Homo Economicus 1.0 is about invisible hand. In the 18th century, Adam Smith who is a scottish philosopher and economist came up with the idea of invisible hand. The collective forces fuelled by actions and choices of self-interested individuals affect the economy. Theoretical models and scenario case studies were used to predict what will happen in the future. Homo Economicus and Economics men are rational, intelligent, coldly analytical, and they always act out of self-interested motivations to maximise their profit and utility. For example, Jerry is a Homo Economicus and he gets a $50 sweater from his mother. He does not really like the sweater and rather returns it and takes the money to do something else. Home Economicus men always consider their actions and act rationally out of self-interested and don’t care for emotion. Homo Economicus 2.0 and psychological economics are closely related to Homo Economicus 1.0. Emotion does matter although it is hard to quantify. People are motivated by something, think about all the possible consequences, and emotion tips the scale when stakes are high. For example, when a person plans to hit a gas station to rob money, he many consider how much money in the fuel, chance of being caught, and years he may have to serve in prison. If the cost outweighs the benefit, he or she will not do this, but if he or she outweighs the cost, they will do. Homo Economicus 2.0 is a person who does not care about self-interest, but cares about the pursuit of self-interest. For example, Jerry buys a new hybrid car because he wants people to think that he cares about the environment and that he is wonderful. He is selfish and selfless at the same time. What motivate a new economics man are money, progress, competition, and unlimited desire to push ego in the eyes of others. In conclusion, the new Homo Economicus 2.0 is often irrational, a cheater sometimes, bumper and busy pursuing self-interest.

The economic models of marriage and romantic partnerships have changed since the 1950s. For a long time, economic models of marriage and relationships were treated as romantic partnerships like business partnerships. Betsey and Justin Wolfers, labour economists, they also see economics in their marriage. For example, they divided up the duties for her daughter such as feeding her and playing with her. Thus, relationship between love and economics is considered very significant among several economists because they both are the matter of being productive and efficient. Another example, Betsey and Justin decided to hire a cleaning lady for their free time. Their relationship got better than before, bringing more sense of love to the house. It is very productive and efficient for them to get a cleaning lady, because they now get the chance to spend time together during their free time.

Incentives refer to the rewards that people have for certain behaviors. It is a powerful tool to change people’s behaviour. For example, in order to deal with the increasing number of students drops out in the middle of university, the university offers 15% of their tuition back if students graduate. On the other hand, perverse incentives refer to something that gives people an incentive to do something undesirable. Florida’s three strikes law in 1994 would be an example of perverse incentives. The law states that if a person already commits 2 serious crime, then he or she will be sentenced to 25 years in prison when committing the third crime whether the crime is severe or just a small one. Its purpose is to stop people from committing crime after crime, and it seems to be a successful law. However, the number of police officers who died doubles since this law had introduced. Criminals take advantage of this law which they would tend to kill someone since they would get the sentence of murder just the same as the sentence for a robbery. Similarly, death sentence can only have perverse incentive when criminals may commit a crime when they know they will be hung anyways. The study of economics is the study of incentives and how people response to choices to get the best results for themselves. People are not naive to respond to choices predictable. In fact, people make choices that gives them a good result not burden, and those choices can harm others.

Gouging is a practice of charging unjustly high prices and an excuse to rip somebody off, but in economists perspectives, it is needed and desirable economic activity. For example, Here is the good example of the great gouging, Ice storm incident in Quebec in 1998. This incident was very severe that lots of people lived in the houses without electricity, and during the chaos, the gougers suddenly raised the price of electricity during that time. Unfortunately, the people had to pay way too much money. Hurricane in Katrina is another example. When the hurricane hit Katrina, people needed shelter, food, water and protection. However, the gouger were working on their real estate so the people had difficulties going back to normal life. Also, John, a price gouger, bought the generator and sold eight times higher when there was a severe hurricane in Katrina. He was desperate for money for his family and the people needed the generator. An economist named Mike Munger thinks the gougers don’t really care about others’ warfare, and business men are motivated by greed and that they are working in the best for  their own profit or interests. The effect of gouging is that it distributes scarcity goods to those people who value the most. Thus, self-interest from the gouger has led to more agreeable outcome, and this is how invisible hand works. Law says the idea is emotional; economists see price gouging as a part of free market which will lead to a positive outcome.

Sometimes in a transaction there are costs or benefits that nobody pays for. Economists call them externalities. Externality is any private behaviour that has a spill over effect on somebody else who is not involved in transaction, and that transaction can be positive or negative.

Ex) Positive externality: beautiful garden in front of house will make people happy (Benefit for many people, free rider)

Negative externality: mostly caused by environmental activities and pollution (Causes extra costs)

Economists say that market failure happens when there are costs and no one wants to pay for them. Economists also think that people should feel guilty because we are not paying enough for daily products which causes externalities, and pass on to others to pay for our externality costs. Moreover, nature gave us so much positive externalities land, water, and fresh air; however, people harm the nature in order to live easier life by developing technology. Positive externality for neighbourhood building owners – they watch the Chicago cups for free in the building and baseball filed owners do not like them watching baseball game for free so they plan to put wind screen to block the view. Now, by law, those building owners have to pay to watch the game.  Government often get into taxation and policy in order to manage fair externalities so that no one can take advantage or get harmed by externalities. Furthermore, Negative secondary effect is another way of saying externality. Strip club owners in Huston are forced to pay for externalities fee which city counsellors think that strip clubs promotes more sexual crime. And, the counsellor made a statement by saying that when people pay for gasoline, they also pay for extra tax for environmental fee, which is arguable theory.

The final questions is how to calculate the negative externalities and who should pay for them?

Paradox of thrift is a situation in which if everyone saves, they end of losing more money. John Maynard came up with this idea and he thought government should spend money on stimulus program like infrastructure to create jobs for people. For example, in 1920’s during the second Depression, the stock market crashed and the economy dramatically collapsed. When many people start to save their money at the same time, their savings will disappear. Therefore, in order to have healthy economy, money has to go in a cycle. For example, people need to have a good amount of income, in order to have money for savings. To have income, somebody else must spend the money. The more people try to save, the more their income goes down. For an example, Capitol Hill Babysitting Co-up, a co-op in Washington D. C, new members save more scrip than spending, they babysat but not spending scrip. This shows the shortage of demand for babysitting.

http://www.cbc.ca/theinvisiblehand/episodes/2012/08/15/episode-eight-the-paradox-of-thrift/

Profit is made when you sell something for more than it cost you to make. Many people say CEO of a company or a billionaire would benefit most from the cooperative profit. However, many economists don’t necessarily agree with it. It races the fact 1% of the population makes 11% of the wealth in Canada. The 1% earns the most money in the world and makes the most of the money in Canada. An economist Stephen Gordon says labour and capital makes profit. For an example for his statement, he told a story of Dan and his company for breast cancer: Dan and his company held a big international bike ride for breast cancer. He didn’t use the entire donation for only breast cancer campaign; he earned a lot of money not only for the charity but also for himself. Many economists think that profit is a reward for innovation which takes a risk and efficiency. Many business men and people want to live in a capitalist system than in a command market system, and that makes the economy goes around.