Principles of Microeconomics

The law of supply is that the quantity supplied increases as price increases and decreases as price decreases. The announcement by Shell that it is ceasing exploration in offshore Alaska illustrates that the effects on the quantity supplied may not be obvious immediately but, instead, may take years to appear."'Shell will now cease further exploration activity in offshore Alaska for the foreseeable future.'" "[W]hile it had found 'indications' of oil and gas, 'these are not sufficient to warrant further exploration' in the area."

Here is another account that states more explicitly the effect of lower oil prices on drilling and exploration.

Here are two follow-up questions.

What will happen (or fail to happen) to the supply of gas and oil in the future as a result of Shells' decision?
Would the indications of oil and gas be more likely to be sufficient to warrant further exploration when the price of oil is $100 per barrel or when the price is $40 per barrel?

Friday, September 25, 2015

Is a market failure better than government intervention?

Critics of Free Market Shouldn't Overreach
by: Greg Ip
Sep 24, 2015
Click here to view the full article on WSJ.com

TOPICS: Behavioral Economics

SUMMARY: It has been a good month for free-market skeptics. In Britain a socialist is the Labour Party leader. Pope Francis condemns markets for "extreme consumerism." Economists are joining them, writes Greg Ip.

CLASSROOM APPLICATION: Instructors can introduce the issue of whether markets lead to unscrupulous behavior or whether markets promote economic efficiency, and whether policy makers in an attempt to correct market failure would be subject to their own behavioral biases. The need for policy intervention in market relies not only the traditional economic arguments based on market power of sellers, asymmetric information, and transactions costs, but also on the behavior of consumers. "Behavioral economics goes further, arguing that people systematically make decisions that economists consider irrational. They save too little for retirement, eat too much fatty food, or don't exercise enough because they put too little value on the future. They pay inflated prices or accept inferior products because of personal biases, limited information or inertia." However, "While the insights of behavioral economics are now broadly accepted, applying them in a practical way isn't straightforward."

QUESTIONS:
1. (Advanced) Define "behavioral economics." What are examples of non-optimizing consumer behavior? What are examples from studies in behavioral economics that have led to appropriate market regulations?

2. (Advanced) Does evidence that consumers do not maximize by systematically undervaluing future savings from more efficient cars, homes, and appliances imply that government regulation of the energy efficiency of these products is needed to promote economic efficiency? If so, what intervention would correct for consumer behavior?

3. (Introductory) What are examples of government regulators interjecting their biases when setting economic policy?

Reviewed By: James Dearden, Lehigh University

The market system

Want to help the poor people of the world?

Essay. Trade-Offs for Global Do-Gooders
by: Bjorn Lomborg
Sep 19, 2015
Click here to view the full article on WSJ.com

TOPICS: Cost Benefit Analysis

SUMMARY: Cost-benefit analysis suggests the best way to cut world poverty-a focus on expanding trade and preschool while ending fossil-fuel subsidies. "Over the past year, the Copenhagen Consensus Center, the think tank that I direct, asked 82 leading economists to work out exactly how much good could be achieved by investing in the 169 solutions that the U.N. will endorse in a few days. We asked them, in short, to use the standard tools of economics to calculate the costs and benefits of achieving each target."

CLASSROOM APPLICATION: Students can examine whether benefit per dollar spent is an appropriate measure to determine the value on an economic program. Instructors can also present economic methodology for measuring economic benefits of social programs. Value of a statistical life is one measure of the economic benefit of a program that extends life expectancy.

QUESTIONS:
1. (Advanced) Is media attention a useful guide for the world's problems that deserve the most urgent attention? Are campaigners, activists, and celebrities useful guides?

2. (Advanced) Is benefit per dollar spent an appropriate measure to evaluate and rank economic policies?

3. (Introductory) What criterion should be used to rank projects to aid the world's most-disadvantaged people?

