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?

Annotation
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.

EWOT Goggles #13


Images taken from gonorthwest.com

In regards to yesterday's lesson on rent controls, I immediately thought of the Fremont neighborhood in my hometown of Seattle. Washington State doesn't have price ceiling rules for rental properties, though it does have renter unions. This allows for more or less of a free market for apartments and condos throughout the state. Fremont used to be a hippy, bohemian neighborhood with living spaces that were pretty far from luxurious. It was filled with hole-in-the-wall restaurants and second-hand clothing stores. About fifteen years ago, a collection of more highly paid demanders decided that the area was "chic". Not only did the quantity demanded of spaces for rent increase, but so did the demand for higher quality apartments and condos. As a result, the hippy artist renters were driven out of the Fremont housing market because of the new higher earning, higher bidding demanders. The businesses in and around the Fremont living spaces assimilated with the new crowd of renters. Chain and upscale restaurants replaced the diners, and the second-hand stores were traded for chic boutiques. The market behaved in the way it normally should because rent controls weren't present. If they were, Fremont might not have evolved in the way it did. The quality of the apartments would have suffered because of a fixed rent landlords could charge, and Fremont would not have been as trendy as it is today.

Wednesday, November 30, 2011

Reading Analysis of 'The Use of Knowledge in Society'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Hayek mentions in this piece that the knowledge problem applies not only to the to the producers of a good, but to the consumers of it, too. In terms of allocation, a consumer may believe that he or she values a particular good more than the other demanders of the same product. This person doesn't know, however, if the next consumer would put the product to better use. In other words, a consumer may believe that their use for a good is superior, but actually has no idea if his/her form of consumption is "better" or more efficient. The information problem extends well into the demand market as well as the supply market. I also find it interesting that society tends to regard people who have an advantage of information that allows them to acquire a good as dishonest. They simply have a comparative advantage in obtaining a certain good over other demanders in that market. Hayek suggests that the other demanders feel contempt for such a person with a knowledge advantage, but I believe it's more jealousy than it is anything else.

Discussion Questions
Why do you think governments still appoint several central planners even though it has been proven to be inefficient time and time again? Do they have another option besides central planning? Why or why not?

Is there a way to economically plan without centrally planning? At what point does the former cross into the realm of the latter?

Annotation
The point of this article was to further discuss the extent of the information problem in markets, and to reenforce the idea that central planning is virtually worthless. There is no possible way that one person has the capacity to make decisions for the whole because there is no feasible way for them to acquire all the knowledge they would need to make choices on that level.

Class Summary 11/30/11

Rent Control


Price ceilings are destructive because they prevent markets from functioning correctly. Rent controls set the price ceiling for possible renters. This causes quantity of apartments supplied to fall, and the quantity demanded of possible spaces to rent to rise. This price ceiling is binding because it results in a shortage. Rent controls cause a new equilibrium price to emerge that is not market-clearing, which isn't good.

Consequences of Rent Controls:

  1. There is a reduced availability of apartments, and they're more difficult to obtain.
  2. Lower quality apartments are in abundance because landlords have no incentive to improve spaces due to the overabundance of potential renters.
    1. By reducing quality, you are effectively reducing quantity.
  3. A black market for rental spaces emerges.
  4. Apartments can be misallocated since the people who value them the most don't necessarily get them.
  5. Rent controls have impacts on other markets.
  6. An unfair burden is placed on the landlords.
  7. Discrimination and other insidious costs emerge since rentees can afford to be pickier.
  8. Monitoring and enforcing the law itself is costly.
    1. Over the long-run, supply curves will shift inward.
    2. It's destructive because police officers aren't contributing anything else to society--opportunity costs and the broken window fallacy.
    3. Even if the police are doing a good job, taxes must be raised, which is costly.

Class Summary 11/28/11

Some Properties of Equilibrium


Decentralized markets are much better off because they allow for experimentation. Government planning doesn't allow for any experimentation, which explains why many government programs fail or are otherwise ineffective. The only way to survive in a complex world is to decentralize decisions. Competition makes us richer because it's unproductive to to tell people to meet goals without any financial incentives.

Four possible problems with centralized planning:

  1. It's impossible to determine who is the right or wrong seller without the price system to tell us.
  2. Suppose a central planner manages to get the seller right, the allocation problems are immense. How do you determine who values a good the most without prices?
  3. It's impossible to determine how much should be supplied without prices.
  4. If the quantity supplied is too high, it effectively makes us all poorer.

Sunday, November 27, 2011

Reading Analysis of 'The Problem with Price Gouging Laws'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
It was interesting to read that, after all we've learned about the ineffectiveness of price-controlling czars, Tennessee's state government prosecuted gas stations for price gauging. The rise in gas prices was simply a result of the scarcity of oil during that particular time. The businesses selling gas were responding to the increased effort it took them to obtain gasoline by raising the prices. Is it possible that some sellers were dishonest in how big of an increase in cost of opportunities they faced? Yes, but for the most part, these distributors were likely responding to the fact that an increase in scarcity of a good insinuates an increase in price of that particular good in the market. Prosecuting firms for abiding by market "rules" is a bit ridiculous. A similar situation occurred in North Carolina during a storm. Men were arrested for selling ice at a higher price than it was marked at even though no one complained about paying the higher price. Ice was more valuable to the people so they were willing to fork over a little more cash to ensure their stock in the event of scarcity.

Discussion Questions
We learned that both participants of a market, buyers and sellers, work to achieve an equilibrium price for a good. How do natural disasters like the ones described above mess with the equilibrium price of something? How do buyers and sellers react to return to the "right price" of a good? Can they do it on their own or is outside intervention required? What is/are the consequence(s) of outside control?

Why do events such as natural disasters receive special treatment in the light of prices and allocation of goods that are different than the usual workings of the market? Is this "good" or "bad"? Explain.

Annotation
This reading describes the issues that arise because of price gauging laws. The people policing price increases during events of scarcity would need to know an astronomical amount of information in order for these laws to be even marginally effective. There is absolutely no way for them to obtain that level of knowledge, and therein lies the problem with such laws. I'm not suggesting that there should be a total market free for all during natural disasters because people don't always abide by the Silver Rule when it comes to transactions. Suing distributors for a natural economic response during scarcity, however, isn't conducive to the functionality of the market at all.

Class Summary 11/23/11

How Markets Use Knowledge

Say, for example, that new demanders in the titanium market seek 6 billion pounds of titanium at a price of $20/lb. This will cause a shortage of titanium. There are three relevant parties in this situation:
  1. Existing users of titanium
  2. Suppliers of titanium
  3. New users of titanium
In order to deal with the shortage, there cannot be a czar of titanium. A central allocator would have to ask the existing users to use less, the supplier to supply more, and the new users to lessen their demand for titanium. This simply isn't practical because no person has the knowledge needed in order to suggest any of this. A titanium czar would need to know a myriad of things that he or she couldn't possibly ever know. It's likely that even the market participants, of whom these requests are asked of, don't know the answers. The price system does what a czar would want to do.

