Oligopoly

Here is a nice slideshow talking about oligopoly.

Collusion

Cheating

Does the Pope understand economics?

This article reports that the Pope's encyclical on climate change states, "The strategy of buying and selling emissions credits can give rise to a new form of speculation and would not serve to reduce the global emission of polluting gas. This system seems to be a quick and easy solution with the appearance of a certain commitment to the environment, which however does not imply by any means a radical change in the scale of circumstances. Thus, it may become an expedient that supports continued excessive consumption by certain countries and sectors."

Externalities

Hospitals are rational. Is that good for patients and taxpayers?

Hospitals Discharge Patients to Maximize Medicare Payments, Study Finds
by: Anna Wilde Mathews and Christopher Weaver
Jun 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Health Economics

SUMMARY: New research in Health Affairs confirms a Wall Street Journal analysis that found a pattern of long-term-care facilities discharging patients at lucrative times.

CLASSROOM APPLICATION: Students can evaluate the effect of Medicare payment rules on hospital discharge decisions. Instructors can present the Medicare-hospital relationship as a principal-agent problem with hidden information (in which the hospitals have private information about the health status of patients).

QUESTIONS: 
1. (Introductory) What is the evidence that long-term-care hospitals are responding to the financial incentives in their discharge decisions? Is this evidence refutable?

2. (Advanced) What is the principal-agent problem with hidden information? Is the case described in the article one of these problems?

3. (Advanced) Should Medicare use a step function (i.e., payment thresholds) to determine hospital reimbursements?

Reviewed By: James Dearden, Lehigh University

OPEC

The article described below reports on OPEC's recent meeting. Google the title if the article does not load when you click on the link.

Here are some questions to consider.

1. Why are the countries pumping more oil that the limit they set?
2. What is happening to the willingness of countries to abide by output restrictions? Why?
3. Do Russia and the US oil producers benefit or lose when OPEC sets and abides by output restrictions?

OPEC Keeps Output Unchanged
by: Summer Said, Bill Spindle and Benoit Faucon
Jun 06, 2015
Click here to view the full article on WSJ.com

TOPICS: Cartels, Oil Markets

SUMMARY: OPEC on Friday said the cartel would keep its collective output level unchanged at 30 million barrels a day, the second time in six months it decided to take no action amid a global glut of crude and weak oil prices.

CLASSROOM APPLICATION: Students can evaluate the cause of OPEC's reduced market power. They can also evaluate the benefit to non-OPEC oil producers of the cartel's output restrictions.

QUESTIONS: 
1. (Introductory) Why has OPEC decided to keep its collective output unchanged?

2. (Advanced) Why has OPEC's role in the world's oil market fundamentally changed in the past year?

3. (Advanced) Which OPEC nations are expressed satisfaction with the group's decision to allow members to unilaterally set the amount of oil they extract? Which are dissatisfied?

Reviewed By: James Dearden, Lehigh University

OPEC, June 2015

Here is a nice summary of OPEC. The crude oil market is a good example of an oligopoly. We will examine oligopoly in L22.

P.S. theSkimm is a great news digest.

Lies, damned lies, and accounting

This article describes how costs accountants record in their books fails to reflect accurately opportunity costs.

Chipotle's ads

Business World. Chipotle vs. Science
by: Holman W. Jenkins, Jr.
May 02, 2015
Click here to view the full article on WSJ.com

TOPICS: Advertising

SUMMARY: Health-food advertising depends on the eagerness of the customer to be fooled. "Over the years the courts, in enforcing the Lanham Act, a federal law banning false advertising, have carved out a considerable zone for 'puffery.' Puffery, as one case puts it, is 'an exaggeration or overstatement expressed in broad, vague, and commendatory language. Such sales talk is considered to be offered and understood as an expression of the seller's opinion only, which is to be discounted as such by the buyer.'... Of course, because such advertising depends on the eagerness of the customer to be fooled, a better solution than lawsuits might be an education system that lowers the general level of idiocy in the population."

CLASSROOM APPLICATION: Students can evaluate whether the advertising presented in this week's Business World column improves consumer welfare. If consumer preferences are rational (about GMO foods for example), then the information provided by the advertising noted in the column could improve consumer welfare. However, if the advertising is persuasive, then perhaps consumer welfare is reduced.

QUESTIONS: 
1. (Introductory) What is puffery? Does the Lanham act, which bans false advertising, prohibit puffery as well?