Reviewed By: James Dearden, Lehigh University

Wealth of nations

Cap and trade

Here are two articles that describe China's proposals to reduce pollution emissions. The proposal call for some type of cap and trade program.
http://www.latimes.com/world/asia/la-fg-china-global-warming-20150924-story.html

http://www.bloomberg.com/news/articles/2015-09-25/china-said-to-plan-pollution-trading-expansion-to-cut-emissions

Wednesday, September 23, 2015

Surge pricing = equilibrium?

http://newsroom.uber.com/2015/09/the-effects-of-ubers-surge-pricing/

Supply and demand in action

An example of the gains from trade

http://kottke.org/15/09/how-to-make-a-1500-sandwich

Gains from trade

Tuesday, September 22, 2015

Is this an example of a market answering well the 3 fundamental economic questions??

From TheSkimm

"WHAT TO SAY WHEN THERE'S SURGE PRICING…

"That's not ideal. Yesterday, a drug called Daraprim jumped in cost from $13.50 to $750 a pill overnight. The drug – which treats a rare infection but can also be used as part of cancer and HIV treatment – was recently bought by a company called Turing Pharmaceuticals. The drug's more than 60 years old, but Turing decided it wanted to make a big profit off of it (insert 5,000% price increase here). The move has doctors, patients, and even Hillz up in arms. "
An economist might ask, "Who is paying the $750?"

Here is a follow-up: http://money.cnn.com/2015/09/22/investing/daraprim-aids-drug-price/.

Monday, September 21, 2015

What is the best way to help the poor?

This article argues that the market system is the best way to help billions escape from poverty: https://reason.com/blog/2015/09/21/if-pope-francis-wants-to-help-the-poor-h. It is a response to Pope Francis's criticism of capitalism and "unbridled consumerism" and their role in creating poverty and pollution.

Here is another dim review of Pope Francis's grasp of the ability of free markets, the rule of law, and free trade to help the poor escape poverty: http://www.wsj.com/article_email/pope-francis-unfettered-1442875692-lMyQjAxMTE1OTI2MjQyMjI2Wj.

Wealth of Nations

Friday, September 18, 2015

The Market System and Tickets to See the Pope

This article illustrates how supply and demand determines the price of scarce goods. The questions are good.

Tickets for Pope's Visit Are Hot Commodity
by: Lisa Beilfuss
Sep 16, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Supply and Demand

SUMMARY: Some people are trying to resell free tickets to the papal visit for up to $5,000. It's "against everything that Pope Francis stands for," said a spokesman for the Archdiocese of New York.

CLASSROOM APPLICATION: Students can discuss the ethical issues of ticket-lottery winners selling their tickets to see the Pope. Their discussion could include the determination of an ethical criterion to evaluate the issue.

QUESTIONS:
1. (Introductory) The tickets were free for a reason, said Joseph Zwilling, communications director at the Archdiocese of New York: "We want as many people as possible to be able to see the Holy Father, including people of modest means. Trying to sell the tickets is against everything that Pope Francis stands for." Is it in a poor person's best interest to prevent him or her from selling a ticket to see Pope Francis?

2. (Advanced) Is it ethical for a person to scalp a ticket to an athletic event but unethical to scalp a ticket issued by a Catholic Church lottery to see the pope? Does the ethical criterion to evaluate this question involve the preferences of the institution (in this case the Catholic Church) issuing the tickets?

3. (Advanced) Does preventing the resale of tickets to see Pope Francis reduce the allocative efficiency of the tickets?

Reviewed By: James Dearden, Lehigh University

Airline consolidation, prices, and elasticity of demand

Airline Consolidation Hits Smaller Cities Hardest
by: Jack Nicas
Sep 11, 2015
Click here to view the full article on WSJ.com

TOPICS: Oligopoly

SUMMARY: Airline mergers over the past seven years have had an uneven effect on travelers. While airline service has changed little at the nation's major gateways, carriers have cut flights and raised fares at smaller airports. "From 2007 to 2014, domestic airfares at the nation's 10 busiest airports, including Atlanta, Dallas and Denver, increased less than 1% on average, while the combined number of domestic seats fell 1.6%. But at the 90 next-biggest airports-including Detroit, Honolulu and Birmingham, Ala.-airlines cut their total domestic seats by 14.5% and raised fares by 6.4%. All airfare figures are adjusted for inflation."

