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Alone, welcome to Planet Money's Summerskill. The economics education you always dreamed of but never quite got around to this is class number one decisions and data. I know, I know you thought you'd have the whole summer off riding bikes, going to the beach, staring at the clouds and doing nothing. Well, the good news is you can still do that while simultaneously exploring the world of economics. I'm Robert Smith. Every Wednesday to Labor Day, we are going to meet here in your ears to learn the essential principles of econ one to one.
Each lesson will feature stories from some of our favorite Planet Money episodes. And yes, it is going to be on the test at the end of the series if you can pass our online final exam. You'll be eligible for a Planet Money diploma not suitable for framing. Today on the show, how to think like an economist.
This has been the greatest thing that I've picked up posting Planet Money over the years. Every problem, every decision you face can benefit from stepping back and looking at it like an economist would in order to help us with this superpower.
We've brought in two economists and residents this summer.
I'm going to allow them to give a short and lively introduction. I'm just one will go first and see it just it was pointed at me to go first.
And then you said Charatan Lively. And so then he realized he needed to take anywhere.
I could do it. Professor Justin Wolfers and Professor Betsey Stevenson are collaborators. They wrote a textbook together, Principles of Economics. They've charmed introductory econ students at the University of Michigan with sort of a couple, too. They are a couple. They have two amazing children, hopefully busy and quiet in the next room. A professors.
Hi. Good to be here. So when I took my very first course in economics and we're talking high school here 30 years ago, the way it started was was pretty grim.
The the teacher at the time would say, you know, economics is all about scarcity. There's there's not enough stuff in the world. An economist figure out who gets which stuff. And once we're properly scared, we moved into supply and demand. But when you teach economics, how do you start the class?
Every year, my first sentence is economics is not about money. Until then, I think it's a lens of great power and beauty, and it can help them understand everything from. The stock market to marriage and divorce, to crime, to elections, to the decisions you make in your everyday life.
That explanation you heard 30 years ago, Robert? I think it's a very glass half empty way of thinking about economics. It's an idea that there's not enough stuff in the world. And so how are we going to fight to the death to get our share? There's a glass half full vision that I like to start with, which is how can we allocate what we have in a way that makes as many people happy as possible? How can we make decisions in life that let us live our best possible life?
The first economic principle we'll touch on in today's class is thinking about the world in terms of costs and benefits for every choice you make. There is the joy you get from that choice. We call it the utility. And then there is the cost of the thing. You didn't choose the road not taken. Economist have fancy names for these things like opportunity cost and thinking at the margins, which will go over today, along with how to apply that economic advice to your everyday life, to your personal decisions.
Even who you date. Because in economics it is all about choices, individual choices.
Two economists like atoms. Physicists. It's the base on which everything is built. That's what the economy is. It's a whole lot of individuals making choices. All right.
Today, we're gonna fire up the particle accelerator. We're gonna aim it at individual choice. And we're gonna see what makes up the very atomic structure of economics. This message comes from Western Governors University, W.G. You is a non-profit university committed to helping you reach your academic goals at an affordable price. They charge a flat rate tuition for every six month term, meaning the more courses you complete each term, the more affordable your degree becomes, offering online bachelor's and master's degrees in business, I.T., education and nursing.
Learn more about their offerings at W.G.. You got iti you slash Planet Money.
These days, Chelsea Handler tries to keep her and her friends white privilege in check. She starts, like, really getting weepy. How's it feel? What are you doing right now? You just said your wife fragility. You can talk. I can't cry.
Comedian Chelsea Handler on white privilege and a new book. Listen to It's Been a Minute.
From NPR. So here's the way Planet Money Summer School is going to work in each class. We will play one of our favorite episodes or excerpts from episodes and we'll look for the big economic ideas in each one. And we'll talk it out with our in-house economists, Justin and Betsy. First up, a selection from our 2014 episode. Dear Economist, I need a date. It was hosted by Lisa Chow and Hannah Jaffe.
Walt, when Lisa signed up for Match.com. She was at this point in her dating life where she'd been feeling like she needed a whole new approach.
I had to be kind of more aggressive about it. I had to be more diligent and I had to be focused.
Lisa was 31 years old. She just moved back to New York City and she'd basically spent her 20s in a series of long term relationships.
I kind of decided at 31 that I didn't have that luxury anymore. I couldn't do that anymore until I was much more efficient.
