Tuesday, April 22, 2014

A new research paper on the "Amazon.com Tax". LOTS of lessons for Microeconomics!

Via Business InsiderTHIS LINK is to a paper that researched the effect that levying State Sales Taxes on online purchases from Amazon.com. The results are an Economics teachers dream!  There are MANY basic microeconomics concepts explicitly discussed and illustrated.

This from the conclusion:
Internet taxation is an important issue that will continue to be debated for years to come.
Despite the importance of widespread “Amazon Tax” laws, little is currently known about their
effect on the demand for Internet retailers such as Amazon.com and whether the implementation of such laws leads to substitution effects such as bolstering local sales at brick-and-mortar stores when online retailers’ sales tax price advantage is removed.  
Using transaction-level data of 1.4 million households, we identify the effects of Amazon 
Taxes on the purchasing behavior of residents living in five states that adopted such laws over 
2012–2013. We find that Amazon sales fall by 9.5% after implementation of an Amazon Tax, corresponding to an elasticity of –1.3. We find the effect to be more concentrated in large purchases, such as those over $300. For this subset of purchases, we find that Amazon sales fall by 23.8% after implementation of the Amazon Tax, corresponding to an elasticity of –3.2.
I see an opportunity to learn the Substitution Effect, availability of Substitutes, elasticity of demand, incidence of taxation and who bears the burden of the tax, and Dead Weight Loss as the result of taxation.  A veritable cornucopia!! :)

The tax raises the price of the good BUT not by the full amount of the tax, dependent upon relative elasticities between buyers and sellers.  Because consumers are price sensitive (elasticity of 1.3) they decrease their Quantity Demanded (Point "A" to Point "B" along the "D*") because they have other online options with no sales taxes collected ("Substitution Effect").

The new Market Quantity will be at "Q1", less than it was prior to the tax.  So, solely due to the levying of the Sales Tax, Dead Weight Loss was created.  This means that there is a quantity of the good consumers don't get to enjoy at a lower price (area of Demand Curve represented by BLUE Triangle) and there is a quantity of the good that Amazon does not get to supply at a higher price (Red Triangle).

Notice the RED triangle is larger than the BLUE one.  This means that Amazon will bear a larger portion of the tax and will not be able to fully pass it on to the consumer. If they did, it would make things much worse for them. Consumers would move further UP and to the LEFT on the Demand curve, making the quantity sold even lower.

Monday, April 21, 2014

Chipotle and Marginal Revenue Product of Labor (MRP(L)). My two favorite things in one blog entry. Life is good (with a side of guac)..

Here is a nice real-life example using Chipolte to illustrate the AP Microeconomics concept of "Marginal Revenue Product of Labor (MRP L)".

Calculating MRPL is important in determining how many workers a firm should hire.

MRPL is obtained by multiplying Marginal Product ("MP") times the Price ("P") of the Good or Service.

Marginal Product is the physical amount of production EACH worker adds to the total.

So if a worker produces 10 units of a good (their "Marginal Product (MP)") and the price of the good is $1.00 then the Marginal Revenue Product of that workers Labor (MRPL) is $10.00.

Assuming Labor is the only input, a firm will hire up to the point where "MRP of Labor = Marginal Resource Cost (MRC)".  MRC is a fancy way of saying "Wage".  The MOST I am willing to pay this worker is $10.00 per hour.

Chipotle continues to refine the science of burrito velocity

Over the first three months of 2014, the US Mexican-food chain saw an average increase of seven transactions per hour at both peak lunch and dinner hours—12 to 1pm and 6 to 7pm, respectivelyOn Fridays, one of its busiest days of the week, Chipotle fielded 11 more customers per hour at lunchtime on average across its stores, a roughly 10% increase.
Chipolte has increased productivity on the burrito assembly line. Through efficiencies they have increased the number of transactions per hour.

This suggests that the Marginal Product of Labor for each worker has increased. Using my simple example above, if we increased productivity 10% then my worker now produces 11 units of the good.  If the price stays the same then the MRPL is now $11.00 (11 units of the good times $1.00).