CLASSROOM APPLICATION: Students can evaluate the effect of a change in airline strategy toward larger aircraft and increased service at major airports and decreased service at smaller airports on seat prices.

QUESTIONS:
1. (Introductory) From 2007 to 2014, during the most recent wave of airline consolidation, the average round-trip domestic flight, including fees, increased nearly 16% and airlines cut domestic seats by 10%. Assume that the cut in domestic seats is due to a decrease in supply. What is the price elasticity of demand?

2. (Advanced) Why have Cleveland airfares risen while Cincinnati and Memphis, Tenn. airfares remained flat or fallen slightly?

3. (Advanced) What will be the effect of shift toward larger jets and a pilot shortage on flights to and from regional airports?

Reviewed By: James Dearden, Lehigh University

Wednesday, September 16, 2015

Does everyone benefit from free trade?

Here is an article that discusses why some people oppose an agreement to make trade more free.

Auto-Parts Dispute Taps the Brakes on Pacific Trade Deal
by: William Mauldin and Dudley Althaus
Sep 04, 2015
Click here to view the full article on WSJ.com

TOPICS: International Trade

SUMMARY: A fight over how cars are assembled is pitting North America's auto industry against Japan's in a dispute now holding up a major trade agreement spanning the Pacific.

CLASSROOM APPLICATION: Students can examine the issue of the percentage of auto components produced within the TPP trading bloc on whether the autos are freely traded within the bloc. Two interesting issues are the percentage cutoffs set by member countries, in particular Japan, Mexico, and the U.S. Students can examine the preferences of these countries and the tradeoffs of changing this percentage within the U.S. in particular. "Detroit auto makers in general prefer rules of origin somewhere in the middle, because strict rules could crimp their reliance on global supply chains, while lax rules open Detroit up to increased competition from Asia, said an executive at one U.S. auto maker. But labor groups that represent a swath of the industry, including auto-parts workers, want tight rules to prevent the bulk of auto components from being produced in countries, including China, that aren't preparing to sign on to the labor and environmental standards of the TPP."

QUESTIONS:
1. (Introductory) What is the tradeoff within the U.S. of increasing the percentage of auto components produced within the TPP trading bloc on whether the autos are freely traded within the bloc?

2. (Advanced) Why are U.S. labor unions pushing to reduce this maximum percentage? Why is Japan pushing to increase this maximum percentage?

3. (Advanced) What is a major concern of Canada and Mexico in setting this maximum percentage?

Reviewed By: James Dearden, Lehigh University

Tuesday, September 15, 2015

What happens when the cost of injuring someone < cost of killing them?

Here is a gruesome example of the effect of incentives: http://managerialecon.blogspot.com/2015/09/whats-marginal-incentive-to-commit.html

Incentives

Tuesday, September 8, 2015

Is Last-come first-served more efficient than first-come first-served?

Some Danish researchers say that the change alters incentives and reduces time wasted standing in line. The change, for instance, would remove the need for K-ville.

Role of government

Is a proper role of government to require contractors to give employees at least 7 paid sick days? If so, how about 14? 21? 28? Would Milton Friedman agree?

"Yesterday, [President Obama] said 'Happy Labor Day' by signing an executive order that will require federal contractors to give their employees paid sick leave. Meaning 300,000 workers who previously got zero sick days will now get up to seven" (http://www.theskimm.com/2015/09/08/skimm-for-september-8th-2).

Tuesday, September 1, 2015

Is heroism rational?

Is a decision made instinctively rational? See http://www.nytimes.com/2015/08/30/opinion/the-trick-to-acting-heroically.html?smid=pl-share&_r=0.

Label = Choice

Monday, August 31, 2015

Two recent articles paint different pictures of the oil market.

No End in Sight for Oil Glut
by: Russell Gold
Aug 21, 2015
Click here to view the full article on WSJ.com

TOPICS: Oil Markets

SUMMARY: When oil prices started to edge down a year ago, most energy mavens thought the drop would be small and short-lived. Instead, the price of crude has plunged by almost 60% from its 2014 peak.

CLASSROOM APPLICATION: Students can evaluate the factors that have caused declining oil prices and examine whether a firm, or in this case oil producer, would optimally maintain output while facing declining prices.

