Justin, Lisa Child, Zoe Chase discussed on Planet Money
There's money left on the table that drives economist Crazy. That was Lisa Child and Zoe Chase from a planet money episode in 2014. Now listening along to this episode are professors Justin and Betsy. Let's take the economic thinking that we've just learned and apply it to this situation. This uber situation we just heard about. So I think the most interesting thing about a snowstorm in taxis. Is think about what happens on each side of the market. So this nice stone means lots of customers. Not many kids. Lots of demand, no much supply. How do we fix that if we want more cars on the road? Each of these drivers is thinking, Should I work? One more Allah there thinking about the marginal benefit relative to the marginal cost. The marginal cost of being on the road in a snowstorm is it's miserable. It's super high. A marginal benefit of being on the road is how much extra money I'm going to make. That is the price that they can charge for their rights. So the way to get them to one of Mawr drivers to want to be on the road is for the press duress surge pricing actually tries to bring out more drivers. This is a thing of price is an incentive. If we want more drivers on the road, a high price is an incentive for them to stay out on the right or to get up off the couch and get on to the right. Well, the show to have the company itself. Uber is thinking on the march in, you know, in a normal kind of car service situation, I suppose you could order your drivers to go out in the snow storm and just say you have to do this or you're fired. But the genius of uber and markets like it is that it's thinking about what will it take? To influence the marginal decision of the person waiting for a cab of the driver. You know who's thinking about going out? It's it's really trying affect their really next decision. The amazing thing about markets is it all works through voluntary exchange. And so it's exactly that a choosing incentives to try to encourage sellers to sell so the snowstorm problem is lots of bias. Very few seller's willing to solve that A higher price is attractive to sell us. So it's going to get more cars on the road and unattractive Tobias fewer people going to want to take taxis that higher price brings the quantity demanded down the quantity supplied up. It brings the market closer to balance. I know people hate this. I hate this when I have to pay more. But once you learn economics is a certain joy in watching uber during the search, you may not want to pay more. But you, khun C supply and demand happening in front of your eyes in real time on the app. And this balancing of supply and demand. I mean, this is happening in every market this happening inside every business, right? It's everywhere. All around us. We still see it. It's even happening. In the dating market. OK? Oh, come on. Have you ever been in a nightclub while you notice that one gender is more numerous than the other? Okay. Remember dating go with it. Go, and I know I just remember this night. Very well. Betty took me out dancing in Philadelphia. And we looked around, and there was a lot more. Sheila's them blokes in the bar, but this is a predominately straight And we noticed this. I mean, we call it a disequilibrium the two sides of the market. We're not in balance. Not everyone was there to dance. And we saw market forces work. Word got out that there was a Let's call it profit opportunity. Four young men willing to dance in this particular bar, and over the next two hours, we watched equilibrium happen. So there was a surge of men coming into the building. There was quite literally a search and I saw the supply and the demand of Young men and women come into balance over a period of about 2.5 hours. It was one of the most extraordinary things. This balance is called a market equilibrium, and that's going to be our last economy. Word of the day, and you can think of the market equilibrium as the point where the blokes meet the Sheila's. Or in the uber example probably better where the number of people who are willing to pay for the search price are equal to the number of drivers willing to drive at the search price. And so finally Justin and I just want to ask you like it doesn't necessarily mean that everyone gets what they want. In this situation. When we have a market equilibrium, right? It doesn't and they're still people waiting in snow because they can't afford uber because the price is too high to them, their drivers who are not out on the road, this is really important. Equilibrium tells us what's going to happen. It's our ethics that tell us what we think should happen or what we want to heaven. They could be really different things and so a market could be an equilibrium. And they could still be a lot of pretty miserable outcomes. It is the case that there are often many market failures and market imperfections that mean that markets will come to rest at a place that's not socially desirable are first class. And we're already getting into the messiness of taking intro economics out into the real world, because all the choices we've talked about today. I have been in a vacuum. Remember everyone else is also making their optimal choices and in future classes, Planet Money Summer school will talk about how individual economic choices. Can have real impacts on your neighbors, your community on inequality and the future of the world. All right. Class has come to an end. But we should probably go over our vocabulary words. We had opportunity cost the value of the next best thing you're giving up. We learned to ignore some costs, and we spent a lot of time thinking at the margins. What is the cost of one more delicious Chicken nugget. And.