I did make an Excel file and I started just writing down their names. Lisa needed this spreadsheet because in a year and a half, Lisa Chow went on 50 dates, 50 first dates, 22 of the 50 I went on second dates with of fun. Oh, is so much fun. Really? Yeah, I really loved it. I mean, you know, it's so funny. I was actually really pleasantly surprised.
I mean, there there's some really nice guys that is literally the first time I ever heard that. Oh wow. Really?
Like, pleasantly surprised how how many really great guys are. My colleague Lisa is a secret dating genius. I had no idea she went on 50 first dates and she never once felt sad or stressed or demoralized. She thoroughly enjoyed the entire experience. Here's what you did. She went on 50 dates and each time she went home after the date and she would record month, year, time, location, name and one memorable detail.
Pothead, touchy, boring would.
Oh, this guy had four gym memberships or is the one that I'd said that I loved here for this person. You have bobs his head a bit too much. This guy way West Coast, but supercute dude.
At the time Lisa had lots of friends who were also dating online and they would all complain all the time about, you know, I wrote five guys and only one of them wrote me back when I was doing online dating.
I never wrote people emails. I mean, some people might call that a copout, but I just said I'm going to lower my transaction costs and purely just a wink. And if they're really interested, they'll write back.
I remember actually I'd be sitting, like, watching some HBO show, just like sitting back at my computer and going, click, click, click, you know, wink, wink, wink. And not even thinking twice about it. The date needed to happen very soon after first contact. Lisa didn't want to build up some idea of the guy before meeting him and then have an opportunity to be disappointed. Similarly, no dates on Friday or Saturday nights.
She told me it's depressing to come home after a bad date on a weekend. So she just never let that happen. And if Lisa went on a third date with someone, she would always take them to a social gathering that included some casual friends of hers. That way she could observe them in a social setting. In other words, Lisa took something that's normally mysterious and squishy. Human attraction. And she tried to strip it of all of the messy emotions.
I really think that's what made her so successful. She made this thing that most people find so stressful and tedious that just sucks your time and self-confidence and hope. And she made that fun. And she did it using data and statistics. And she applied the principles of economics to her love life.
And it worked. There was one guy on number forty five. Right. And we were seeing each other for about six weeks. And I just at one point just decided, okay, this is not going to work out.
So I cut the cord and I thought, like, I make a mistake. Like, you know, we did have so many kind of things in common.
And then the next week, I went on a date with Kevin. And instantly I knew I didn't make a mistake, you know. And I was thinking if I had stayed with that guy, you know, I wouldn't have had that opportunity to meet, like, the Kevin. It kind of crystallized right there, like, oh, OK. That's what an opportunity cost feels like.
It's like when you stay with that guy, you're kind of feeling if you go and you're missing out on, you know, Kevin. Kevin, as you may have guessed, is Lisa Chow's husband. They got they got married. So economics to the rescue. Oh.
And Lisa grabbed this like this really big concept, this is the first one we want to start with. This opportunity costs that any time you decide to do something, there is something else you are not doing, their many things you're not doing. What's the more formal definition with you?
What is the true cost? Doing something. Is the next best alternative. You've got to give up to get it. What would you do in place of this thing you're doing? That's what you're going to give up. It's not just about time now, right? There's an opportunity cost awaiting a donor from trying to limit my calories. 100 calories on a donut means I don't have 100 calories left for a bit later that night. The opportunity cost of the doughnut is to be.
And I think what's so beautiful about that episode is now she really sort of fundamentally understood that even though she didn't know she was going to meet Kevin, but she understood that the opportunity cost of continuing in a relationship that didn't quite feel right was that she would give up the opportunity to meet someone who might be better. And what you have to do is take a gamble, not a gamble, a calculated risk.
But isn't this paralyzing to go through life as an economist and constantly think with with every choice? Well, I could do this and I could do this and I could do this. And what is this worth and what is that worth and what is that worth?
Now, it's incredibly freeing. It's really a. People won't waste your time if you know, you keeping track of and you're thinking about what you could be doing. Otherwise, it's quite useful to know what you're giving up. Sometimes you'll say, huh, maybe I should get out of it and go on that date. And fact is absolutely reason, Betsy saying this. I was gonna say that's that's in fact how I met Justin.
It was a Halloween about 400 years ago, and Betsy was at her home passing out candy to children. But do you remember who called you? My mother. Yeah. And what did she say? She said, you're not going to meet anybody, stay in that home, passing out candy to children.
So she got dressed up, went to a party, stole one of my beads. And we've been inseparable since. So she said staying home means you're giving up the opportunity to go somewhere where you might meet some exciting people or you might have more fun.