QUESTIONS:
1. (Introductory) What factors have caused the increasing supply of oil?

2. (Introductory) Why are oil companies suspending deep-water projects?

3. (Advanced) What are possible reasons for an oil producer to increase oil production while facing declining oil prices?

4. (Advanced) What is the effect declining oil prices on the demand for gas guzzlers?

Reviewed By: James Dearden, Lehigh University

Here is a graph from the article.

Here are some questions.

Does the graph depict demand and supply or the quantity traded and quantity produced?
What would you expect to happen to the price of oil between 2013Q1 and 2015Q2? Click here to see what happened.
If revenues for a county increase when it increases production and prices are low, would would happen to revenues when a country increases production and prices are high? If the answer is the revenues would increase, why didn't the countries increase production BEFORE the price of oil fell?
When is the quantity supplied greater, when producers expect the price of oil to increase or when producers expect the price of oil to decrease? What do you think expectations were in 2013Q1? 2015Q2?
What is the impact on the future quantity supplied when producers suspend work on deep-water projects and push back oil-sands projects?

Oil Prices Soar Amid Lower U.S. Output Estimates, OPEC Article
by: Nicole Friedman
Sep 01, 2015
Click here to view the full article on WSJ.com

TOPICS: Oil Markets, Supply and Demand

SUMMARY: Oil prices soared Monday, marking their strongest three-day rally since Iraq's 1990 invasion of Kuwait, on doubts the global glut of crude would be as long-lasting as many investors and traders had earlier believed.

CLASSROOM APPLICATION: Students can evaluate the cause of Monday's increase in oil prices. They can also evaluate whether a response in oil production to oil price increases would be a movement along a supply curve or a shift in a supply curve. Furthermore, they can evaluate the length of a decline in oil prices required for oil producers to decide to shut down production.

QUESTIONS:
1. (Introductory) "The newly released federal data confirmed that U.S. oil output has taken a hit from falling oil prices, as new investments have proven unprofitable and some companies have struggled to stay afloat. The number of rigs drilling for oil in the U.S. has dropped by 58% since October...." Does the above report imply that the drop in U.S. drilling is a shift in supply? Alternatively, is it a movement along the supply function?

2. (Advanced) "Many analysts argue that oil prices still need to stay low for an extended period to force more production cutbacks in the U.S. and elsewhere." Why would an extended period : as opposed to a short period : of low oil prices be required for oil production cutbacks?

3. (Advanced) What investment strategy prompted the three-day rally in oil? Why did investors adopt the strategy?

Reviewed By: James Dearden, Lehigh University

Friday, August 28, 2015

What is economics

This vimeo says that economics is about people. The vimeo is a good introduction to economics for students in a principles class even though it focuses more on graduate studies in economics.

economics

Wednesday, August 12, 2015

Examples of government regulation of externalities

This article in the WSJ reports that the Supreme Court agreed to hear a challenge to the Environmental Protection Agency's requirement that power plants reduce mercury emissions. At issue is whether the EPA should have considered the costs imposed on the power plants when it established the requirement.

This article from The Guardian reports that President Obama plans to reveal new lower lmitis on ozone pollution.

The Camel and the Coase Theorem

This article talks about the City of Richmond's noise ordinances and whether or not they should be altered. The author in the article references the Coase Theorem and proceeds to give the theory and a real world application behind the story.

Why doesn't the Coase Theorem work with the current ordinance. My understanding is that individuals own the right to silence under the current ordinance and demand that the city send out a trained officer with one of fourteen city-purchased decibel meters when someone violates that right. Couldn't Camel offer compensation to the people adversely affected to purchase their agreement not to demand public action and, thereby, reach an efficient solution?

My understanding is that the variance requested by Camel shifts the property right away from people who own silence to people who own the right to make noise for additional hours of the day. How would this transfer of property rights affect the outcome in the Coase Theorem assuming transactions costs are nil? Would the level of noise change? Who would win and who would lose?

Markets Work

Click here for a blog post discussing responses to prices are driving consumers away from oil towards natural gas as the fuel of choice for heating. It is a nice example of how markets create incentives for socially optimal behavior without the need for government intervention.

