Wednesday, November 30, 2016

Tension in OPEC

This article describes well the tensions faced by firms when they try to attempt to collude: everyone wants everyone else to reduce output but no one wants to reduce its output. Here is a money quote:

"Everyone in Vienna concurs that cutting OPEC production to accelerate that perceived trend is a great idea—but no one can agree on who should do the cutting. Well, that’s not precisely true. Everyone thinks that the Saudis should do all or most of the cutting, except for the Saudis, who are insisting that the pain be more evenly shared.

"Specifically, the Saudis want Russia, Iran, and Iraq to cut."

The price of oil falls when observers think that the OPEC will not reach an agreement to reduce output and rises when the prospects for an agreement increase.
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Saturday, November 19, 2016

Substitution in the construction of houses

TOPICS: Manufacturing
SUMMARY: A persistent shortage of construction workers across the U.S. is prompting some of the nation's largest home builders to experiment with a model they once derided: factory production.
CLASSROOM APPLICATION: Students can examine the reasons for factory production of homes : a short supply of skilled construction workers and the introduction of new wired technologies in homes.
QUESTIONS: 
1. (Advanced) The article notes a shortage of skilled labor in the construction industry. Does a shortage in this sense mean that at the current wages in the industry, the quantity demanded of skilled labor is greater than the quantity supplied? If not, what is the meaning of the term shortage? If quantity demanded of skilled labor is greater than the quantity supplied, do wages adjust?

2. (Advanced) What is the effect of innovations in wired technologies on the home production processes?

3. (Introductory) What are deterrents to construction companies building home modules in factories?
Reviewed By: James Dearden, Lehigh University
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Friday, November 11, 2016

Supply and demand in action in the nursing market

TOPICS: Supply and Demand
SUMMARY: After years of relative equilibrium, the job market for nurses is heating up in many markets, driving up wages and sign-on bonuses for the nation's fifth-largest occupation. "The last nursing shortage more than a decade ago ended when a surge of nursing graduates filled many positions, and the financial crisis of 2008 led older nurses to delay retirement. But as the economy improves, nurses who held on to jobs through the uneven recovery are now retiring or cutting back hours, say recruiters. The departures come as demand for nurses has increased, thanks to expanded insurance coverage from job growth and the Affordable Care Act."
CLASSROOM APPLICATION: Students can evaluate the causes of increases in both the demand for nurses and the supply of nurses. They can use supply and demand analysis to show that an increase in supply and demand can result in an increase in the equilibrium quantity of nurses and the equilibrium wage of nurses.
QUESTIONS: 
1. (Advanced) Is the supply of nurses increasing? Is the demand for nurses increases? Demonstrate that an increase in the demand for nurses and an increase in the supply of nurses can result in an increase in the equilibrium quantity of nurses.

2. (Advanced) What factors are causing wages for nurses to increase? Demonstrate that an increase in the demand for nurses and an increase in the supply of nurses can result in an increase in the equilibrium wage of nurses.

3. (Introductory) Why do employers pay signing bonuses as opposed to paying greater wages?
Reviewed By: James Dearden, Lehigh University
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Supply and demand in action in the pilot market

TOPICS: Labor Markets, Supply and Demand
SUMMARY: Regional airlines that feed the nation's biggest carriers are boosting starting wages to fight a pilot shortage, hoping to encourage aspiring aviators to endure what has become lengthier training. "The marketplace for pilots is pretty tight right now," said Capt. Tim Canoll, president of the largest pilot union, Air Line Pilots Association. "What we're seeing is the operation of supply and demand economics."
CLASSROOM APPLICATION: Students can evaluate the effect of a decrease in the supply of commercial pilots for regional airlines on the equilibrium salaries of these pilots. The article also informs students about the importance of regional airlines to the major commercial airlines.
QUESTIONS: 
1. (Introductory) What factor has caused a decrease in the supply of commercial airline pilots?

2. (Introductory) What is the effect of a decrease in the supply of commercial airline pilots on the equilibrium wages of pilots?

3. (Advanced) What is the effect of decrease in the supply of commercial airline pilots on the prices of travel on regional airlines?

4. (Advanced) What is the effect of a decrease in the supply of commercial airline pilots on the supply of flights offered by regional airlines?
Reviewed By: James Dearden, Lehigh University
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An example of collusion?

