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.

1. 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." 
2. Would revenue rise if Hachette cuts price from $14.99 to $9.99?
3. 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.
4. Are the interests of Hachette, the authors, and Amazon aligned over what price to charge?
5. Are the interests of Hachett, the authors, and Amazon aligned over how to share revenues and (fixed) costs?
6. 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 
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

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 

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

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.

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

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