EWOT Goggles #12

Random economic anecdotes from my Thanksgiving travels:


I never truly notice the 2000+ mile difference between my home in Seattle and Rochester until I sit on my ass for more than seven hours. This aside, airports proved to be a very apt locale to observe economic concepts in action. One of the first things I noticed when I was checking in was the plethora of computerized check-in stations. Some might argue that the introduction of this technology eliminated ticket agent jobs. There was actually, however, an abundance of agents directing people where to go and stepping in when the computers couldn't complete requests. This was especially helpful when, on account of the Continental/United merger, I couldn't use the computer to check in. The check-in technology likely created more jobs upon it's implementation when the computer service jobs are factored in with the front desk agent positions.

Unfortunately, there isn't a direct flight between Rochester and Seattle, so I had the pleasure of connecting in Chicago. The Midwest isn't the most lovely of places, but I would rather fly through O'Hare than a large number of other places. The Midwest region isn't particularly health-conscious, so searching for consumables other than McDonalds-like health level took a bit of looking. When I finally stumbled upon a vendor that sold something with actual vegetables, the line was decently long. The wait signaled the degree of salad scarcity. Regarding allocation of these scarce goods, the price system was of extraordinary assistance because other distribution methods would have probably caused me to miss my flight.

My last economic point on airline travel centers around the "everything's great and no one's happy" concept. Griping was commonplace during the day-before-Thanksgiving travel rush. People were upset about not having open overhead bins above their row, making a fuss about needing to consolidate their carry-ons to meet regulation requirements, and visibly perturbed that United Airlines would suggest that Pepsi was a substitute good for Coke. The fantastic idea that we were able to make a cross-country journey in the span of seven hours was totally lost on all of these travelers. Instead of bitching about the little things wrong with their flight, these people should marvel at the fact that they reached their Thanksgiving destination in a matter of mere hours.

Saturday, November 26, 2011

Class Summary 11/21/11

Equilibrium and the Price System


The actions of buyers and sellers are generally completely independent of each other. When the supply and demand curves cross, an equilibrium price is reached and the buyers' and sellers' actions are coordinated. We ask two questions of supply/demand curves:

  1. How does each half of the market respond?
  2. Whose plans are satisfied?
Surplus: at a particular price when the quantity supplied exceeds the quantity demanded
Shortage: at a particular price when the quantity demanded exceeds the quantity supplied

During a surplus, buyers are satisfied because the price of a certain good or service decreases. Sellers aren't satisfied because they must cut their prices during surpluses. During a shortage, the seller is satisfied because the price of a particular good or service increases. Buyers aren't satisfied because sellers raise their prices during shortages. High prices signify that a good is relatively scarce. When prices are increasing, a shortage is being alleviated. Low prices signify that a good is relatively abundant. When prices are decreasing, a surplus is being alleviated.

Regardless of price fluctuation, there's a competitive plan between buyers and sellers to reach an equilibrium. This is because they don't compete with one another, they work together. Buyers compete with other buyers and sellers compete with other sellers, but buyers and sellers don't compete. 

Equilibrium: a price where buyers and sellers have no incentive to change their behavior; a price and quantity comparison
  • "Market clearing" -- spontaneous order
    • quantity demanded = quantity suppled --> good!
  • "Non-Market clearing" --> not good!

Sunday, November 20, 2011

EWOT Goggles #11



Child labor is a hotly debated topic in the world today. This article highlights the key issues that consistently arise. For Victor,  a Bolivian 15-year-old who has been working for five years already, must work in order to provide income for his family. He vehemently asserts that he has a right to work. On a moral level, no one would prefer that children be a part of the workforce. In the practical world, however, it is necessary for them to work so that their families can eat. Citizens of the poorer nations in the world, such as Bolivia, don't really have much of a choice. This being said, fair treatment of child laborers should be of the utmost priority since abolishing child labor isn't feasible. According to the rule of law, these children should be treated the same as unionized adult workers. Children are improving the economy by increasing the supply of products to meet the people's demands, and should have equal rights because of their contributions to the market. This is currently not the case because employers believe they can do whatever they want since the children have less of a voice. The working conditions are often appalling, but instead of attempting to improve them, the organizations of the world are fixated on ridding the world of what they call 'child slavery'.

The level of intensity of the issues surrounding child labor is on par with those enveloping the universal healthcare debates. Both concepts deal with the equality of people. All humans deserve the right to work as well as access to adequate healthcare, but the current policies aren't conducive to helping people. The attempts to centrally control child labor and universal healthcare will actually hinder people rather than help them. Rizzo mentioned in class this week that the more important a good or service is, the more important it is that the allocation of it is left to the market. If child labor laws improved the working conditions for children, their employment could fluctuate with the market demand for it. The same idea applies to healthcare. Medical treatment would be more accessible if there wasn't a central planner involved. The Times article about child labor urged that instead of dealing with child labor, policy makers should concentrate on the poverty that causes it. Protectionism in regards to child labor will only exacerbate the poverty in countries like Bolivia. If people focused more on economic ideals, working children in these nations would be much better off.

"Reading Analysis" of WWII Propaganda Posters

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
The WWII propaganda posters' messages don't correctly coincide with the laws of supply and demand. All of the posters urge the people of America to consume less of specific materials (i.e. rubber, certain metals, etc.) in order to ensure that there are ample amounts of these goods to input into aircrafts, weapons, tanks, and other war necessities. This advice is juxtaposed with supply and demand laws because demand is the driving force behind supply. In fact, it would make more sense for Americans to consume the same amount, if not more, of the raw materials needed for the war effort during times of conflict. For example, if United States citizens demanded more rubber erasers, suppliers of such products would have to create more erasers. Thus, more rubber would have to cultivated in order to meet the demands of the people. By the laws of supply and demand, there would have been more rubber circulating in the American market in that instance than if the United States people took the advice of the posters. Not only that, but the existence of more rubber in the market would have lowered its price. Overall, this would have improved the war effort.

Discussion Questions
Presumably, Americans followed the advice of the posters and consumed less than they normally would due to the war. What affect would this have on the prices of specific goods they were told to reduce usage of? How would listening to the propaganda messages skew the price system as a whole? Explain.

Annotation
Pointing out the flaws in the suggestions of the propaganda posters enforces our understanding of how supply and demand work. Demand is the driving force behind supply. Producers make more of something when the demand for it is higher. This, it turn, makes a product less expensive because price decreases when there is more of something in a particular market.

