An example of the gains from trade

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

Gains from trade

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/.

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

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 

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

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

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

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).

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

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.

1. Does the graph depict demand and supply or the quantity traded and quantity produced?
2. What would you expect to happen to the price of oil between 2013Q1 and 2015Q2? Click here to see what happened.
3. 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?
4. 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?
5. 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

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

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.  

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

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.