A Good Summary of Political Debate

This article in The American is a good summary of the important question in our political debate: "In short, we need to decide if we will continue moving toward "social democracy" ... or back toward American constitutional limited government." The author laments the extent to which Obama and Romney ignored this fundamental question in their recent campaigns.

Friday, August 7, 2015

Subsidies for education

This article reports that government subsidies to students have increased the price of education. Students should be able to use supply and demand analysis to explain the link and to predict the effect on the quantity traded.

Aid's Role in Rising Tuition Gains Credence
by: Josh Mitchell
Aug 03, 2015
Click here to view the full article on WSJ.com

TOPICS: Education

SUMMARY: More economists believe the federal government's loose standards for student loans are fueling a vicious cycle of higher college tuition prices, similar to what some say happened with the housing bubble.

CLASSROOM APPLICATION: Students can evaluate the effect of federal subsidies for higher education on tuition and the cost and quality of higher education.

QUESTIONS:
1. (Introductory) What is the effect of federally-subsidized loans and grants to higher education on the demand for higher education? What is the effect of increased demand for higher education on equilibrium tuition set by colleges and universities?

2. (Advanced) What is the effect of federally-subsidized loans and grants to higher education on the quality of services offered by colleges and universities?

3. (Advanced) What is the effect of federally-subsidized loans and grants to higher education on the costs of providing higher education?

Reviewed By: James Dearden, Lehigh University

Supply and demand

Wednesday, August 5, 2015

Two cheers for sweatshops.

This article from the NYT shows that sweatshops may be the best alternative for many of the workers.

Obama increases minimum wage for federal contract workers

This article reports that President Obama issued an executive order raising the minimum wage for federal contract workers to $10.10. Would this increase tend to increase unemployment in the federal contract worker labor force? Who bears the extra expense of the higher wage? The article is a good introduction to the debate over the minimum wage and the difference in incentives facing government and private business.

Compensation at The Container Store

This article in the WSJ reports on the compensation at The Container Store. The company pays well and works to pay people according to their contribution.

Friday, July 31, 2015

Minimum Price for Alcohol in GB

http://www.bbc.co.uk/news/health-20515918 describes a proposal to put a minimum price on the retail price of a unit of alcohol in Great Britain. A study estimates that setting the minimum @ 45 p would reduce consumption by 4.3%. Also see http://www.huffingtonpost.co.uk/2012/11/28/theresa-may-to-announce-m_n_2202231.htmland http://www.marketplace.org/topics/world/british-government-wants-booze-price-hike.

A colleague wonders why GB is thinking about setting a minimum price instead of imposing or increasing a tax. Using higher taxes will also reduce the quantity demanded and would have the additional benefit of generating tax revenue. Using a minimum price has the advantage of targeting cheap alcohol, the consumption of which imposes more externalities than sipping brandy.

elasticity, externalities, price controls

Rationing water in CA

This article from CNN reports that Gov. Brown calls for 'voluntary "20% conservation of our water use"'. It might be a good way to introduce rationing in courses. It could also spur discussion about why we typically rely on governments instead of free markets to supply water in most localities. Finally, it might be the basis for a good question: "What percentage price increase reduces water usage by 20%?"

label = elasticity

Amazon increases the price for Prime

This article from the WSJ reports that Amazon is increasing the price of its Prime service from $79/year to $99/year. It is a good introduction to pricing, elasticity, and behavioral economics.

If the does not work, conduct a Google search on the title.

SUMMARY: Amazon plans to raise the rate for Prime membership to $99 a year from $79, the first price increase for the shipping and video-streaming service. The Seattle retailer said the 25% increase was needed to offset rising delivery and content-acquisition costs. As a result of the 25% price increase, "analysts said they expect fewer than 10% of the more than 20 million Prime members to drop their accounts."

CLASSROOM APPLICATION: Instructors can use the article to present the price elasticity of demand for Amazon Prime services, and also present the reason Amazon is increasing the price of the service.

QUESTIONS:
1. (Advanced) According to the data presented in the article, what is the possible range of the price elasticity of demand for Amazon Prime?