Saturday, November 19, 2011

Class Summary 11/18/11

The Price System


Advantages of using the price system:

  1. It expands upon people's ability to act on their interests.
  2. You don't have to assertively ask people to order themselves by need.
  3. People can evaluate which uses of a good they value most.
  4. It forces consumers to think about the value that other people place on a particular good.
  5. Not using the price system bankrupts us.
    1. Without prices, people have to rely on brotherhood, which never works.
  6. The more important the good or service is, the more important it is that it's left to the market.
Money
  • Changes the nature of transactions
  • Cuts out the information problem of transaction costs
  • Solves the "double coincidence of wants" problem
  • When people want to trade more, some form of money emerges
  • Money is divisible

Class Summary 11/16/11

Rationing Mechanisms


How do you allocate scarce goods to people?

  1. Need --> determining need is extremely costly
  2. Queue --> the length of the line can signal the price, and sometimes makes the price higher because of opportunity costs
  3. Lottery --> lotteries are very easy to rig
  4. Equal Shares --> essentially communism; it's difficult to cut up goods & value decreases in distribution
  5. Might makes right --> planning is difficult and inefficient
  6. Merit --> who decides merit? No one has the capacity to do so, and you don't necessarily want them to. Rewarding merit isn't efficient.
Evaluation of Rationing Mechanisms
  • Where does competition come from?
    • Competition derives from scarcity.
  • What is the nature of competition--destructive or constructive?
    • The price system is constructive; rational criteria above are destructive.
    • The world is richer when you allow for constructive competition.
  • What are incentives for producers to make/deliver more?
  • Other considerations?
    • You're assuming the goods exist.
    • We tend to reward dishonesty in today's society (i.e. making yourself look poorer to be more eligible for college scholarships)

Monday, November 14, 2011

Class Summary 11/14/11

Supply
All of the relevant costs for producers are opportunity costs. There are times when the price of something is too low to warrant the production of it because a profit cannot be made. The general gist of supply is that it costs more to make more.

Supply curves tell us:
  1. Marginal cost - every point on the curve is the marginal opportunity cost of producing that particular item
  2. Total cost
  3. Total revenues
  4. Producer surplus - total revenues minus total costs
The law of supply has exceptions, unlike the law of demand that is unchanging. A caveat is found in the theory of labor supply. There is some point of income where you would actually work less. For example, if your salary was a million dollars a minute, you would probably only work for about five minutes per day. Apart from a few exceptions, supply curves generally slope up. This is because of diminishing returns in production, and the fact that you need more resources in order to make more products.

What changes supply?
  1. Price of inputs
  2. Expectations (even expectations about factor prices)
  3. Technological improvements
  4. Changes in other markets
Price elasticity of supply: percent change in quanitity supplied
                                            percent change in price of good
This determines how much more is produced when price increases. Market supply curves are flatter than individual supply curves. Average costs determine entry and/or exit into/out of a particular market. Again, don't factor in sunk costs!

Sunday, November 13, 2011

Reading Analysis of 'The Theory of the Leisure Class'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Any time there exists a hierarchy of people in a specific location, the economic market in that locale will be affected. Because only the top-tier people were permitted to consume lavish items, the inferior classes couldn't have a demand for such products. The fact that the lower class's quantity demanded for luxurious items was impressed upon them by the structure of the caste system was particularly interesting. Coupled with the fact that they couldn't afford these opulent goods, the order arrangement of people impressed upon them that they didn't want these luxuries either. It was against the system, and almost sinful, to consume goods reserved for the higher class if you belonged to an inferior one. This reduced the quantity demanded of these lavish products down to nothing. The caste system skews the market, and futzes with the idea that prices are indicators. They hold little valid information once what one can purchase or consume is restricted.

Discussion Questions
Only the inferior classes can do manufacturing or manual work. How does securing the upper class's leisure affect the natural job churn cycle of the market? How would technological innovations affect the lower tier jobs?

Although it's not really conveyed in this piece, India's caste system wasn't designed to hurt the poorer people. In fact, the upper classes have an obligation to take care of and look out for those in the lower classes. America doesn't have an official caste system, but we do have levels of income that determine how much luxury we consume. Do you think Americans look out for people of lower income levels. Why or why not? Is it simply a result of capitalism? Explain.

Annotation
This piece illustrates the detrimental effects of protectionism on the poor. It tends to hurt them much more than it helps them. Within the leisure class example, the poorer people were locked into manual labor-type jobs. Technically speaking, they have a relatively high job security because they will always have to serve the upper classes, but they aren't permitted to act on their own self-interest at all. This has a large impact on the market because it exacerbates the information problem since prices are no longer an accurate indicator.

EWOT Goggles #10

There are some times that I'm in the mood for a good infomercial. I'm always fascinated by the fact that the developers of such products featured in infomercials are able to create a desire for a product seemingly out of thin air. The root cause is that they solve the information problem of transaction costs. "A blanket with sleeves? Thats a ridiculous idea!" some might say. If they take a moment to think about it, however, they will likely remark, "I do really hate that my arms get cold when I'm reading a book..." Thus the value for Snuggies is born! This is a perfect example of supply creating its own demand. Informercials tend to point out issues that we didn't know we had. It is this strategy that allows the demand for products as "pointless" as the Snuggie to exist. The infamous $19.99 price tag of infomercial goods is usually low enough for the quantity demanded of these products to increase. Most people decide that solving the problem of cold arms due to the construction of the average blanket is worth about twenty dollars. The majority of people are willing and able to pay this price. Consequently, Snuggies are now a best-selling product.

Class Summary 11/11/11

Supply and Demand


Is there such a thing as "perfect inelasticity"? No! At some point, you won't be able to buy a particular good because the price is too high. There's a substitute for everything, although it might not be completely desirable.

We use income elasticity of demand to determine whether goods are normal or inferior. We use cross price elasticity of demand to tell us when goods are substitutes and complements.

Law of Supply: when the price of a good rises, suppliers will make more of it (there are exceptions)
Quantity Supplied: the number of goods you are willing and able to produce

For something to be a cost, it has to be tied to an action. There is a difference between "How much does a college education cost?" and "How much does it cost to obtain a college education?" because you're taking the opportunity costs and sacrificed opportunities into consideration. Costs have to be costs to someone.

Thursday, November 10, 2011

Class Summary 11/9/11

Elasticity


Own price elasticity of demand:             % change in quantity demanded            
                                                      % change in [whatever you're interested in]

Demand is said to be inelastic when people are not very sensitive to the change in price of a particular good. Demand is said to elastic when people are very sensitive to changes in price of a certain good.