And some exciting people. That's how she describes me. Some exciting people. Not Mr. Right. Not the love of my life, but, you know. Good night. Where the marginal benefit of search no longer exceeds the marginal call.
A quarter century later, Justin still hasn't found a better option.
You know what I mean? It's romantic and empowering.
Now, as we're talking about opportunity cost and and we're we're feeling overwhelmed. All these other costs we have to think of whenever we make decisions. There is. We should mention one cost you should should not be thinking about. And this has the the fun name of sunk cost. How does sunk costs fit into this whole opportunity cost?
Sunk costs are costs that cannot be reversed. You cannot undo them even if you quit your project. You can't get your money back. You just can't get your money back. I'll give you a great example. You walk into a movie and you've paid for the ticket and you're sitting there and the acting is horrible. The plot line is weak and you're bored out of your mind. And you think I'd be better off going for a run right now.
Yeah, but you think to yourself, like, I paid sixteen dollars for this movie ticket, I should stay until the credits roll. And economists, that's it you're saying would say get out of there. You should not stay.
Get up and walk out. Doesn't matter how much you paid for the movie. That's a sunk costs. But since you can't get the money back, you can't get it back. But what you can do is not waste the rest of your time.
Let bygones be bygones. Just move on. Santa Claus. That is freeing. The opportunity cost makes me anxiety ridden than sunk costs. This is a freeing concept.
You know, we've all got that friend who's been in a relationship with Mr. not very good for maybe two years, maybe three years. And she calls you or he calls you and says, you know, should I continue with this person? And time and again, our friend says, you know, I've invested so much in this relationship. What you've invested is a sunk cost. You can't get it back. You should ignore it. The fact that you've spent a lot of time being miserable with someone is not a reason to continue to be so.
Let me make the connection for you. Between Santos and opportunity costs, because they're really the same idea. It's that the opportunity cost principle asked you to compare the consequences of your choice with the next best alternative. So when you're thinking about your relationship, should you stay in it? What you're going to be thinking about is, well, what will I get out of this relationship if I stay in it, say, another month vs. what would I get if I left and was doing something different?
None of those considerations. Consider whether you've invested three years or three weeks or three days. So the opportunity cost, when you're thinking about that movie and saying, should I walk out? The only thing that matters is what's the best way to spend the next hour of my life? Is it staying in this movie or is it doing something else? The fact that you bought a movie ticket not relevant. It's in the past. It's all about the future.
It's like this episode of Planet Money. You should not keep listening because you've already invested precious minutes of your life. That is a sunk cost. Instead, you should think about the next best alternative you could click on over and listen to Joe Rogan. Compare that option to the amazing things coming up in this episode. You will learn to identify exactly when you should stop wolfing down chicken MC nuggets using the magic of marginal thinking. After the break.
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I want to tell the story from the big economics convention ACA in 2017 was in Chicago. You were both there? Yes, we were. It was freezing. It was zero degrees. The wind was brutal. We were all trapped in this hotel. And I was reporting and I was so hungry and the only place that wasn't crowded to eat was in the basement. And it was a McDonald's. And I'm like, fine, I'm going to have the smallest thing, the offer.
I'm going to save room for dinner. And I ordered a six piece chicken mac nugget for three dollars and 99 cents. And the guy behind the counter says, well, you know, we have special for the same price. You can get ten instead of six. Is this a trick? Is Steven Levitt over in the corner from University of Chicago, taking notes on my machine? There is free disposal, you know. It's free to get the extra four chicken nuggets.
Esequiel Weinerman here on average. Of course, the ten big nuggets are cheaper, obviously. Right. But that's not how I should make the decision. I only wanted six mic nuggets. So what's the cost of number seven? Number eight. Number nine. Number 10, the chicken nuggets. It didn't cost me any more money, but honestly, I probably couldn't bring myself to throw the extra ones away. I would almost certainly eat them. I'd spoil my dinner.
I'd gain weight. I'd increase my unhealthy intake by like 66 percent.
Oh, so your fear was that you would eat them if you got them? Yeah.
So I'm faced with this dilemma of the extra chicken MCPS nuggets and an economics that is a meme for this concept. This this choice, this decision about whether I should have one more of something.
So. Economists call this thinking on the margin, on the margin, say we want to make decisions incrementally. It's easier to think incrementally to break how many decisions down into a series of smaller or marginal decisions like should I have one more?