2. (Introductory) Why is Amazon raising the price of its Prime service? Is it an increase in cost of providing the service or an increase in demand?

3. (Advanced) Under what condition would it be profitable for Amazon to price Prime at below the marginal cost of providing the service?

labels= elasticity, pricing, behavioral economics

Price elasticity and ebooks

This article in the New Yorker reports that Amazon wants Hachette to reduce the prices for most ebooks it offers through Amazon and to increase the percentage of the price paid to authors from 25% to 35%. It is a great introduction to elasticity and pricing.

What is the arc-price elasticity if Amazon is correct when it wrote, "for every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99."
Would revenue rise if Hachette cuts price from $14.99 to $9.99?
Who gains and who loses if price decreases from $14.99 to $9.99, the percentage retained by the author increases from 25% to 35%, Hachette's share falls from 45% to 35%, and Amazon's share remains constant at 30%? Assume that the marginal cost of an additional download of an ebook is $0.
Are the interests of Hachette, the authors, and Amazon aligned over what price to charge?
Are the interests of Hachett, the authors, and Amazon aligned over how to share revenues and (fixed) costs?
Why does Amazon advocate that some books be sold at prices in excess of $9.99?

See this post to learn what happened.

labels= elasticity, pricing

Competition, strategies, and UPS's profit margin

This article from the WSJ reports that UPS has seen its profit margin decrease as e-business deliveries quadrupled. Some juicy quotes follow.

"Because of the ubiquity of free shipping, fierce competition from other delivery services and Amazon's power to drive down shipping costs as it gets even more enormous, UPS's average revenue on each Internet-related package it handles is dropping.

"UPS is under more pressure than FedEx Corp. and the U.S. Postal Service because UPS is the biggest e-commerce carrier and its two rivals dived into the business later with narrower strategies.

labels = elasticity, pricing, strategy

Another great article

"This article in FiveThirtyEightEconomics covers supply and demand, elasticity, and several other fascinating ideas on the secondary Nike Shoe market".

Label = supply and demand, elasticity

Pricing, elasticity, and sunk costs in the wireless industry

Google, Cablevision Challenge Wireless Industry's Business Model

by: Ryan Knutson, Alistair Barr, and Shalini Ramachandran
Jan 27, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Innovation
SUMMARY: Google and Cablevision Systems are preparing new cellphone services that would turn the wireless industry's business model on its head, increasing pressure on companies already dealing with a price war. Related article: Cablevision's service, dubbed "Freewheel," will take advantage of the 1.1 million Wi-Fi hot spots the company has deployed in its greater New York service area since 2007.
CLASSROOM APPLICATION: Students can conjecture about the effect of the introduction of wireless service using Wi-Fi hot spots and cellular connections on the price of wireless service.
QUESTIONS:
1. (Advanced) Distinguish the types of consumers who use 'Wi-Fi only,' 'Wi-Fi first,' and cellular wireless service. Conjecture on the price elasticities of demand for these different types. How would the consumer price elasticities of demand affect the equilibrium prices of these services?

2. (Introductory) How would the increasing popularity of 'Wi-Fi only' service affect the equilibrium prices of cellular service?

3. (Advanced) What are "sunk costs"? Are the costs of constructing cellular networks fixed and sunk? How do large fixed and sunk costs required to offer a service affect entry into an industry? How does limited entry affect equilibrium prices?

4. (Advanced) What is "normal economic profit"? Does the limited entry resulting from large fixed costs of entry imply that the firms operating in an industry earn above normal economic profit? Are cellular companies earning above normal economic profit?

Reviewed By: James Dearden, Lehigh University

labels = elasticity, pricing

TPP would hurt the US sugar industry

Sugar Industry Sour on Trade Talks
by: William Mauldin
Jul 30, 2015
Click here to view the full article on WSJ.com

TOPICS: International Trade

SUMMARY: High-level talks to wrap up a 12-nation Pacific trade pact have put one set of Hawaii's locals on edge: Maui's sugar cane operation, which is concerned that U.S. concessions to growers in other countries could hurt its business model. "The proposed Trans-Pacific Partnership appears all but certain to allow more sugar imports into the U.S. from some countries, putting pressure on farmers and potentially disrupting a carefully balanced government program that protects the industry, American growers say."