What impacts elasticity?

  1. Time
    1. Short run vs. long run
  2. Budget
    1. Some goods make up very small portions of your budget so their price change doesn't affect you very much.
  3. Substitutes
    1. Price elasticity for your health is very low (basically 0) because your health is important to you, and there are no substitutes. 
Someone said, "If the price of salt doubled, I would still consume the same amount of salt. Doesn't this refute the law of demand?"
  • NO! Your demand for salt is inelastic because there are no substitutes for salt.
  • The law of demand tells us that at some ridiculously high price you'll consume less of a good.
  • The more narrowly a good is defined, the more substitutes it has.
Firms are incredibly interested in how elastic their consumer's demand for their good is. Firms can make money by lowering costs of goods because they get more costumers incentivized by lower prices or they can raise prices if costumers are loyal and make more money that way.

Class Summary 11/7/11

From Individual to Market Demand


There is a difference between demand and quantity demanded! It is possible for your demand to remain constant, while your quantity demanded fluctuates. It's also possible for the price of a good to remain constant, yet you want more or less of it.

Things that impact your quantity demanded:

  1. Income changes
  2. Prices of other things change
  3. Expectations change
  4. Tastes change
  5. Number of participants in the market change
Normal Goods: when income increases, your quantity demanded also increases --> you buy more or better quality versions of these goods

Inferior Goods: when your income increases, your quantity demanded decreases

Substitute Goods: when the price of substitute goods increase, your demand for the original good increases

Complementary Goods: if the price of complementary goods goes up, the demand for the paired goods goes down --> treat these goods as the original good

Expectations: expectations about the future price of goods affect how much you consume. Also, expectations about the price of substitutes affect how much you consume.

Sunday, November 6, 2011

EWOT Goggles #9

Genetically modified foods are a topic of massive debate in our modern agricultural society. There a several  aspects of the process that worry people (i.e. "playing God", health risks, etc.), but the fact of the matter is that GM crops have a comparative advantage over regular crops. The World Health Organization estimates that there are around 5,000 pesticide-related deaths each year. Genetically altered crops usually have a pest-resistent gene, thus eliminating the need for pesticide use. This dramatically reduces the number of cases related to pesticide poisoning among GM crops.

GM produce also fosters specialization. Due to strides in fertilizer development, crop rotation is becoming more and more outdated. Corn, for example, can essentially be grown year round on particular fields. Farmers can specialize in certain seeds so all growers don't need to raise everything. Your average grocery store has fruit, vegetables, and grains that originated in all points in the country, and often the world. Because the genes that cause products to spoil have been isolated and removed as fully from crops as possible, produce can be stored for obscene amounts of time without spoiling. GM crops have overcome the physical transaction cost of distance because their long shelf life allows for long transportation times.

As with almost every job field besides health care and higher education, strides in agricultural technology have replaced many manuel workers indefinitely. Machines can plant, water, fertilize, and finally harvest the crops. Genetically modified plants cut down on the amount of machine work as well because little or no pesticides or herbicides are used. It's difficult to say whether GM plants are "better" because they still belong to a world with a ton of unknowns, but they definitely have comparative advantages in most all growth and cultivation processes over regular crops.

Reading Analysis of 'The Economic Organization of POW Camps'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Easily the most fascinating aspect of this article is the idea that free trade is so persistent a force that it can occur in un-free societies. The atmosphere of a POW camp certainly doesn't seem conducive to the development of a method of exchange. However, the fact that markets regulate themselves definitely rings true. Non-money prices did exist, and cigarettes prevailed as the main form of currency. Because of this, cigarettes had value to everyone, including the non-smokers. Arranging a trade proved to be difficult, and before a better way to do so was established, people would wander around calling out their offers and desires. This is almost identical to what happened to us in recitation during the buyers and sellers game. The residents of the POW camp recognized this hinderance to trade, and each bungalow posted a board that listed specific desires and prices of its residents. This organized the transactions quite nicely, although transactions costs were encountered. There were often people from many nationalities in these camps so language barriers were frequent, and it was sometimes difficult to overcome the information problem. People who were in the know, however, made the smartest transactions. For example, when it was discovered that a driver of a ration truck was willing to sell bread for one chocolate bar, bread and chocolate became complementary goods. 

Discussion Questions
The economic markets within the camps became more and more fixed when they had very little contact with outside markets. What does this say about our global trade market? Do prices fluctuate too much? What would happen if countries took a more isolationist approach? Would this be less efficient? Explain.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
Interference is a transaction cost. Violence, for example, hinders transactions. Prisoners of war are a product of violence. How do you explain the existence of a market amongst them then? Did they find a way to overcome this transaction cost?

Annotation
This article was used to convey the persistence of markets. They are born out of a human desire for trade and transaction, and the most successful ones aren't controlled by a single person. Markets are prone to constant fluctuation in both money and non-money prices. Free trade is also essential to market stabilization. The wider the trading sphere, the more variables a market has. The main point is that market prices establish such a feeling of normalcy that they were born and sustained in a society where the people had almost all of their rights revoked.

Saturday, November 5, 2011

Class Summary 11/4/11

Supply and Demand


Rachel's Demand Schedule for Burritos


Price             Quantity of Burritos
$0                               12    (<--not infinite when cost is $0 because there are still costs to consumption)
$0.75                          10
$1.50                          8
$2.25                          6
$3.00                          4
$3.75                          2
$4.50                          0

This chart tells us about: 1) marginal values 2) total expenditures 3) total value & 4) buyers' net gains --> consumer surplus

  • Marginal values and total values solve the water-diamond paradox
  • Total value = the sum of all burrito consumption
  • Marginal value is $3.50 of burritos, but the total value of the burritos is $14.25
  • Total expenditures + total value = 4 burritos = $12
There is no correct way to consume something. As price rises, you're going to give up the uses of burritos that are of less value to you. Prices force you to prioritize your wants, and think about the values of everybody else. The demand curve is price related to the number of whatever is consumed. Demand curves are always downward sloping.

Why do we behave in this way?
  1. Wealth effects--you're poorer when prices go up, and this causes you to consume less.
  2. Substitution availability--your purchasing power is higher when your real income increases, and you're going to look for other things besides just burritos to purchase.
  3. Diminishing marginal utility--each unit that you purchase of a good gives you less satisfaction than the previous one. You wouldn't be willing to pay for the next burrito because it brings you less pleasure.