2. (Advanced) What is the distinction between informative advertising and persuasive advertising? What are examples of informative advertising? What are examples of persuasive advertising?

3. (Advanced) Is Chipotle's announcement that the company plans to stop using genetically modified ingredients persuasive advertising, informative advertising, or possibly both?

4. (Advanced) What is the effect of informative advertising on consumer welfare? That is, does this type of advertising make consumers better off?

LA raises minimum wage

This article reports that teh City Council in LA approved a plan to increase the minimum there to $15 / hour. We will be talking about minimum wage next week. Here are three questions.

1. How effective is an increase in the minimum wage at fighting poverty? "The council's decision is part of a broader national effort to alleviate poverty, said Maria Elena Durazo, former head of the Los Angeles County Federation of Labor."
2. How much would an increase affect employment opportunities for low-wage workers? "'The very people [council members'] rhetoric claims to help with this action, it's going to hurt,' said Ruben Gonzalez, the Los Angeles Area Chamber of Commerce's senior vice president for public policy and political affairs. He predicted that many businesses would absorb their new labor costs by laying off employees, reducing work hours or moving out of the city entirely." 
3. Why are unions the big supporters of the plan? "The vote was the latest show of organized labor's clout at City Hall. During nearly a year of often emotional debate, labor leaders never gave ground on their central demand that the minimum wage rise to at least $15." The article mentioned support from Maria Elena Durazo, former head of the Los Angeles County Federation of Labor, now with Unite Here, the hotel and restaurant workers' union. 

Price controls

Free trade?

Here are two articles. One opposing free trade and one encouraging free trade. Both are interesting to take a look at and see why some believe free trade is good and others believe that free trade is bad.

encouraging free trade

http://www.heritage.org/research/reports/2004/05/why-america-needs-to-support-free-trade

against free trade

https://afgj.org/5-reasons-americans-should-oppose-free-trade

Supply and demand in action in the ethanol and corn markets

Here is a good example of supply and demand in action. We discuss supply and demand in action next week. If you Google search the title of the article, you can usually 

Opinion. Paying for Ethanol at the Pump and on the Plate
by: Mike Brown and Rob Green
May 15, 2015
Click here to view the full article on WSJ.com

TOPICS: Environmental Regulation

SUMMARY: The federal mandate has driven up the price of corn-and of poultry, meat, eggs and dairy.

CLASSROOM APPLICATION: Students can evaluate the effect of the corn-ethanol mandate on the price of corn, the on prices of beef, pork, and chicken and on the profits of restaurants.

QUESTIONS: 
1. (Introductory) What is the effect of the federal corn-ethanol mandate on the price of corn?

2. (Advanced) What is the effect of an increase in the price of corn on the prices of beef, pork, and chicken?

3. (Advanced) What is the effect of an increase in the price of corn on the profits of restaurants? How does the answer depend on the price elasticity of demand for restaurant meals?

Reviewed By: James Dearden, Lehigh University

Is a guaranteed basic income a good way to help poor people?

The article discusses the pros and cons of a guaranteed minimum income, an idea Milton Friedman defended as a better way to help poor people than welfare, subsidized housing, food stamps, and the minimum wage. We discuss minimum wage after Test 1.

Audrey Hepburn teaches economics

http://www.wsj.com/articles/audrey-hepburn-teaches-economics-1432591645

Why would unions want the "freedom" to agree to contracts that pay less than the minimum wage after saying earlier that no one deserves to work for less than a sub-minimum wage?

Should unions also have the freedom to agree to contracts that have less health insurance than specified by Obamacare?

Should individuals have the same freedom?

http://www.latimes.com/local/lanow/la-me-ln-los-angeles-minimum-wage-unions-20150526-story.html

Elasticity and the Super Bowl

here is a cool article involving demand, elasticity, and the super bowl! 

http://www.forbes.com/sites/prishe/2013/09/19/super-bowl-xlviii-pricing-a-lesson-in-demand-elasticity/

The article discusses ticket prices on the rise, mark ups, and also evaluates consumer surplus.The conclusion is that there will be higher 
face prices for marquee seating at this year's Super Bowl.

Shortages in chocolate leading to higher prices

Here is an article about how chocolate is decreasing, but how the demand for chocolate remains the same. This article shows the basics of economic demand. Prices are increasing due to the decrease of chocolate availability.

http://www.newser.com/story/198705/the-world-is-running-out-of-chocolate.html