Now, the firm faces a choice.

(1) It could hire an additional worker with the additional revenue and make life easier for the existing workers (this is what it could do if it operated in a "perfectly competitive labor market") .

(2) It could hire additional workers AND give raises to existing workers who increased the productivity by working more efficiently (this is what it would do if it operative in a "Monopsony labor market"".

(3) It could keep current staffing and wage levels and use the additional profit to open new stores. This would require additional workers to be hired, either at the same wages OR could be more (but likely not).

(4)It could keep the profits and stay at the status quo.

Looking at Chipolte's growth, I think they are pursuing #3.  They already pay above minimum wage so any increases in productivity seem to help fuel expansion with perhaps a side of wage growth on the side.

I could be wrong here.  I welcome alternative scenarios I may have missed. Thanks.  :)

AP Macroeconomics test hint: You must get "Employment" and "Unemployment" right when asked how it changes as the result of a Real GDP change.

I know this is VERY EASY but lots of students get it wrong, mostly because of inattention and/or nerves while taking the test.  Don't miss this EASY point!

My cyber-friend over at The New Arthurian has this graph showing the relationship between POSITIVE relationship between Real GDP and Employment (the relationship is NEGATIVE between Real GDP and UN-employment)

All the lines show the percentage change in that variable year-over-year.  Real GDP is in BLACK and the other measures of EMPLOYMENT are in the the various other colors.

The New Arthurian
Below is the same graph (but starting in 1950) but with only with the change in Real GDP and "Total Non-Farm Employment" to simplify the visual.

Notice the trend?  Real GDP(BLACK line) "pulls up"  or "pushes down" employment.

If you have a question on the AP Macroeconomics test that asks how employment is affected as a result of and INCREASE in Aggregate Demand (AD) OR an increase in Aggregate Supply (SRAS or LRAS) you would answer like this:

"As Real GDP (output) increases business need more workers to produce the additional goods and/or services.  More labor is needed and the EMPLOYMENT Rate will INCREASE.

If the question asks how employment is affected as a result of a DECREASE in Aggregate Demand (AD) or a DECREASE in Aggregate Supply (SRAS or LRAS) you would answer like this:

"As Real RDP (output) decreases businesses will need fewer workers because they are producing fewer goods and/or services. Less labor is needed and the EMPLOYMENT rate will DECREASE".

The graph below illustrated the NEGATIVE or INVERSE relationship between Real GDP and the UN-employment rate---the number of people without jobs but are actively seeking one.

As the Real GDP Increases the UNEMPLOYMENT rate DECREASES.

If you have a question on the AP Macroeconomics test that asks how unemployment is affected as a result of an INCREASE in Aggregate Demand (AD) OR an increase in Aggregate Supply (SRAS or LRAS) you would answer like this:

"As Real GDP (output) increases business need more workers to produce the additional goods and/or services.  More labor is needed and the UNEMPLOYMENT Rate will DECREASE.

If the question asks how employment is affected as a result of a DECREASE in Aggregate Demand (AD) or a DECREASE in Aggregate Supply (SRAS or LRAS) you would answer like this:

"As Real RDP (output) decreases businesses will need fewer workers because they are producing fewer goods and/or services. Less labor is needed and the UNEMPLOYMENT rate will INCREASE".
Read those answers in BOLD again so you fully understand how to answer a question when asked how EMPLOYMENT or UNEMPLOYMENT is affected by a change in Real GDP.  While they both indicate the same thing (an improving or declining economy) , the directional change in important for you to get right on the test.

A small thing, I know, but it WILL cost you a point if you don't get the terminology right.

Sunday, April 20, 2014

"Too much money chasing too few dinners". Food prices are not rising because of Monetary Policy. Think Supply and Demand fundamentals instead

The prices of wide swaths of food items have increased over a relatively short period of time.  The longer term trend in rising prices has been the increased demand from developing countries, China being the most notable.  As disposable incomes increase people (1) consume more food overall and (2) become more diverse in what they consume (more meat and a variety of veggies along with grains already consumed).

