Saturday, January 1, 2011

Nice graphic--How things have changed from 2000 to 2010...Quite Amazing!

2000 Vs. 2010: How the world has changed (HT: FLAD on Facebook)

If world leaders (Iran, Bolivia, Venezuela, Cuba, (US?)) would read the chapter in a basic economics textbook on subsidies, they could avoid social unrest and alot of grief.

Bolivian president cancels gasoline price increase

""The government announced Sunday that it was raising gasoline prices by 73 percent, to 92 cents a liter ($3.48 a gallon) for regular gasoline, up from 50 cents ($1.89)....Bolivian President Evo Morales on Friday abruptly canceled a decree that sharply raised fuel prices, reacting to widespread protests and the threat of more to come in the biggest setback of his five years in office... 

Public subsidies are payments by the government to producers and/or consumers of a good or service. The justification for subsidies is the current production of the good/service is less than the socially optimal level of production and/or the current market price is too high. A subsidy to the producer decreases the cost of producing and incentivizes the producer to increase the supply of a good/serviced at a given price (Supply curve shifts RIGHT) which decreases the market price and increases the quantity supplied at that lower price. A subsidy to the consumer decreases the price of a good/service and incentivizes the consumer to increase the demand for a good/service at a given price (Demand curve shifts RIGHT) which Increases the market price (but is off-set with the subsidy) and increases the quantity demanded. This article suggests the subsidy is bestowed on the supply/supplier side, so I will show graphically the effect of the subsidy on supply of gasoline in Bolivia. are payments by the government to producers and/or consumers of a good or service. The justification for subsidies is the current production of the good/service is less than the socially optimal level of production and/or the current market price is too high. A subsidy to the producer decreases the cost of producing and incentivizes the producer to increase the supply of a good/serviced at a given price (Supply curve shifts RIGHT) which decreases the market price and increases the quantity supplied at that lower price. A subsidy to the consumer decreases the price of a good/service and incentivizes the consumer to increase the demand for a good/service at a given price (Demand curve shifts RIGHT) which Increases the market price (but is off-set with the subsidy) and increases the quantity demanded. This article suggests the subsidy is bestowed on the supply/supplier side, so I will show graphically the effect of the subsidy on supply of gasoline in Bolivia.

The first graph shows the apparent market equilibrium price of $3.48 WITHOUT the subsidy, as indicated in the paragraph above. This is shown as Point "A" where Supply* intersects with Demand*. At Point "A" quantity supplied EQUALS quantity demanded.

NOTE: On horizontal axis units are in tens and hundreds. They could be thousands or millions. For simplicity I will just use tens and hundreds
 When the subsidy is granted to the producer the cost of producing decreases. Focus on Supply* curve.  Supply* reflects the quantity supplied (horizontal axis) at every price (vertical axis). With the subsidy, to produce 100 gallons of gasoline it now costs something less than the $3.48 market price, represented by Point "B" in this graph:

What is true at Point "B" is also going to be true ALL ALONG Supply* curve. This is reflected in the following series of graphs:

Points "A", "B", "C", "D", "E" represent different price and quantity supplied combinations that now lie parallel and to the RIGHT of Supply*. If we connect these points and clear the above graphs of all the notations, we will see that we have a new market supply curve, Supply 1:
Notice that ONLY one of these new points on Supply 1, "D", intersects with Demand*.  We have a new market equilibrium price of $1.89 and market quantity 125. Nothing in the market caused Demand to change (shift) ONLY the quantity demanded.  Demanders responded to this increase in Supply, driven by a decrease in the cost of producting, by INCREASING their quantity demanded, moving down and to the right on Demand*, just what the Law of Demand states!
To see this more clearly, assume the market did not recognize what happened and the price stayed "sticky" at $3.48.  In the graph below, we can see at $3.48 the Quantity Demanded is 100 BUT because of the subsidy the Quantity Supplied at $3.48 is 150, shown at Point "F". Quantity Supplied is GREATER than Quantity Demaned! The only why to clear the markets is for the producers and suppliers to move ALONG their respective curves until the reach a new equilibrium at Point "D" where quantity supplied equals quantity demanded at a price of $1.89.