Generic-Drug Firms Face Possible Collusion Charges
by: Peter Loftus, Brent Kendall, and Christopher M. Matthews
Nov 04, 2016
Click here to view the full article on WSJ.com
TOPICS: Antitrust, Price Fixing
SUMMARY: Federal prosecutors, after a lengthy probe, are nearing possible criminal charges for price-collusion in the generic-drug industry, according to a person familiar with the matter.
CLASSROOM APPLICATION: The article offers a case for instructors to present about potential price fixing. Instructors can demonstrate the increased profits that firms earn from colluding in setting prices.
QUESTIONS: 
1. (Introductory) What is "price fixing"?

2. (Advanced) Demonstrate that price fixing results in increased profits for firms that collude.

3. (Advanced) Why would antitrust, or competition, laws be written to prevent price fixing?
Reviewed By: James Dearden, Lehigh University
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Wednesday, November 9, 2016

Reblog: Comparative advantage in the Beatles

https://managerialecon.blogspot.com/2016/11/comparative-advantage-in-beatles.html
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Friday, November 4, 2016

Outcomes and externalities in the marijuana market

TOPICS: Law and Economics
SUMMARY: The costs so far from marijuana legalization are higher than advertised.
CLASSROOM APPLICATION: Students can evaluate the economic consequences of the legalization of marijuana, including the price of marijuana, usage rates, and drug cartel behavior.
QUESTIONS: 
1. (Advanced) What is the effect of the legalization of marijuana on the supply of the drug? What is the effect of the celebrity glamorization of marijuana on the demand for the drug? What is the effect of legalization and celebrity glamorization on the equilibrium quantity of the drug?

2. (Advanced) What is the effect of the legalization of marijuana on the arrest rates of black and Hispanic youth? What is the effect of the legalization of the drug on traffic accidents?

3. (Introductory) Has the legalization of marijuana eliminated the illegal market for the drug? How has the legalization of the drug affected drug cartel behavior?
Reviewed By: James Dearden, Lehigh University
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What happens to the price of gasoline when an explosion disrupts supply?

TOPICS: Supply and Demand
SUMMARY: A major fuel artery for the Southeast and East Coast was disrupted for the second time in two months, underscoring the fragility of a delivery system that is relied upon by tens of millions of people.
CLASSROOM APPLICATION: Students can evaluate the effect of a negative shock to the supply of gasoline on the equilibrium prices of gasoline (in particular in futures markets).
QUESTIONS: 
1. (Introductory) What is the effect of the Colonial Pipeline fire on the supply of gasoline to the East Coast?

2. (Advanced) What are "gasoline futures"? What is the effect of the Colonial Pipeline fire on the prices of gasoline futures?

3. (Advanced) What is the effect of the Colonial Pipeline fire on the amount of gasoline shipped by trucks?
Reviewed By: James Dearden, Lehigh University
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What happens when politicians allocate?

This opinion for the WSJ gives a glimpse into how the political process allocates scarce resources.

TOPICS: Cost Benefit Analysis
SUMMARY: Whoever wins on Nov. 8, a flood of public-works money is coming. Cost-benefit tests are crucial. "No matter who wins the presidency, a huge pot of additional money earmarked for infrastructure, on top of the recently passed $305 billion five-year highway bill, is sure to unleash a mad scramble in Congress to secure funds for the home turf. The logrolling and pork will get ugly without far tighter cost-benefit tests and oversight."
CLASSROOM APPLICATION: Students can discuss whether cost-benefit analysis should be applied to decisions about whether to improve infrastructure. They can also analyze the incentive problem created by the U.S. federal, state, and local budgeting system; and they can learn about the ways that politicians hide the true costs of projects to taxpayers.
QUESTIONS: 
1. (Advanced) "The logrolling and pork will get ugly without far tighter cost-benefit tests and oversight." What is "logrolling"? What is "pork-barrel spending"? Why are logrolling and pork-barrel spending especially problematic when cost-benefit tests are not applied?

2. (Advanced) What is the incentive problem created by the U.S. public budget model in which most infrastructure requests and decisions are made at the state and local level while being funded mostly at the federal level?

3. (Introductory) What are ways for politicians to hide the true costs of infrastructure projects from taxpayers?

4. (Introductory) Should politicians use social spending for social engineering?
Reviewed By: James Dearden, Lehigh University
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