When quantity demanded is greater than quantity supplied, over time prices inevitably rise.

Short term variables, like weather and disease (plant and animal), affect harvests and the stockyards in the interim.  This combination seems to be prevailing force behind the rise in prices at the grocery store.

One distinction I would like to make is "food inflation" is not a product of Monetary policy and the excessive "printing of money".  It is a product of market fundamentals mentioned above--the push (supply side) and pull (demand side) of Supply and Demand.

It is a scarcity of output/production as opposed to an abundance of money that is the primary cause of rising food prices we have seen as of late.

Here is a list from USA Today of 10 food items that have increased in price in the short and long(er) term.

1. Bacon
> 4-yr. change: +53%
> 1-yr. change: +13%
> Current price: $5.55 per lb.

2. Ground Beef
> 4-yr. change: +35%
> 1-yr. change: +8%
> Current price: $4.13 per lb.

3. Oranges
> 4-yr. change: +35%
> 1-yr. change: +23%
> Current price: $1.21 per lb.

4. Coffee
> 4-yr. change: +31%
> 1-yr. change: -17%
> Current price: $5.00 per lb.

Friday, April 18, 2014

Update on the price of limes. Quantity Supplied is still less than Quantity Demanded---only more so now...

Visited my local Kroger (burbs North of Columbus, Ohio) to do some shopping and checked in on the price of Limes---$1.49 each today (April, 18th, 2014). On April 1st they were $.99 each. That is a 51% increase in the span of less than 3 weeks.
Displaying photo.JPG
April 18th, 2014

Weather and gang activity are to blame. Bet those two variables are not put together very often to describe the price of produce.

This was the price on 4/1/2014:
Displaying photo.JPG

Family Dollar is closing lots of its stores. Is this a sign that it is an Inferior Good?

Is the retail chain Dollar Family Stores an "Inferior Good" or a "Normal Good"?

Here is an article regarding the closing of over 300 stores nationwide with the implication that as the economy recovers and incomes rise fewer people are shopping at their stores.  They experienced rapid growth during the recession as unemployment spiked and incomes decreased.

Family Dollar: Is bad news for store good news for US economy? 

 Family Dollar is closing 370 US stores and will open fewer new ones. After booming during the recession and its aftermath, Family Dollar could feel the pinch of Americans feeling richer, some say.

If Income decreases and the Demand for a good (or service) increases the good (or service) is considered to be "Inferior".  Make less money you downsize from something more expensive to something less expensive.  The opposite is true also:  if Income increases the Demand decreases for the good or service. Inferior goods are characterized by an inverse relationship between changes in Income and Demand for the good or service.

With a "Normal" good or service there is a direct relationship between changes in Income and changes in Demand.  Make more money you "up-size" from something less expensive to something more expensive. When income decreases consumer Demand less of the good or service.

All this really describes is desirability of a good or service relative to changes in income at any point in time.

One person's Inferior good might be someones elses Normal good.  

If you are a Target shopper and your income decreases you have to shop at Family Dollar, then Target is a Normal good for you and Family Dollar is an Inferior.

If you are a Family Dollar shopper and your income increases you start shopping at Target, then Family Dollar is Inferior and Target is Normal.  

While it certainly varies from individual to individual I would say Family Dollar is an Inferior good, not in terms of the value it adds to society, but as descriptor of a basic term we learn in Microeconomics.

The Opportunity Cost of Water Use: California Marijuana Edition.

I previously posted this graphic that shows how water intensive some agricultural products are.  California is a major source for these food items, and as we know there is a water shortage in some of the areas most in need of water for growing these crops.

I just came across this statistic from The Smithsonian:
Pot plants, says the Press Democrat, can take anywhere from 6 to 15 gallons of water per day throughout the growing season. To feed the region's grow ops, then, takes upwards of 720,000 gallons of water per day. By comparison, corn takes, roughly, 9 gallons of water per day per plant.
Nice example for a discussion on Opportunity Cost for scarce water consumption.

