Monday, December 12, 2011

Class Summary 12/12/11

Profit and Losses

Profit: the difference between your total revenues and total cost--essentially, whatever is leftover
Interest: a price that comes from supply and demand; it emerges from the market of loanable funds

  • A positive price we're willing to pay to obtain an unearned good now

In order to ensure profits, wages and rents are contracts that eliminate uncertainty. Economic profits are different than accounting profits because the former takes implicit and explicit costs into consideration. Economic profits are how much richer you are now as opposed to doing the next best things. Profits can be a potential cost for entrepreneurial activity. The necessary condition for profits is that we live in a world of uncertainty. Sometimes you don't know how to cut yourself in on the profits.

Losses are essentially making people pay for sucking at whatever it is that they're doing. Eliminating losses costs everyone because:

  1. Allocation of resources would be all wrong and destructive
  2. Eliminates feedback loops
  3. Insulating people from losses causes them to take more risks.

Saturday, December 10, 2011

Class Summary 12/9/11

Profit, Losses, and Entrepreneurs

We know very little about private entrepreneurs even though many of them have done a lot to improve our lives. Society as a whole also doesn't usually celebrate the making of profits. We celebrate giving them away. For example, Bill Gates is more highly regarded for his donations and charities than he is for being so wealthy. Money will always be the motivator. Even if you love what you do for a living, pay is still important. For instance, the polio vaccine probably wouldn't exist if it were created based on the developers' altruism. The scientists behind the cure created it because they knew it would make them money. Taking money out of the equation ensures that the good won't be there.

The costs of factors of production--land, labor, and capital--matter for entrepreneurs. Explicit and implicit costs are important. Even if you're using your own resources to develop your idea, you're still paying for things by way of opportunity costs.

Profitability = Rental Rate + Appreciation Rate - Interest Cost

Wednesday, December 7, 2011

Reading Analysis of 'The Sumptuary Manifesto'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
One of the first things we learned in this class was that values are subjective. As simple as this idea is, it always pops into my head whenever I read anything pertaining to economics. There's certainly a lot of frivolity present in today's market, but it's only there because people are consuming it. There's a supply of it because there's a demand for it. Do people really need flashy, expensive cars? No, however, if they're willing and able to pay for them, then a quantity demanded exists. It's interesting to suggest that people should limit their consumption to only the necessary things they need for survival. It's Communist-esque in the sense that goods are rationed by capping expenditures, but unlike it because the people would still have excess income that they weren't allowed to spend. This is similar to self-sufficiency being the road to poverty, and the importance of fair trade. People would just be sitting on their money without the ability to enter it into the market, making everyone poorer. Prohibiting exchanges impoverishes us.

Discussion Questions
What are some possible repercussions of enforcing the rule against frivolous spending? Who would benefit/suffer the most from a policy like this? Are there any positive unintended outcomes that could come about from the implementation of such a strategy?

Market supply molds to fit the market demand. If consumers want trivial tangible items, then they'll be created. It doesn't necessarily mean that people are "wasting" their money. Restricting the purchases of such goods won't promote any sort of economic equality because other ways to distinguish one's self will emerge. Free trade makes all of us richer on net, so prohibiting certain exchanges will make us poorer because entire sectors of the market would disappear. Freedom of purchase coupled with competition allow our economy to thrive.

EWOT Goggles #14

The dining halls on campus, also known as the bane of my food consumption existence, have an interesting policy that I was recently made aware of. Apparently, as part of our dining bill for the semester, all students pay some sort of a dish and cutlery taken/breakage fee around $80. Since this is paid at the beginning of the semester, it is a sunk cost. We know that consideration of sunk costs lead to bad economic decisions, but this fee disincentivizes being careful about breaking plates and incentivizes sneaking a cup or ten to your dorm room. One of my friends, who will remain unnamed, was ecstatic about the return of the deep soup mugs because he had been waiting to take one up to this room for awhile. Can we also just focus on the ridiculousness of the fee we're charged? It's not my fault that someone purchased breakable ceramic dishware for Danforth in the University's strive for feigned elegance. Putting delicate plates and bowls in the hands of sleep-deprived college students wasn't exactly the bright idea of the century. Regardless, out of all the meals I've eaten at Danforth, I've only heard two dishes break. The number of dishes broken and/or stolen from the dining hall hardly add up to $80 per student. This fact coupled with the astronomical lines might cause someone to take a few forks out of spite. The fee promotes a certain level of carelessness and dishonesty, even though it's just a precautionary measure.

Class Summary 12/7/11

More on Taxation

Because taxes cause a reduction in the quantity supplied, they don't generate the estimated or needed revenue that warranted their creation. We also lose $400 billion per year through opportunity costs involved with doing our taxes. The economic incidence of a tax is completely separate from the legal incidence of a tax. This means that a tax placed on a firm may actually end up costing the consumer more money because the cost to the firm has to come from somewhere. There's a specific type of tax--a payroll tax--that we say firms and workers split. This isn't true because all this tells us is who has to write the check, it says nothing about who actually pays. Because corporations are people, raising an employer's cost will actually cost the worker. The relative elasticity of supply and demand determines who pays.

Good tax policies apply taxes to goods where there's an inelastic demand for them. This way, there's no dead weight lost because buyers and sellers don't change their behavior. You don't want to implement regressive taxes, or taxes that place the most burden on the poor. The same theory about taxation can be applied to subsidies.

Class Summary 12/5/11

Illegality and Taxation

Making drugs illegal doesn't eradicate them, it just makes the supply curve steeper. This is because suppliers still bear the cost of transporting drugs, but the costs of the risks involved with doing so are much higher. Risk factors of distribution also increase the potency of the drugs. If you're going to risk making drugs, you might as well make them stronger because the danger and repercussions are the same regardless of how effective the drugs are. As these drug producers decide to grow/make more, the supply becomes more and more elastic.

Excise Taxes: the sellers have to write the check to the government --> the legal liability just refers to who is writing the check

Raising taxes isn't costly, but the act of doing so is costly. The price of the good also doesn't increase by the amount of tax that's placed upon it. Taxes get in the way of exchanges because they cause supply and demand (depending on the type of tax) curves to shift in. It's the value of the forgone transactions due to taxes that cost everyone money. Even the IRS is costly--11 billion dollars per year are spent to run it. People at the IRS aren't creating anything of value. Essentially, they are a dead weight to society. This dead weight loss is separate from tax fraud, which is encouraged by the complexity of the US tax code.

Friday, December 2, 2011

Class Summary 12/2/11

Price Floors

One of the most common price floors that we see is minimum wage. Policymakers who believe that raising minimum wage helps the poor are incorrect for several reasons.

  1. Minimum wage doesn't assist the poor because less than 50% of people who hold jobs that pay minimum wage are below the poverty line. The majority of people with MW jobs work less than 20 hours per week.
  2. It's worse for everyone when the demand for labor is elastic.
  3. Raising minimum wage makes it harder for people to get jobs as well as making it more difficult for people who are currently employed to keep their jobs. This is because the increased labor costs have to come from some other section of the pie.
Minimum wage generally causes a surplus of labor. Just because there's a surplus doesn't mean that something isn't scare, however. There are still opportunity costs to get a good even when it's scarce. Rarity and scarcity are also two different things. It's possible that something that's rare isn't valued, and thus it isn't scarce.