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)