So did I properly think on the margin there, the value of each additional chicken?
Yeah, because the price in terms of dollars was zero, which we called the marginal cost. How much extra did those four extra make Nugget's cost?
But when we think about the marginal benefit to you is actually negative because you'd have to use self-control. So either you force yourself to throw them away, you just throw them away, or you would fail to use the self-control and you would spend calories that you would have rather spent having a delicious dinner. More delicious than the seventh make nugget. All right. So I'm starting to think on the margin. I'm thinking that the cost of one more thing, the benefit, the utility, the joy I get from one more thing.
I'm balancing these two. How do we add this altogether for decisions?
So the key idea of the marginal principle is it just provides a simple rule of thumb to help you think through getting the most you can out of life. And it really comes down to the idea that if something's worth doing, you should keep doing it until your marginal benefits from doing more of it are just equal to your marginal costs from doing more of it. I'm not tells you when it's time to stop.
Economists call this the rational rule. You might say, why would I do something until the marginal benefits equal? Well, the answer is you want to make any choice where the marginal benefit exceeds the marginal cost. If you take every opportunity where marginal benefit exceeds marginal cost, the very last opportunity it's left is the one where the marginal benefit equals marginal cost.
See, you know that from the cost benefit principle that if the benefits exceed the costs, it's a good choice. And so when you apply that marginal principle, you think, well, incrementally on the margin, it allows you to really narrow in and say, what are the marginal benefits I'm going to get from this decision? What are the marginal costs I'm going to face?
And am I going to be better off if I say, yes, we're going to take a quick break and then we're going to put all of our concepts, opportunity costs at the margins to work by taking a very, very expensive car ride across Manhattan. Do you want one more chunk of Planet Money? We'll be waiting for decision.
Planet Money. Tick tock. That's economics. Planet Money. Tick tock. How did how did you guys get verified? Planet Money. Tick tock. Same great taste. Half the calories. Planet Money.
Tick tock. Tell your kids to learn.
That's lovely. The one. Our last story today features economics playing out in real time before your very eyes on the streets of Manhattan. The stories from 2014 when we were obsessed with what was at the time, a pretty new company, Uber, the Uber app feature something that we don't often see in economics. Prices changing by the minute before your eyes surge pricing. I'm sure you've seen this when a lot of people are calling an Uber on the app.
The price for the ride goes up two times the regular rate, two point four times the regular rate, three times, six times the regular rate. Needless to say, this pisses people off.
It feels unfair. It could feel like only people with money can get where they're going. And the poor have to wait in line to hail an old fashioned cab or even walk.
But from an economic perspective, something quite remarkable is happening during an uber surge. This is the topic of our episode from 2014. Zoe Chace and Lisa Chow hit the streets for a story.
I met and turn off in a line of people waiting for taxis outside of Penn Station. It's 20 degrees outside. It's snowing. Everyone wants a cat and there aren't many cabs. So the wait is long. About 30 minutes. And economists would say people like and they may not be paying higher the usual cab fare if they're waiting just in the taxi line. But they're still paying. They're just paying with their time. Time spent waiting here on this line in the cold.
And Uber is giving them this other option that instead of paying with time, they could just pay with their money. You paid up. When you paid your. Maybe it depends if the caps keep coming.
Slowly, it gets more like maybe so the argument for Uber is people like and would benefit people willing to pay with money instead of their time and other people would benefit, too.
Specifically, Uber drivers like Aura, Hajo Trion. He tells me the story of December 14th here in New York City.
It was rain, snow, sleet, freezing weather. So we were not driving. We were more like sliding on the streets. On top of that, it was also the day of Santa Con that saw people dress up as Santa Klauss and go get wasted.
I remember that day of Santa Con. It was bad. I was actually in Penn Station. I was surrounded by drunk Santas singing Christmas carols and I took the subway. It was almost impossible to get a cab that day. Uber prices surged to seven, eight, nine times their usual rates. Aria told me about this one couple he picked up that day at seven times the usual rate.
When I picked them up. I felt very bad that I'm picking them up at that rate. And I apologized. I even offered to do some extra stuff for them, like, you know, get them a cup of coffee or something just to make them feel better. But you describe the couple to me. Sure. There was a young couple about twenty five years old. The girl was wearing a very short skirt in that chilly weather. And the guy told me that actually he doesn't mind paying the search price because they were waiting for a cab for about hour and a half outside.
