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.

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.

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.

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)