Remember, the price is lower and the market quantity is higher due to the subsidy.  If the subsidy was removed then, absent some other factor affecting cost of producing, Supply 1 would snap back to Supply* and the market price would return to  $3.48.  This is what prompted the Bolivian government to revoke the planned removal of the subsidy.

This is just another reminder of why it is important to study economics and how economic policies can affect politics and society.  As I often say in class, show me a place that has social unrest and I will find you a very basic underlying economic reason for it.

Friday, December 31, 2010

My wish for the New Year....YES, it is related to economics...Don't judge me...

Food for thought as we pass into the New Year...
""On Jan. 1, 2011, the oldest Baby Boomers will turn 65. Every day for the next 19 years, about 10,000 more will cross that threshold. By 2030, when all Baby Boomers will have turned 65, fully 18% of the nation's population will be at least that age, according to Pew Research Center population projections. Today, just 13% of Americans are ages 65 and older.""Pew Research Center
New Year, same problem with long-run Social Security and Medicare sustainability...Is THIS the year these programs will be addressed with the seriousness they merit? That is my wish for the New Year---or to lose 25 pounds, whichever comes first.  They both face insurmoutable odds... :)

Thursday, December 30, 2010

If you shovel snow from a public parking space, can you "save" that space for yourself? Show your work for full credit...

Interesting how circumstances can change the way people think about public property.  Just because someone shoveled a space they feel entitled to it.  Perhaps these residents are using this passage from John Locke "Two Treatises on Government" to justify their attempt at co-opting of public property:

""The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others.""
However, I don't believe Locke would not approve of using his words in this case with land legally appropriated for use "in the common"--it is no longer "in the state of nature"--or is it? If government fails in its duty to preserve the property in common (not plowing the road for the safety/convenience of its citizens),should/could it not be considered plunged back into the state of nature?  It would be an interesting episode of COPS to see a resident use Locke to justify  his place-holding of a public parking spot...I am guessing that would end with a tasing.

Wind energy is for the birds! Actually it is AGAINST the birds! I thought Wind Energy was clean...Sounds kinda nasty to me...

Wind energy is already expensive to produce (per kilowatt hour, minus the subsidies it recieves) and if well-intentioned interest groups have any input, it will get more expensive. The problem: Birds are victims of the spinning blades and the American Bird Conservatory would like to require additional environmental impact studies and additional regulations imposed to be more "bird-friendly". 

From American Bird Conservatory:

""Wind power has the ability to be a green, bird-friendly form of power generation, but can also adversely affect birds. Birds can die in collisions with the turbine blades (up to 14 birds per megawatt per year in the U.S., with a median rate of around 2.2 birds/MW/Yr according to industry estimates), towers, power lines, or related structures, and can also be impacted through habitat destruction from the siting of turbines, power lines, and access roads. Some birds, such as sage-grouse are particularly sensitive to the presence of turbines, and can be scared away from their breeding grounds several miles away from a wind farm.

Potentially all night-migrating songbirds are at risk of colliding with wind turbines, as are raptors and waterbirds when wind farms are sited in areas they frequent, particularly wildlife refuges. Greater Sage-Grouse are particularly sensitive to the presence of wind turbines near their breeding grounds.

American Bird Conservancy supports alternative energy sources, including wind power, but emphasizes that prior to the approval and implementation of new wind energy projects, potential risks to birds should be evaluated through site analyses, including assessments of bird abundance, timing, and magnitude of migration, and habitat use patterns.

Wind energy project location, design, operation, and lighting should be carefully evaluated to prevent bird mortality, as well as adverse impacts caused by habitat fragmentation, disturbance, and site avoidance. Wind power projects should be sited on areas with poor habitat where possible, such as heavily disturbed lands, (e.g. intensive agriculture). Excellent guidelines to prevent adverse impacts of wind power generation on birds are already in existence, but these need to be turned into mandatory regulations. Read ABC’s complete position statement on wind.
Cost of production is a determinant of Supply. When additional costs are incurred complying with regulations, ceterus paribus , then supply decreases (shifts left). Moving up to the left along our demand curve, from Point "A" to Point "B", we reach a new higher market price ("P1) and a lower market quantity ("75"). (HT: Environmental Economics)

Tuesday, December 28, 2010

Good ol' Days--Part 3---Shipping costs in 1960 relative to today...I was born too early!! The good ol' days are today...