CLASSROOM APPLICATION: Students can examine the winners and losers of reducing trade barriers. With reduced U.S. trade barriers for sugar imports, losers could include the U.S. sugar farmers and processors, while winners could include American confectioners and other sweetener consumers. Students can also examine the tradeoff to U.S. politicians of reducing trade barriers. "As with several thorny issues in the Pacific talks, U.S. trade representative Mike Froman is seeking to strike a delicate balance on sugar, opening American markets to more foreign competition without disrupting a politically entrenched program protecting the industry, according to people following the talks."

QUESTIONS:
1. (Introductory) What is the effect of the U.S. lowering barriers to sugar imports on the price of sugar in the U.S.?

2. (Advanced) In the U.S. who is harmed by reduced barriers to sugar imports? Who benefits by the reduced barriers?

3. (Advanced) What is the effect of U.S. increasing the Australian quota on the Mexican sugar industry?

Reviewed By: James Dearden, Lehigh University

Tuesday, July 28, 2015

Opportunity cost of your time

Work & Family. Do You Know What Your Time Is Really Worth?
by: Sue Shellenbarger
Jul 22, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Opportunity Costs

SUMMARY: There are new ways to look at the value of time, allowing people to make more thoughtful choices.

CLASSROOM APPLICATION: Instructors can use this Work & Family column to introduce issues involved in determining opportunity cost of time. They can also use the column to highlight the types of mistakes people make in time-use decisions.

QUESTIONS:
1. (Advanced) Why does putting a dollar value on your time require more than dividing your pay by hours worked?

2. (Advanced) What are examples of inconsistencies in decisions about the use of time?

3. (Introductory) Should people factor opportunity cost into their time-use decisions?

Who benefits from subsidies to college students?

This article in the WSJ reports that the primary beneficiaries of subsidies to college tuition are the colleges. It might be a good example to illustrate the incidence of a subsidy for a good with an very inelastic demand.

Review & Outlook. College Aid Means Higher Tuition

by: Editorial Staff
Jul 20, 2015
Click here to view the full article on WSJ.com

TOPICS: Education

SUMMARY: A new Fed study shows that colleges pocket most student subsidies. The New York Fed staff paper is available at http://www.newyorkfed.org/research/staff_reports/sr733.pdf.

CLASSROOM APPLICATION: Students can evaluate the effect of grants for higher education on the tuition by using supply and demand, students can evaluate the effect of subsidy on the demand for higher education and ultimately the equilibrium price. Investigating the issue in greater detail, students can examine the relationship between the price elasticities of supply and demand and the effect of federal student aid on equilibrium tuition rates.

QUESTIONS:
1. (Advanced) In a perfectly competitive market, what is the effect of a subsidy for purchasing a good on the price of the good? How does the magnitude of the price change depend on the price elasticities of supply and demand?

2. (Advanced) What is the effect of federal subsidies to higher education on tuition?

3. (Introductory) Should the federal government subsidize higher education? Should it cap tuition increases set by colleges and universities?

Reviewed By: James Dearden, Lehigh University

Wednesday, July 1, 2015

Price controls and medical care

This opinion in the WSJ states that access to medical care is better under private insurance than under government programs such as Medicaid. Here are some questions to consider.

Why would "55% of doctors in major metropolitan areas refuse new Medicaid patients"?
Why would "29% of Medicare beneficiaries who were looking for a primary-care doctor in 2008 already had a problem finding one"?
Why would "patients with private insurance have better outcomes than similar patients on government insurance"?

Tuesday, June 30, 2015

Oligopoly

Here is a nice slideshow talking about oligopoly.

Collusion

Cheating

Wednesday, June 17, 2015

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

Friday, June 12, 2015

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.

Why are the countries pumping more oil that the limit they set?
What is happening to the willingness of countries to abide by output restrictions? Why?
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

Friday, June 5, 2015

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.

Thursday, June 4, 2015

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.

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."
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."
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