Wednesday, November 2, 2011

Class Summary 11/2/11

Transaction Costs, Middlemen, and Demand

Transaction Costs; anything that prevents beneficial exchanges and trade

Middleman: someone who has a comparative advantage in lowering transaction costs for producers and sellers
  • They get a bad rap, but are extremely common. For example, Wegmans is the ultimate middleman.
  • The price is generally higher when you buy from the middleman because you're paying for the convenience, not just the product itself.
  • People get rich when they lower transaction costs.
Demand

Exchange can occur in small groups, but we have a world of 7 billion people so that's just not realistic. Firstly, there's a problem regarding information. It's impossible to understand what people want in bigger groups. Secondly, there's a transactions cost problem--there's no way to overcome the immense distance.

Price: information; signals to buyers about what is scarce, and a signal to sellers about what you value
  • they steer knowledge in a way that causes order to occur
  • prices come from markets--markets are the ether
Markets: any group of potential buyers and sellers
  • there are physical, virtual, and betting markets
  • any decentralized, unorganized interaction between buyers and sellers
  • cause money and non-monetary prices to emerge (usually both in most markets)
    • because goal of markets is to produce order--meaning there's stuff on the shelves
Buyers are demanders. In the goods market, households are buyers, and in the factor market the firms are the buyers. Sellers are suppliers. In the goods market, firms are sellers, and in the factor market the households are suppliers.

There's no such thing as perfect competition. In order for markets to work, buyers' and sellers' transactions can't have spillover repercussions on others.

Demand: not an all or nothing concept; a relationship between the amount you wish to obtain and the sacrifices you must make to get it (marginal value)

Quantity Demanded: a plan, a number; amount of a good that buyers are WILLING and ABLE to consume at a particular price
  • For example: say you want a Maserati, but you don't have a quantity demand for it because you can't afford it
Law of Demand: other things equal, the quantity demanded of a good falls when price rises (including all three of types of prices)

Class Summary 10/31/11

Trade and Debt


Trade is always perfectly balanced, even when dealing with debts. For example, China can purchase United States' debt bonds. A foreign purchase of debt is only bad if a tax payer bailout occurs. Many people don't agree with this, and view it as China "taking over" America. Why would saving/investing be virtuous when it's done within the country, but bad when "foreigners" do it? Political borders don't have any meaning when it comes to the benefits of trade.

The majority of trade occurs between high-powered manufacturing firms. This is because trade lessens transportation (pollution), and less resources are used (not every country has to grow all crops--> specialization). Every 10% increase in someone's income has a  20% benefit to the environment.

Smithian Notion

  1. Specialization frees of time
  2. Specialization allows you to apply specific knowledge and capital that you otherwise could not
  3. Specialization allows you to expand the market
Ricardian Notion
  1. Specialization and trade lower cost (opportunity cost)

Sunday, October 30, 2011

Reading Analysis of 3 Paul Krugman Pieces

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Paul Krugman asserts that free trade is hotly debated as contentious topics surrounding religion. It's interesting that something as concrete as the belief in the benefits of trade and specialization could spark backlash comparable to declarations about evolution. This situation returns to the idea that it's more permissible to question social scientists as opposed to doubting "hard" scientists' findings. Perhaps it is due to the amount of incorrect economic information the public is forced to guzzle from frequent newscasts. In "Ricardo's Difficult Idea", Kruger writes, "Modern intellectuals are supposed to be daring innovators, not respecters of tradition." The daring quality of these thinkers often skews the economic reality.

One such incorrect depiction is that the strides made in first world countries hinder third world nations. In his second article concerning improvements on third world countries, Kruger states that "jobs with bad wages are better than no jobs at all". Not surprisingly, many people had a problem with his point of view, regardless of the amount of fact it contained. In the same article, Kruger informs the reader that aid from developed nations has done almost nothing for improvement in living standards in third world countries. This is a surprising realization for many. Most people cater to the belief that charity really does stop the hemorrhage when in actuality it simply slaps a band-aid on the entire situation. Wage and job improvements in the developing nations are positive unintended consequences of first-world enhancements.

Not everything in the first-world is perfect, as demonstrated by the final article entitled "A Raspberry for Free Trade". There are clearly double-standards about certain American policies. Kruger writes, "When the U.S. consumer is offered cheaper shirts from abroad, the United States loses the same number of shirt-making jobs regardless of whether the shirts were produced by workers making 30 cents an hour or $30 an hour." It really doesn't matter how underpaid, fairly paid, or overpaid the worker was when the American consumer is incentivized to buy the cheapest shirt he or she can find. I'm not saying that wage doesn't matter, but job loss is inevitable in almost all employment sectors.


Discussions Questions
Why are comparative advantage, and even trade in general regarded as controversial topics seemingly on the level of religious debates? Are there differences between the discussions on trade and the disputes on creationism vs. evolution?

Why is it that people believe so strongly in the zero-sum theorem? Is it truly that difficult to believe that the first world can become richer without further impoverishing the third world, but in fact raising the standards of living for the citizens of the latter? Explain.

How did globalization attain such a negative connotation?

Annotation
The purpose of the series of three Krugman articles was to further enforce ideas about the pros of free trade and globalization in the marketplace. He wrote about real-world examples concerning specialization and exchange, and established that standards of living improve on a global scale as international production increases. If production is increasing, then technology innovation is also increasing. This means that the number of jobs in a job sector with a fair amount of technological advancement is decreasing. The job churn, however, ensures that new jobs will always be created as old ones are eradicated.

EWOT Goggles #8



Linked above is probably one of the funniest websites on the internet. The man behind the whole scheme replies to Craigslist ads in the most awful, rude, and inconsiderate ways possible. (I highly recommend the read.) Most of the time he doesn't even accurately address the desire of the Craigslist post-ee. All jokes aside, Emails from an Asshole perfectly illustrates the impossibility of altruism and/or the Golden Rule in market systems. Trade becomes a zero-sum situation whenever altruism is present in an exchange. Selflessness is a necessary component of altruism. Self-sacrifice cannot be present in trade because then it's no longer a fair exchange, but rather borderline thievery by the gaining party. If one person "wins" and one "loses" then it's no longer a trade.

Rizzo suggested that a comparable moral code does indeed exist in markets, creatively coined the Silver Rule. Under this principle, one must deal with others how they would want to be dealt with in market transactions. The creator of Emails from an Asshole clearly doesn't abide by this policy, and neither do a myriad of Craigslist, Ebay, and other users of similar websites. People are constantly getting ripped off on online trading websites because interaction are impersonal. It's much easier to deceive someone you can't or will never see than it is to purposefully trick someone you're looking in the eye. Ebay removes the humanity from trade even more so than Craigslist. Online bartering sites are a breeding ground for dishonesty. What does this say about morality within the market? Even further, what does this suggest about the moral compasses of the participants of said market?