Professor Mark Perry at Carpe Diem has done a series of "then and now" price comparisons using a terrific online resource from Radio Shack. They have put the ENTIRE contents of decades worth of their catalogs online. It is really fun to look at the catalog from my (or your) birth year. The pictures are fun to look at and for those of you who are really into the technical aspects of consumer electronics will be AMAZED at the detail they go into with each good. Don't see that anymore....

Dr Perry has focused on final goods, but I was curious about the transportation costs of getting a good delivered to you.  Below you will find the table from the 1960 catalog (my birth year).  If I wanted to buy something that weighed 11 pounds (easy to do the math) and have it shipped to me it would have cost $6.30 in 1960 (1st pound $.70 and each additional pound $.56).  I also used "Zone 5" estimating that the package would travel 1000 miles to get to me.  Using an inflation calculator, that would be $46.57 in TODAY's dollars! WOW!
Radio Shack Catalog--1960
From the US Postal Service website, I found the following:
Just guessing, but an 11 pound item would probably fit in either of the boxes on the right.  These are retail prices, so a large company like radio shack probably gets a significant price break on it shipping costs from the USPS.  Shipping costs are 3 to 4 (maybe 5) times cheaper today than in 1960.

Not only have the goods we buy today gone down in price but the transportation costs to get them to us have decreased significantly as well.  In the age of a global supply chain, it seems you could not have one without the other...

Who is more selfish---Senior Citizens who won't take reduced benefits to help young people financially, or young people who won't pay more taxes to help old people financially? Good luck with that question...

My students over the last few years have heard something very similar in my lectures, but I have always prefaced it by suggesting this is not something you can say out loud (outside of an academic setting) because these two programs (Social Security and Medicare) are so sacred and personal.  Up to this point, politically, they are off-limits to any significant change.  However, they are the "elephants in the room" that are moving from the recliner to the couch and will soon need a sectional sofa to fit its ever expanding self... 

WSJ: Notable and Quotable-
Robert Samualson
""There has been much brave talk recently, from Republicans and Democrats alike, about reducing budget deficits and controlling government spending. The trouble is that hardly anyone admits that accomplishing these goals must include making significant cuts in Social Security and Medicare benefits for baby boomers. . . .Doing so, it's argued, would be "unfair" to people who had planned retirements based on existing programs. Well, yes, it would be unfair. . . But not making cuts would also be unfair to younger generations and the nation's future. . . . The old deserve dignity, but the young deserve hope. The passive acceptance of the status quo is the path of least resistance—and a formula for national decline.""
What do you think of the following two premises and questions? Are there any alternatives? If so, Washington needs to hear them.... :)

(1) Ask any grand-parent if they would do anything for their grand-children they would say yes...Then why can't we cut Social Security and Medicare benefits to that group of people?

(2)  Ask any Grand-child if they would do anything for their grand-parents they would say yes...Then why can't we raise the Social Security and Medicare taxes on that group of  people.

What South Korean students are doing on Christmas Break vs. What American students are doing....

"What did you learn over Christmas Break?"

South Korean student answer: "How to dominate the world!"

South Korean elementary and middle school students rub their bodies with the snow during a winter military camp for kids at the Cheongryong Self-denial Training Camp on Daebu Island in Ansan. Some 50 students took part in the three-day camp as a way to mentally and physically strengthen themselves. Baltimore Sun.

American student answer: "Break was too short! It is not fair!"

American students practicing for a "really cool" Flash Mob to be performed at the mall,
re-enacting the last episode of "Glee"

Does DisneyWorld fascinate you? Nice NYTIMES article on how they monitor lines and wait times...It is scary how efficient they are without you knowing it!