Source: Mother Jones

Headline from the Washington Times today. They must have boosted hiring in the their Dept of The Obvious...

Made me chuckle.  :)

Washington Times

Thursday, April 17, 2014

Sriracha Sauces loss is my gain. Nice example to show how a potential change in fixed costs and variable costs affect a firm.

Sriracha sauce maker considers relocation

The makers of the most popular Sriracha sauce (Huy Fong Foods) is facing a dilemma.  A by-product of producing the sauce is an awful smell that permeates the air in the City of Irwindale, California where the manufacturing facility is located.  Area residents don't like it and want something done about it.

The city wants the company to install air-scrubbing technology.  Apparently this is very expensive to do and the company is resisting.

I suppose if the company refuses it can be fined, better yet for our analysis, a "per unit tax" could be levied on each bottle produced.

So, the firm faces the possibility of having to incur a large up front "fixed cost" of installing the equipment or face a small-ish "per unit tax" variable cost on each of the bottles it produces.

Which is better for the firm?

Let's see how this affects the firm in context of how we study it in AP Microeconomics.

I presume Hoy Fung Foods in one of several competitors in the market for Hot Sauce.  As such, I will classify it as operating as a "Monopolistic Competitor".

Here is what the firm graph would look like assuming Hoy Fung Foods is making "Economic Profits" and operating as it has been.

Installing the equipment would be a "fixed cost" for the company.  It is a cost that is incurred regardless of how many bottles of the hot sauce are produced and the cost is spread out over an all the additional bottles produced.  

This affects the AVERAGE TOTAL COST ("ATC*) of producing ONLY and NOT the Marginal Cost ("MC*) of producing each bottle.

This will SHIFT the ATC curve "ATC*" UP to "ATC 1".  The profit maximizing quantity at MR=MC stays the same  at Point "A" (read that again!).   What does change is the firms Economic Profit. 

Where I shifted the "ATC 1" curve, it assumes that it is at "Break Even" (in Economic terms, not Accounting terms) at Point "B".

So, Hoy Fung Foods is breaking even and still producing the same amount of product at Qe and at the same Price consumers are willing and able to pay at "Pe".  Status quo, except for profits!!

What if instead a per unit tax is assessed on each bottle of hot sauce. That would be a small dollar amount for Hoy Fung to absorb, so it MUST be better....right?

A per unit tax affects BOTH the ATC and the Marginal Cost (MC) of producing.  The tax applies to each unit and increases the cost of producing each unit by the amount of the tax. This will shift the ATC curve and the MC curve together.  The MC curve will shift to the LEFT to "MC 1"(or some say "up").

It is kinda hard to see with all the curves, but notice our "Profit Maximizing Quantity" at MR = MC is now at a different spot---Point "A" at "Q1".  Because MC shifted it will intersect Marginal Revenue (MR) at a different spot along the MR curve.  THIS IS KEY!!

Let me clean up the graph above for you.  See below. As a result you can see that the PRICE consumers pay is higher than it was ("P1") and the quantity sold is less too.

BUT is gets worse for the firm.  Notice now that the ATC of producing Q1 bottles of hot sauce is now GREATER than the Price received from consumers (ATC 1 more than P1).  The firm is now incurring Economic LOSSES equal to the area "P1-"C"-"D"- P1".

In this simple analysis holding LOTS of variables constant, we can see that Hoy Fung Foods should probably install the equipment to avoid a per unit tax.  It appears it will be the best outcome for the firm.

While this example might not completely reflect the real time situation, I hope it helps you understand the different way a fixed cost and a variable cost (per unit tax) affects a firm.

This is a must-know concept for the AP Micro test!!

Wednesday, April 16, 2014

Community Colleges get a boost. To state the obvious, enhanced skills are the pathway to the jobs of the present and future.

