interest coupled with distrust versus restrained, rational self-interest coupled with a trust in the agreed upon

   system.

♦ The schematics and all available resources represent a market.

♦ Distribution of wealth problematic / MAJORITY MARGINALIZATION evident.

♦ No formal system of exchange or currency.

♦ No formal price signals or demand and supply economics in operation.

♦ An oversimplified economy in-play.

♦ Illegal / black markets in effect.

♦ Unrealistic moral hazard (when a party takes on more risk because someone else bears the cost of those risks ... it arises when

   the parties have incomplete information about each other).

♦ Disproportionate # of participants idle (i.e., waste), even when specialization and economic interdependence operated.

♦ System of trade and specialization not "internationalized".

♦ No capacity to expand resource base by trade or exploration.

♦ Production / Consumption parity.

♦ No formal markers of status or wealth.

♦ Universal ability to participate / contribute.

♦ 3 economic questions predetermined (What, How, & For Whom to produce).

♦ 3 economic goals of Equity, Stability, & Efficiency not clear.

♦ Anti-competitive behaviour operated.

♦ High High strategy, implicit collusion, and counteraction easily transformed in a Low Low strategy.

♦ Opportunity cost skewed.


The Condition of Restrained Self-Interest
→ Thinking About How to Restrain Self Interest in the Free Market (WATCH Milton Friedman in Greed is Good Clip).



POWERFUL QUESTION:        

What are the Dangers Posed by Fallacies & Assumptions that Underpin Market Economies?



TRUTH / FALLACY   1  →  Infinite Economic Growth is Possible Under the Constraints of the Invisible Hand

CASE STUDY RESOURCE → Guest Speaker on the Origins & Impacts of the 2008 Global Financial Crisis

Listen to Jeff Rubin, former Chief Economist at CIBC, discuss the links between the economic growth imperative, oil and the 2008 global financial crisis (click on the audio on the left → minute 3:00 to 13:47).


Economic Cause & Consequences Using Jeff Rubin


Subprime Mortgage Market and Risk Backgrounder to Jeff Rubin's Audio Comments

Why did banks hold these toxic assets?  Why were these subprime mortgages created in the first place?


In the early years of the new millennium, ever increasing housing prices were outstripping the increases in incomes.  Fewer and fewer could afford new homes so banks needed a new way to entice buyers with ever more attractive mortgage conditions.  These loans became known as NINJA loans (meaning, No Income, no Job, and no Assets).


The dangerous assumption these new subprime mortgages were predicated on was that housing prices always go up, thus, despite the low interest payments the banks (and others who bought the assets once they were turned into securities traded on a market) would collect on these mortgages, they assumed they could sell these houses financed by subprime mortgages for an attractive profit in the future.


Since banks must hold a reserve of funds available in cash relative to the size of their assets, banks used financial wizards to design ways to keep these subprime mortgages off their balance sheets.  Anything that has a predictable steady stream of income can be packaged and sold as a security (called securitization), thus subprime mortgages were bundled into securities and sold to other banks and financial institutions as an investment.  This kept these mortgages off the books, while the banks still enjoyed the monthly interest payments as a revenue stream.

Banks bundled these subprime mortgages with a diversified mix of low to mid to high risk mortgages, thus spreading the risk and impact of any one individual default on the value of these subprime securities.  Once interest rates jumped from 1% to just under 6% from 2004 to 2006, it didn't take many of the high risk mortgages to default on payment to send their AAA rating, and thus their market value, on a landslide to Junk rating and almost worthless in the markets.


Suddenly banks and other financial institutions that held billions in these toxic assets witnessed their value evaporate into huge losses.  The financial crisis began to unfold as institutions "too big to fail" folded in bankruptcy, confidence in the markets faltered, and bailouts became reality.


R



TRUTH / FALLACY   2  →  An Economic System Based on the Belief That We Are Rational, Self-Interested

                                           Beings Maximizes Freedom


CASE STUDY RESOURCE → Documentary Film The Trap Part 1 F**k You Buddy BBC

The fallacy of self-interest as rational, simplified human behaviour.


CENTRAL QUESTION IN THE TRAP DOCUMENTARY → Can stable economic order be created in a modern and complex world simply by unleashing individual freedom and self-interest?


WATCH

The Trap Part 1 "F**k You Buddy" (2007 BBC Documentary)


The Free Market Claim → Individual freedom allows for self-directing individuals to maximize personal advantage by acting in their own self-interest according to market incentives and performance targets all the while balancing one's self-interest against all others.


The Trap Documentary Notes


CAUSAL MODELLING THE END STATE FREEDOM MAXIMIZED → Applying the Core Concepts from The Trap


STEPS TO STUDENT--LED DESCRIPTIVE FEEDBACK ON CAUSAL MODELS


SAMPLE CAUSAL MODEL → STUDENTS CRITIQUE & IDENTIFY JUMPS & ASSUMPTIONS
PDF SAMPLE OF CAUSAL MODEL ABOVE

DEFINING THE COMMON GOOD



TRUTH / FALLACY   3  →  Economic Modelling is Values--Free


CASE STUDY RESOURCE → Audio Documentary It's the Economists, Stupid CBC

AUDIO LINK → It's the Economists, Stupid.
It's the Economist's Stupid   AUDIO DOCUMENTARY   CLASS BOTTOM LINES 2019

It's the Economist's Stupid   AUDIO DOCUMENTARY   CLASS BOTTOM LINES 2018


FALLACY   3   CONTINUED  →  Economic Modelling is Values--Free: The Case of Debt, Austerity, & Greece
The fable of the ant and the grasshopper. This characterization of Greece as an economy that caused it's own problems has led to a crisis of confidence and credibility.
WATCH → The Greek Crisis Explained in Under 3 Minutes
Greece Debt Crisis BACKGROUNDER
Greek Crisis in 300 Words BBC

Austerity, Public Good, & Public Choice Economics → A Case of Freedom, Stability, & Order Undone
WATCH → On The Streets of the Greek Financial Crisis



2.     How Does Varoufakis' Ideas Fit into the Prospect of the Greek Economy Recovering?
M. Bauer (ɔ) 2021