Class Summary 10/28/11

Trade and Jobs (continued)


Absolute advantage and comparative advantage determine whether or not jobs are shipped overseas. This equation helps asses the situation:

                Wages                        
Marginal Product of Labor

For example:  China- $8/hour                America- $30/hour
                                   4 units                                 20 units

China can produce something for $2/unit, and the United States can produce the same something for $1.50/unit. America has a comparative advantage at producing that particular unit over China. The United States also has the absolute advantage at producing this specific unit over China. Obviously the jobs should remain in America, right? Not necessarily because we don't know the opportunity cost of those American employees working those jobs as opposed to the opportunity cost of the Chinese workers. Perhaps the American workers currently employed in that manufacturing job could be curing cancer if they didn't spend the majority of their time in a factory. The opportunity costs might be higher than the production costs.

China can often produce something much more cheaply than America can. Some people advocate for tariffs being established on Chinese goods. Raising tariffs on Chinese products would hurt American manufacturing rather than help it. This is because imports from China are usually inputs into other American products that are already produced in a America.

Trade surpluses don't create jobs, and trade deficits don't take jobs away. People who say they do ignore:

  1. We pay for our imports with our exports.
  2. Specialization makes us wealthier because, on net, employment increases.
Trade deficits do, however, affect capital account balance. For example, Prof. Rizzo buys $10 worth of toys from China, and a Chinese person buys $5 worth of classes from him. If that Chinese person doesn't spend that $5 in America, it makes us wealthier. This is because reducing the number of bills in circulation raises the value of existing American currency.

Thursday, October 27, 2011

Class Summary 10/26/11

Trade and Jobs


Today's technology caters to the higher educated, higher skilled people. People have to keep changing their specialties in order to keep up with technological innovation. Trade improves such technology. Some would argue that the "cost" of trade is jobs, however, jobs are constantly lost and new ones are consistently created. Every year, about four million jobs are lost and four million jobs are created. Despite trade, the number of jobs eradicated and gained reach an equilibrium. Trade doesn't cost us jobs, but rather creates new and different ones.

The logic behind the job churn/turnover is that those who lose their jobs were the first to benefit from trade in the first place. Trade doesn't kill jobs. Technology actually kills jobs by a factor of forty over trade. New jobs are dependent on technological innovation. Capital and labor are compliments to improvements.

Trade Surplus:  less imports, more exports
Trade Deficit: more imports, less exports

People that assert that "America doesn't make things anymore" are full of shit. US manufacturing produces more than they ever have before. Not only that, but more things are produced with less employees. There has been almost no innovation within the healthcare and higher education sectors. Those jobs are generally "safe". Society will always need medicine and training for new skills. Employees in the two aforementioned job categories are paid less than employees in more at-risk job markets. This is because salary is directly correlated with job safety.

Monday, October 24, 2011

Class Summary 10/24/11

Comparative Advantage


The ability to produce something with less of a societal cost as compared to the next guy.


Another hypothetical situation: Rochester and Cornell students can create wine and cameras. Rochester students are able to create 10 bottles of wine per year and 5 cameras per year, while Cornell students can only create 3 bottles of wine per year and 4 cameras.

+Rochester students have an absolute advantage in making wine over Cornell students.
+Rochester students have an absolute advantage in making cameras over Cornell students.

Two questions arise:

  1. Who is more efficient?
  2. What is sacrificed?
Rochester                                                                                  Cornell
Cameras: 5 cameras "cost" 10 wines                                          4 cameras "cost" 3 wines
               1 camera = 2 wines                                                     1 camera = 3/4 wine

Wine:     10 wines "cost" 5 cameras                                           3 wines "cost" 4 cameras
              1 wine = .5 cameras                                                     1 wine = 4/3 cameras

+Rochester has a comparative advantage in producing wine over Cornell.
BUT no producer can have comparative advantage at producing everything.
+Cornell has a comparative advantage in producing cameras over Rochester.

Suppose Rochester ONLY produced wine, and Cornell ONLY produced cameras:
Initially Rochester has 10 wines and 0 cameras, and Cornell has 0 wines and 4 cameras. If Rochester trades Cornell 3 wines for 3 cameras, it has 7 wines and 3 cameras in the end. Cornell has 3 wines and 1 camera. Both parties increased their PPF slope, and are therefore richer as the result of the trade.

If you decide to specialize and trade, it makes us richer. This is because it uses less of the earth's resources, and you get more outputs for the same amount of inputs. Each party pays for their imports with their exports.
  1. Self-sufficiency is the road to poverty.
  2. What a country ends up producing is what it's relatively better at.
  3. Policies that restrict trade make people poorer.

Sunday, October 23, 2011

Reading Analysis of 'Individualism and Altruism'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
The concepts of individualism and altruism are interesting to me because they both address the existence of some sort of sense of duty that human beings possess. It is true that humans are relational by nature, and there is no possible way for us to survive an isolated lifestyle. We need human interaction. Though this may be true, where does this urge to help others stem from? An individualist would argue that we assist others to ensure help or have a better chance of being helped in the future. Perhaps by spotting my friend five dollars when he doesn't have enough to pay for his dinner I effectively secure a future loan when I'm also lacking in funds. The altruist would assert that I should willingly hand over my money because the happiness of my friend should be above my own--I should act selflessly. In his notes, Rizzo states that altruism isn't a livable lifestyle. I would safely agree because it goes against human tendencies. I believe the sense of duty we feel to help others is due to a karma-centric thought process--if we do good to others, good will come back to us. We don't self-sacrifice without the thought of a future gain in the back of our minds. This doesn't make us selfish, it just makes us human.


Discussion Questions
Why do you think 'individualism' has such a negative connotation in today's society? If your actions truly make a difference in helping someone else, why should it matter if it was done in your own self-interest? Does this really make us selfish?

Similarly, we have been taught to be wary of altruistic acts wherein the benefactor receives no personal gain from an exchange. Why do ulterior motives seem to travel with altruistic actions? Do people who exhibit altruism have a hidden agenda with bad intentions?

Annotation
Altruism cannot function in a market economy. This is because no person can possibly know the values of others. Producing for the sake of the people instead of for profit ensures failure. The goal of attaining profit motivates the producer much more than the thought of the joy his or her product will bring to consumers. Individualism isn't synonymous with selfishness, but rather the driving force behind production.

Friday, October 21, 2011

Class Summary 10/21/11

Trade (continued)


Trade creates wealth, and is a non-technical form of production.

Production Possibilities Frontier
Properties of PPFs:
  1. All points in/on the PPF are achievable
  2. If someone can produce guns or butter better than another person, then we say that the former person has an absolute advantage in producing either product over the latter person.
  3. All points to the Northeast are not achievable.
  4. Points on the PPF are productively efficient.
  5. The slope captures the concept of scarcity--the only way to get more butter is to sacrifice guns.
  6. The change in slope illustrates the Law of Diminishing Returns (aka increasing opportunity costs). This deals with drawing away lower quality inputs. The trade-offs become worse over time.
  7. Economic growth occurs when you get more resources, better technology, to trade.
    • Affects the curve: less guns more butter, less butter more guns, or overall production increases for both products.