I am a recent convert to the greatness of DisneyWorld...As an Economics teacher, what particularly interests me is the "magic" and how it is created and maintained.  Whenever I go there, I "look at the trees instead of forest" and try to pinpoint all the nuances of how Disney Inc. tries to manipulate us into having the experience they want us to have.  Some would say that takes the fun out of it...Hey, I say it puts the fun INTO it!! 

If you are interested in the behind the scene machinations of how they monitor lines and get people moving without their explicit knowledge, then  it will be worth your time to read the whole article. The study of lines, or "queues", are the subject of much social science research. Businesses are always looking for ways to shorten customers wait times, make that time less of a burden on customers, and/or try to wring out additional sales and profit from that wait time....Good stuff!

NYTIMES: Disney Tackles Major Theme Park Problem: Lines

""Deep in the bowels of Walt Disney World, inside an underground bunker called the Disney Operational Command Center, technicians know that you are standing in line and that you are most likely annoyed about it. Their clandestine mission: to get you to the fun faster....And so it has spent the last year outfitting an underground, nerve center to address that most low-tech of problems, the wait. Located under Cinderella Castle, the new center uses video cameras, computer programs, digital park maps and other whiz-bang tools to spot gridlock before it forms and deploy countermeasures in real time. ""

Sunday, December 26, 2010

Do you want your life to be happier? You can! All you have to do is turn 50. Here is a graph to prove it...

Well, as you can see, turning 26 will do it too, but then is goes back downhill...Although I am only 8 months into my 50th year, I find some validity in the graph below.  Acceptance of things I cannot change has gone a long way in giving me piece of mind...No mid-life crisis for me, unless you consider recently I have not worn my seatbelt when I am in my car alone and take the short trip to the grocery store...Ahhh, the freedom!! I think I am going to be good from now on... :)
""When people start out on adult life, they are, on average, pretty cheerful. Things go downhill from youth to middle age until they reach a nadir commonly known as the mid-life crisis. So far, so familiar. The surprising part happens after that. Although as people move towards old age they lose things they treasure—vitality, mental sharpness and looks—they also gain what people spend their lives pursuing: happiness. This curious finding has emerged from a new branch of economics that seeks a more satisfactory measure than money of human well-being. Conventional economics uses money as a proxy for utility—the dismal way in which the discipline talks about happiness. But some economists, unconvinced that there is a direct relationship between money and well-being, have decided to go to the nub of the matter and measure happiness itself...Read Full Artice HERE
The Economist

""The Good ol' Days""-- Part 2...

(See Part 1 HERE)...Mark Perry at Carpe Diem gives further evidence that the "good ol' days" are TODAY, and as someone born in 1960 I tend to agree.  What gives money its value to the great un-washed is what we can exchange it for in the quantity and quality of goods/services.  You can extend this analysis to consumer goods across the board IF those goods are (1) bought in competitive markets domestically that are subjected to limited government interference through significant market distorting subsidies (private and public goods, i.e. education, medical care) and (2) subjected to international trade and competition.  Please visit this ENTRY many active links in this blog entry I did not include...

""Here's another comparison of consumer purchasing power in the 1960s versus today, based on the time cost of common household appliances like a kitchen oven. The Sears Kenmore oven pictured below retailed for $330 in 1966, which would represent 121.3 hours of work (about three weeks) at the average hourly wage in that year (ignoring taxes).

At the current average hourly wage of $19.10, today's average consumer would earn a little more than $2,300 working 121.3 hours, and would be able to furnish their entire kitchen with the new appliances pictured below (click to enlarge) from Best Buy including a high-efficiency front-loading washing machine, super capacity gas dryer, 30-inch gas stove, 8.8 cubic feet chest freezer, 16.5 cubic foot refrigerator, dishwasher, mid-size microwave and blender:

Measured by what is ultimately most important, the value of our time, household appliances keep getting cheaper and cheaper, thanks to innovation, technology improvements, supply chain efficiencies, increases in productivity and other market-driven efficiencies that drive prices lower and lower year by year. As much as we hear about declines in median income, economic stagnation, the disappearance of the middle class, falling real wages, increasing income inequality, the data tell a much different story: The rich are getting richer and the poor are getting richer.''
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