"The White House on Wednesday will announce $500 million in grants aimed at increasing coordination between community colleges and industry groups and another $100 million to expand access to apprenticeships to boost job training, administration officials said. 
The grants will be unveiled during a visit by President Barack Obama and Vice PresidentJoe Biden at the Community College of Allegheny County in Oakdale, Pa. 
The initiatives are similar to approaches used by some states, which have tried to leverage relationships between community colleges and local businesses to steer workers toward available jobs. But the proposals also show the limits of White House power. While most of the grants will be more targeted, the initiative essentially is a continuation of existing grants already disbursed to community colleges"--Wall Street Journal
Allocating resources (read that money--which is not an economic resource) to help the long term unemployed gain or regain relevant work skills is a necessity right now.  It is a festering issue that will impose costs on society one way or another.  We pay now or pay later in myriad of other social costs, explicit or implicit.

This is a great initiative, in theory AND practice (see HERE and HERE), and COULD BE money well spent.  However, as is the case quite often, it is not targeted towards the greatest need but towards the best grant writers.  And the best grant writers are often employed by the better served areas that need money, but less than communities severely stricken by the recession.

I am not a pessimist but a realist.  Please, Federal Government, target the skills gap not the political favoritism gap.  Thank you.

Supply and Demand Lesson: Fruit and Vegetable Edition. Salad bars are about to become more expensive.

This graphic, from the Wall Street Journal, shows how the prices of various fruits and vegetables are expected to rise in the near future due to drought conditions in California.  The salad bar at your favorite restaurant is likely to be more expensive very soon.
Source: Wall Street Journal
While not a good turn of events for the marketplace, it does provide this economics teacher the opportunity to illustrate supply and demand with graphs.  So, for your learning pleasure I created a set of slides that tell the above story.
"California is the largest domestic producer of each of the products Mr. Richards identified, ranging from grapes to peppers. And in the case of avocados, it’s the only state with a significant crop.The drought has wiped out between 10% and 20% of California crops for the eight items, but the size of the expected price increases varies widely. Lettuce prices could jump as much as 34% and avocado prices could rise 28%, the largest projected increases. 
“People are the least price-sensitive when it comes to those items, and they’re willing to pay what it takes to get them,” Mr. Richards said. “It’s hard to make a salad without lettuce.”In basic economic terms, the drought reduces supply, which puts upward pressure on prices. But how high the price can rise is determined by consumers’ willingness to pay more against their ability to find a substitute".-(Wall Street Journal)

Monday, April 14, 2014

Income vs Substitution Effect. Both explain the downward sloping nature of a Market Demand Curve.

My PPT slides to explain the two main reasons a Market Demand Curve is DOWNWARD sloping.

Hope it helps someone out there who is confused about this topic.  It is tested on the AP Microeconomics test so it is in your interest to learn it here OR somewhere!! :)

Friday, April 4, 2014

Nice GIF showing how Chicago neighborhoods have changed over time in terms of income inequality.

Here is a GIF (CBSChicago) showing the change in the Greater Chicago area in terms of median income. De-industrialization as we moved from goods production to service production? Globalization? "White Flight"? Federal tax /housing policy? Local governance? Drugs and/or Crime?  Short answer is probably yes to all of the above.

According to the key on the graphic the colors represent areas where incomes are either above or below the "median income".  For instance GRAY represents areas where the income is from 75% to 125% of the median. Example: If median income in an area was $50,000 then half the residents of the area earned at least $37,500 but not more than $62,500.

As you see the GIF move through time more Green AND Pink/Red-ish areas emerge and crowd out the Gray.

The Green areas are where incomes are significantly greater than the median (getting richer--pulling away from the median upward) and the Pinkish to Red areas are where incomes are significantly less than the median (getting poorer---pulling away from the median downward).


Here are still shots I took of the GIF is you need to look at it at a more leisurely pace.

Thursday, April 3, 2014

If the Ukraine falls food insecurity will rise in many parts of the world...