Wednesday, October 19, 2011

Class Summary 10/19/11

Trade and Exchange


Feedback loops exist to ensure performance. They work exceptionally well when people feel guilty if they do a poor job.

  1. What should get produced?
  2. How do we decide how to produce it?
  3. How do we get it from producers to consumers?
Once these questions have been answered we turn to this model:
Inputs: factors of production that fall into one of three categories-
        1. Land - things are only resources if we have the technology to deal with them efficiently. For example, oil is not a resource.
        2. Labor - number of bodies
        3. Capital - exists in two forms: physical (produced for the purpose of producing something else) and human (anything we do to augment our natural abilities)
The black box is either self-sufficiency or specialization and exchange. Being self-sufficient doesn't generate any economic activity because economic activity is generated by spending money. 
More self-sufficiency = less economic activity = less GDP
We need Patterns of Sustainable Specialization and Trade. According to PSST, discovery--the ability to use resources efficiently--is imperative to economic success. It is possible to un-discover things, which causes economic funks. Rapid changes in technology often insinuate un-discovery because adaptation takes time. We need to redeploy inputs to get what we want.

Although the overwhelming consensus is that trade is good, it has a negative connotation sometimes. This is because nothing new is created, and it is often seen as exploitive. Addressing the latter point, voluntary exchange isn't trade of equal value, but rather only works when people have different values. Wealth is whatever it is people value, and economic growth occurs when the production of wealth increases.

Tuesday, October 18, 2011

Class Summary 10/17/11

Economic Virtues and Ethics


Free societies function best when people are honest. Humans act in self-interest, generally in a way that enriches us. Though this may be the case, no one has the ability or morality to be critical about the market. Essentially, there must be a substitute for the golden rule in commercial society because no one is omniscient.

It's worse for society as a whole when people follow the golden rule, and produce for other people instead of a profit. For example, thousands of people starved to death in Ukraine when the farmers were told to produce food for the satisfaction of others. This relates to the concept of tacit knowledge--no one knows the entire process, and no one knows what each individual wants.

Altruism in other parts of our lives is celebrated, but the second it's attributed to business it has a negative connotation. Pursuing a self-interest such as jogging is commended, but a company producing efficiently and matching market values exceptionally is considered a thief. Market transactions are reciprocal altruism. 

Commercial societies must operate on something along the lines of a silver rule. You should not do unto others what you would consider unjust or unfair if they did it to you.

Four rules:

  1. It's okay to be charitable with your own money, but not with someone else's money.
  2. There's no such thing as 'enough' profit.
  3. Running a profitable business requires soft values.
  4. If you run a business like a family you'll destroy it, and if you run a family like a business you'll destroy it.
    • Relying on strangers beats relying on friends for commercial actions. This is because the stranger has an incentive to make a profit, while your friend does things for you out of moral regard.

EWOT Goggles #7


Although the legal drinking age is technically determined at the state level, the federal government managed to establish a 21-year-old minimum throughout the country with what was one of the best uses of incentives of all time. Washington told each of the fifty states that they had autonomy over the age requirement for drinking, but that they would use federal highway funding if the drinking age wasn't 21 in their state. This was absolutely brilliant. Of course all the states quickly fell in line to institute the suggested drinking age. The cost of losing highway funding was just too great.

As with most plans, even the great ones, there were several unintended consequences. Because teenagers have to wait longer to legally drink, they often put themselves in dangerous situations in order to consume alcohol. Alcohol accounts for almost 1/3 of all driving deaths among teenagers (http://www.sadd.org/stats.htm). While the highways might be better maintained, the amount of teenagers dying on them  has increased substantially.

Perhaps a more relatable situation is the one involving the all-too-common overprotective parents. Teens who's parents tended to be on the stricter side about alcohol consumption (likely because the death rate among teenagers is high due to the age limit) have a much harder time adjusting to the freedoms of college. If a few of my former classmates are any indication, a night of binge drinking gone wrong is a massive unintended consequence of restrictive parenting. Overprotective parents are also an unintended consequence of the higher drinking age. Every decision comes with negative and/or positive repercussions and implications.

Sunday, October 16, 2011

EWOT Goggles #6

The English-style auction we experienced dealt with a lot of economic concepts we've covered in class. That particular kind of auction often causes people to bid more than what a product is worth. Our example with the dollar illustrated this point well. A few people even overbid by another dollar. Your bid in an English-style auction automatically becomes a sunk cost because you have to pay regardless of whether or not you win. Some participants became too consumed in the idea of winning that they continued to bid to "make up" for the money they had already lost. They made poor economic decisions because they considered the sunk costs. The marginal value of winning was higher than the value of the dollar on the auction block. Each time they bid above the monetary value of the dollar, it altered the value of that dollar at the margin.

The rule of law also played a role in our recitation auction. A price ceiling of $2 was introduced during the final round. This bid limit wasn't present in the first two rounds, which violates the rule of law. Every round didn't have the same regulations. The market suddenly had price restrictions in the last round, which goes against a Laissez-Faire economy. Along with the price constraints was another rule that dictated that auction participants could only bid in increments of five cents to deter bidding up by only one cent at a time. Auction participants no longer had equal fairness in the market. This was a painful situation, as illustrated by Marisa choosing to end the auction by bidding the maximum amount allowed by the price ceiling.

Friday, October 14, 2011

Class Summary 10/14/11

Wrap-up of Economic Principles


Markets often don't work well for two reasons: 1) they don't truly exist and 2) failure of institutions. They do work well when both producers and consumers have options. Also, the outcomes of the markets should be efficient.

Efficiency: delivering what people want at the lowest "possible" cost

Institutions: formal and informal social mechanisms that humans develop in order to sustain peace (i.e. good legal system, good government, etc.)

The rule of law is also necessary for market functionality as well. Under the Rule of Law, everyone is treated equally, the laws cannot be arbitrary, and all good laws are general.