They called some car services. Nobody had cars available. And his girlfriend was so frozen that she said if he doesn't get her a cab, she's just dumping him, I guess. Yeah. And they gave saving their relationship. That's worth paying seven times the regular price.
Aria told me the final bill for this couple was one hundred and forty five dollars. The couple decided their time was worth one hundred and forty five dollars. And the guy that benefitted from that was Orre. Without a service like Uber, that one hundred and forty five dollars would have gone uncollected. Nobody would have made that money where there was money to be made. And that idea that there's money left on the table that drives economists crazy.
That was Lisa Chow and Zoe Chace 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 the snowstorm means lots of customers. Not many cabs, 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 hour? They're 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 superhigh. The 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 more drive is to want to be on the road is for the price to rise. Surge pricing. Yeah, 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 road or to get up off the couch and get onto the road.
Well, this shows you how the company itself, Uber, is thinking on the margin. You know, in a normal kind of car service situation, I suppose you could order your drivers to go out in the snowstorm and just say, you have to do this or you're fired. But the genius of of 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 to affect their really next decision.
The amazing thing about markets is it all works through voluntary exchange. And so it's exactly that. It's using incentives to try to encourage sellers to sell.
Right. So the snow stone problem is lots of buyers, very few sellers. We need to solve that. A higher price is attractive to sellers. So it's going to get more cars on the road and it's unattractive to buyers. Fewer people are going to want to take taxis. That higher price brings the quantity demanded down, the quantity supplied up and brings the market closer to balance.
I know people hate this. I hate this one. I have to pay more. But once you learn economics, there is a certain joy in watching Uber during the search. You may not want to pay more, but you can see 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 is happening inside every business. Right?
It's everywhere, all around us. We just don't see it.
It's even happening in the dating market. Okay. Oh, come on. Have you ever been in a nightclub where you noticed that one gender is more numerous than the other day?
Well, I remember dating. Go with it. Go. Now, I just I remember this not very well. Betsy took me out dancing in Philadelphia and we looked around and there was a lot more sheilas than blokes in the bar. This is a predominately straight bar and we noticed this. I mean, we'd call it a disequilibrium. The two sides of the market were not in balance. None of them was there to dance. And we saw market forces work.
Word got out that there was a let's call it profit opportunity for young men willing to dance at 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 surge. And I saw the supply and the demand of young men and women come into balance over a period of about two and a half hours. It was one of the most extraordinary things.
This balance is called a market equilibrium, and that's gonna be our last economy word of the day. And you can think of the market equilibrium as the point where the blokes meet the sheilas or in the Uber example, probably better, where the number of people who are willing to pay for the surge price are equal to the number of drivers willing to drive at the search price. And so, finally, just. 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 there's still people waiting in the 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 happen. They can be really different things. And so a market can be an equilibrium and they can 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.
Our first class and we're already getting into the messiness of. Singing Intro Economics. Out into the real world, because all the choices we've talked about today 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. Classes come to an end.
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 sunk costs and we spent a lot of time thinking at the margins.
What is the cost of one more delicious chicken nugget in every episode? We want to make sure that we leave you with an assignment you can think about over the next week and share with us.
Justin, we talked today a lot about dieting and say my assignment for our listeners is look at some other facet of your life that you might not have thought was fundamentally economic. And look again and see if you can see market forces underpinning the decisions that people are making. Justin, Betsy, everyone in the class. We will gather next week when we will do supply and demand graphs on the radio using nothing but the power of the human voice. And we will find markets in the places you least expect them.
Those are the most exciting places.
Can't wait to get looking for them. Summer school class next Wednesday. Let us know what you came up with from our assignment this week. Take one of our economic concepts and find a strange place where you can see it in your own life. Does opportunity cost a factor in your job? Can you think at the margin while you're making dinner? Our e-mails, Planet Money at NPR dot org. Or you can find us on Facebook, Instagram, Twitter and tick tock.
Watching the hashtag PDM Summer School for your questions all summer long. Or you can take us. We're at Planet Money.
Today's class was produced by Lauren Hodges with help from Darian Woods. Alexi Horowitz, Ghazi. Nick Fountain. Litsa Yagur. And Sound Design from Isaac Rodriguez was edited by Alex Goldmark. Betsey Stevenson and Justin Wolfers are professors of economics and public policy at the University of Michigan. And later this summer, they will debut their own new audio course. Think like an economist. You could find it on him later. We'll be back next week with a class where pickles and potatoes end up in the wrong place.
The markets come to the rescue. I'm Robert Smith. This is NPR. Thanks for listening.