From the USDA:
Over the last 15 years, Ukraine has emerged as a major supplier to world markets for several agricultural commodities, including wheat, corn, sunflower oil, and rapeseed.  Wheat is a traditional export, with annual shipments varying with crop size. For 2013/14 (July/June marketing year), Ukraine’s wheat exports are forecast at 10 million tons, or about 6 percent of world wheat trade.  During the last decade, Ukraine’s corn production and exports have expanded, with 2013/14 (October/September) exports forecast at 18.5 million tons, making Ukraine the world’s third-largest corn exporter.  Robust production growth is also behind Ukraine’s emergence as the world’s dominant supplier of sunflowerseed oil, with 2013/14 (September/August) exports forecast at nearly 4.1 million tons, or about 57 percent of global trade.  Ukraine has also become a significant exporter of rapeseed, with 2013/14 (July/June) exports forecast at about 2.2 million tons, or 16 percent of world trade. Despite recent political developments in Ukraine, so far there is no evidence of significant shipping disruptions that might alter the 2013/14 Ukraine export forecasts. 

Wednesday, April 2, 2014

An "eggs-elent" article to teach various components of Demand.

A very short article in Quartz regarding the decline in the consumption of eggs in the US and how it can help teach the basics of Demand.

If teaching and/or learning about the "Demand" it identifies several key concepts relating to the difference between a change in quantity demanded vs a change in demand.  This is the bane of existence for every student and teacher of economics! :) There is also a bonus example of the difference between and Normal Good and an Inferior Good.  Good times ahead!! Read on.  :)
Americans once ate nearly twice as many eggs as they do today
1. They’re more eggspensive…
“Egg consumption is affected not only by the price of eggs, which has been rising, but also the price of competing protein products, like meat, which have been falling."
When the price of eggs INCREASES the Quantity Demanded for Eggs DECREASES.  This conforms to the Law of Demand, which suggests that the price of a good and the quantity demanded are INVERSELY related to each other.  A price change results in a movement ALONG the market demand curve (up and to the LEFT or Down and the RIGHT).  If the income you spend on a good is fixed and the price increases your money has less purchasing power and your quantity demanded for a good DECREASES.  If price decreases, your money has more purchasing power and your quantity demanded for a good INCREASES. This is known as the "income effect" and helps explain why a demand curve is downward sloping.

The second part of the quote suggests a "substitution effect" in the market for eggs where the prices of related/substitute goods have an affect on the market for eggs.  As the price of eggs increases the quantity demanded for eggs decreases (movement ALONG the demand curve) because there are viable substitutes available, other proteins in a variety of meats.  DO NOT confuse the difference between the two (Substitution Effect vs Presence of Substitutes)!!
2. …they got caught up in health scares… 
“The major factors behind egg consumption trends are consumer preference factors, in particular, concerns over the cholesterol content of eggs and the risk of coronary heart disease and stroke,” the US International Trade Commission noted in a 1999 report
One of the determinants of demand OTHER THAN PRICE that will SHIFT a market demand curve is "a Change in Consumer Preferences". The change could be positive which would cause consumers to, at every given price, INCREASE their quantity demanded relative to before the change in preference.  This would shift the market demand curve to the RIGHT indicating an INCREASE in demand.

However, the change noted above is negative, suggesting the quantity demanded is LESS than it was before at that price.  This would shift the market demand curve to the LEFT, indicating a DECREASE in demand.

Lastly, there is an example for a lesson on the difference between "Normal" and "Inferior" goods.
3… and people make more money. 
When people get richer, they tend to consume fewer eggs, according to the US International Trade CommissionAmericans are a good deal richer than they were in decades past—the median US household makes roughly 19% more than it did back in 1967, according to US Census data.
With a "Normal Good" an increase in income will increase the quantity demanded for a good. It becomes more desirable as you make more money.  Give me MORE of this good at a given price!

This suggests you might be substituting AWAY from another good that becomes less desirable as you make more money---that would be an "Inferior Good". Give me LESS of this good at a given price!

I hope this helps you understand some of the more difficult concepts surrounding Demand Curve analysis.

Let me know if it works for you! :)