Inflation: the general increase in all prices in an economy --> caused when there's too much money floating around

Thursday, October 13, 2011

Reading Analysis of 'The Case for Contamination'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
To me, the most interesting part of this piece was that people who believe isolation preserves diversity exist. Globalization is part of the benefit of today's myriad of technological advances. Worldwide communication allows us to share ideas and culture like never before. When various backgrounds come into contact with one another, one isn't negated by the other. As with the trade of tangible goods, cultural exchange also isn't a zero-sum situation. Instead, two cultures coming together promotes the development of a whole new lifestyle. This occurs if and only if the exchange is fair. Instances of colonization and take over don't foster cultural growth. They inhibit progress just as unfair trading in the market hinders innovation. If some force was to prohibit the trade of cultural traditions and values, our world would become stagnant, monotonous, and boring. The nay-sayers addressed in the article argued that the Western influence was overpowering, and would overtake all other cultures in its path. Canada, America, England, Japan, and all other developed countries fall under the Western culture umbrella, and yet are all vastly different. Even regions within the aforementioned nations are widely dissimilar. The idea that less contact fosters culture is just extraordinarily invalid.

Discussion Questions
Can you foresee any unintended consequences that could arise if government or some other force mandated isolationism to preserve culture?

How are the people who would advocate for the type of situation posed above similar to the Mercantilist fallacies we previously studied?

Annotation
If the laws of a fair market are correctly followed, trade within any market isn't zero-sum. One side does not effectively become poorer than the other within the concept of exchange. Collaboration makes both sides wealthier. The riches aren't always monetary, but intangible wealth is just as valuable. Innovation is fostered by globalization, not hindered by it.

Wednesday, October 12, 2011

Class Summary 10/12/11

Law of Unintended Consequences


Humans act with purpose, and generally in ways that make their lives easier. Because people respond to incentives, your behavior with change when the benefits and costs to you change. The law of unintended consequences follows axiomatically. Unforeseen issues arise when a few people attempt to regulate a complex system. Collective decisions are flawed because of limited knowledge, small timeframes, poor feedback, and inconsistence incentives. Regulation pushes against incentives, and incentives push back.

Two common instances where the law of unintended consequences had a big (negative) effect:

  1. Mandatory seatbelt laws - though this law was intended to make drivers, and thus our roads, safer has actually increased reckless driving.
  2. The disability act - this act was passed with the intent of hindering discrimination against disabled people in the workplace. Instead, companies are fearful of being sued for unfair termination of employment of a disable person that they simply don't hire people with disabilities at all.

Sunday, October 9, 2011

Reading Analysis of 'What is Seen and What is Not Seen'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Bastiat has an interesting opinion surrounding the controversy of whether or not to subsidize the fine arts. Personally, I have no strong attachment to theatre, etc. I wouldn't notice very much if museums of plays and paintings suddenly disappeared because my values don't include the arts. Other people, however, might argue that the arts are inherently valuable, and necessary to the refinement of the people. Values are subjective. I do agree with Bastiat's point about allowing the masses to control what thrives as opposed to the government assigning values to us in the form of subsidies. Having a government that is supposedly controlled by the people, but allocating taxpayers' money towards something that the citizens wouldn't necessarily sustain seems a bit counterintuitive. While it's important to preserve some things, the government shouldn't choose what non-essential items our tax dollars support.


Discussion Questions
Bastiat writes, "Our adversaries believe that an activity that is neither subsidized nor regulated is abolished. We believe the contrary. Their faith is in the legislator, not in mankind. Ours is in mankind, not in the legislator." What about in worser economic times? People cut back on non-essential items in order to preserve their savings. Items such as play tickets fall under this category of non-necessities. Do we continue to let the arts fend for themselves then?

Annotation
This piece addresses the point that values are subjective, as well as reiterating that there's no such thing as a free lunch. Although not everyone values fine arts, the decision to subsidize them affects every tax-paying person. Money that could have been used to increase education standards or improve roadways is reallocated to sustaining theatre and other fine art forms. Similar to the Broken Window Fallacy, the portions of the pie that suffer because the money is used for something else are unseen. We don't see what could have been. The resources have to come from somewhere.

EWOT Goggles #5

As a freshman in college, I pretty much meet a new person every day. Among the usual introductory conversation topics is an inquiry about what the other person's intended major is. Among the more "practical" answers like Business or Economics are majors such as  Art History or Gender Studies. The salaries related to the latter degrees aren't likely to even repay the total cost of college. What would possess people to decide so early on in their lives that a large salary wasn't in the cards? Doesn't everyone crave a luxurious lifestyle?

The answers to the questions posed above lie in the idea that values are subjective. Clearly the people who choose a Humanities degree value the subjects that they're studying. Perhaps the opportunity cost of not making a high salary is worth pursuing careers in those fields. Money doesn't incentivize the person who settles on a Gender Studies degree, but rather the joy that the subject matter provides for them. We haven't been introduced to the concept of utils yet, but they definitely apply to this scenario. The relative satisfaction of the subject content this person would receive from majoring in Art History is higher than that of someone who would prefer to major in Economics.

It's also a tad ridiculous to focus on the monetary cost of college versus how much a Humanities major will make in their lifetime because college tuition is a sunk cost. A refund is impossible, so they continue to study what they love because that has infinite utils of utility for them. Therefore, these people are "getting their money's worth" from college, and subsequently, their career.

Class Summary 10/7/11

Cost


Cost is subjective because values are subjective. The value you place on your next best option is how much something costs you. Amazingly, the costs you use to make decisions are never imposed upon you.

Marginal Cost: the change in your cost from taking an action; additional cost incurred by another unit of something; decisions correlate to either more or less cost

Sunk Cost: resources that aren't recoverable--bad economic decisions are made when sunk costs are factored into the equation

The Water-Diamond Paradox: water is extremely valuable, but has a very low exchange value, while diamonds are frivolously useless, but have a very high exchange value.

We have the ability to address this paradox that Adam Smith didn't possess. Statements such as "it's awful that teachers are paid so little, and professional athletes are paid so much" ignore the margin. Some people might assert that the pay discrepancy shows how misplaced "society's" values are, but they would be incorrect. How much we value the total might be more than we value the margin. The Water-Diamond Paradox is an effect of scarcity. It's not that we value sports more than education, but rather that there are simply far more teachers than there are professional athletes.

Class Summary 10/5/11

The Broken Window Fallacy


Natural disasters don't boost the economy! It just appears that way because the need for products immediately after a disaster is higher. No new jobs are created, there's no net change, and people value spending on something not disaster-related. Simply think about what someone has before and after the destruction. The Broken Window Fallacy is net-negative.

There are three problems with the idea that destruction stimulates the economy:

  1. We didn't choose to spend our money on disaster-related expenses--our values lie elsewhere.
  2. We lose the value of the resources used to repair the damage.
  3. Even if it employs people for a short amount of time, it raises the price of labor--skills are resources, too.
This also explains why government stimulus doesn't make sense. Stimulus money comes from raising taxes now, raising taxes later, or borrowing. Since the money has to come from taxpayers, less of peoples' income is spent elsewhere. It also lessens spending on infrastructure, and other portions of the government pie.