Friday, March 25, 2011

Nice article with several examples of companies trying to control Variable Costs....

For producers, the key to staying competitive and profitable is to control variable costs. Variable costs are explicit costs that vary with production, i.e. labor, raw materials/inputs, utilities, etc.  In a highly competitive the industry, it is vital to minimize the impact of increasing variable costs on the total cost of producing.  If one cost increases that the company cannot control, then they must off-set this cost increase by a decrease in cost in some other area of production. Otherwise, they will have to pass on the costs to the customer.  In the current economic climate that is not easy to do.  This article has many examples of companies controlling their variable costs so they can avoid raising the retail price to customers.

Manufacturers Scrimp To Keep Customers From Paying More.

VF Corp. is sewing smaller buttons on some of its Lee and Wrangler jeans. General Mills has shifted to a slightly less expensive, though no less flavorful, rice for its Rice Chex cereal. And industrial product maker Quality Float Works is recycling oil for its factory machines.

Many manufacturers are taking small but meaningful steps to trim costs as they cope with surging materials prices without sharply raising prices for customers.

They have little choice. Household spending has picked up recently, but consumers aren’t splurging.
“They might be willing to accept a slight increase in price,” but they might buy less, says Madison Riley, managing director of Kurt Salmon, a retail consulting firm.

Food, energy and other commodity costs have soared the past year on rising global demand. Several manufacturers and retailers say they’ll pass along some increases to customers this year but will likely absorb much of them, squeezing profit margins.

Many say they’re scrimping without sacrificing quality:
•VF is switching to regular buttons on the flies of some jeans. Executives believed slightly bigger buttons “made a statement” and increased convenience, says Vice President Cindy Knoebel.
“We actually found that it didn’t make any difference to consumers.” The move saves about 5 cents on each pair and millions overall for the company, which is paying more for denim due to soaring cotton prices.
•General Mills used to ship rice-based flour for Rice Chex from farms and mills in Texas to its Cincinnati plant. But with agricultural and diesel prices rising, it switched to a different rice from Arkansas that’s less expensive and closer to Ohio. Costs fell about 4%, says Senior Vice President John Church. “You need to save 2, 3% in a lot of places.”
•Quality Float Works recycles oil that greases its factory machines to halve oil costs. The Schaumburg, Ill., maker of steel water-level sensors for tanks saw its oil costs nearly double from a year ago. “We can’t” raise prices, says President Sandra Westlund-Deenihan. “There’s a lot of people still out of work.”

Terrorist Economics 101---Choose a terror target based on the price of a ticket to that location. Sometimes it is that easy...

Even terroists are captive of basic economics. Airplane tickets to more desirable terror targets (Houston, Chicago) were too expensive, so this person decided to target a cheaper, substitute destination---Detroit.  If the price of tickets to one destination increases (or is more expensive), the demand for tickets to another increases--classic definition for Subsitutes.  Now, does that make Detroit an "inferior good" too?  I will let someone else answer that question....

For al-Qaida, Detroit was just the cheapest flight

""When an admitted al-Qaida operative planned his itinerary for a Christmas 2009 airline bombing, he considered launching the strike in the skies above Houston or Chicago, The Associated Press has learned. But tickets were too expensive, so he refocused the mission on a cheaper destination: Detroit....""

Nice Graphic: Visual Data on Teen Drug Use...I wonder how accurate it is...

Teen Drug Use infographic

Major road repaired in 2 weeks in Japan...I wish this crew was working on 114 in Grapevine...

These two photos show a road devastated by March 11 massive earthquake (left) and the same road after restoration in Naka, Japan. The highway company restored the 150-meter section of the highway linking Tokyo and the quake-damaged Ibaraki prefecture in six days. The photos were taken on March 11, 2011, left, and on March 17, 2011, right. (AP Photo/NEXCO East)

Click HERE for more stunning photos...

Wednesday, March 23, 2011

The cost of the earthquake in Japan extends around the world...One small part brings auto production lines to a halt.

It is quite amazing that ONE small part costing only $90.00 can bring auto production lines to a halt.  The costs of the earthquake in Japan extend way beyond its borders...

Japan Parts Shortage Hits Auto Makers :  Hard-to-Find Electronic Component Made by Hitachi Causes U.S., European Production Cutbacks by GM and Peugeot

""A small electronic part that measures airflow to car engines is becoming a big worry for the auto industry in the wake of Japan's earthquake and tsunami.
The disaster has forced auto and parts plants throughout Japan to shut down. General Motors Co., Toyota Motor Corp. and PSA Peugeot-Citro├źn have cut or are making plans to curb output of thousands of vehicles in the U.S. and Europe due to concerns about a shortage of critical parts made in Japan.

On Wednesday, Toyota warned employees it expects to halt some production in the U.S. and Canada as a result of shortages of parts from Japanese suppliers. "It is clear we will incur some non-production time," the company said in a memo. "The amount of non-production is still uncertain."

One part coming under increased scrutiny goes into mass airflow sensors. Made by Hitachi Automotive Systems, a unit of Hitachi Ltd., at a plant north of Tokyo that was damaged by the quake and remains shut down, the electronic part is used by about a dozen auto makers.

Hitachi, which has a 60% share of the world's market for airflow sensors, said it hopes to resume operations by Saturday, but isn't sure how much of its capacity will be restored by then. The area is suffering from water and power shortages.

The sensors cost about $90 each in retail stores. While supplies of the chip are still available and Siemens AG and Robert Bosch GmbH also make airflow sensors, some auto makers are curtailing production out of fear that their supplies could run out.""

"Please don't squeeze the Taxpayer"---A toilet paper tax? Insert your own punchline...

I generally accept the economic principle that if you want people to use less of something you put a tax on it, i.e. alcohol, cigarettes, etc. But is it a good idea to have people use LESS toilet paper?

Suttle unrolls toilet paper tax

""Mayor Jim Suttle went to Washington Tuesday flush with ideas for how federal officials could help cities like Omaha pay for multibillion-dollar sewer projects.

Among the items on his brainstorming list: a proposal for a 10-cent federal tax on every roll of toilet paper you buy.

Based on the four-pack price for Charmin double rolls Tuesday at a midtown Hy-Vee, such a tax would add more than 10 percent to the per-roll price, pushing it over a buck.

The idea came from a failed 2009 House measure by an Oregon congressman to help cities and the environment.""
Perhaps it is actually a good idea.  Can you think of a product whose demand is more Inelastic (the change in quantity demanded will not be significant relative to the change in price)?  If you gotta go, you gotta have it!

Monday, March 21, 2011

Gas and Cars are considered Complements in Econ 101... But can they be Substitutes too? I guess that is learned in Econ 102....

In Microeconomics we learn that a change in price of one good can have an affect on the demand for a second related good. That relationship can be in the form of a Complement or a Substitute. Complements are goods that are separate and distinct, but are usually used together---gasoline and cars/trucks/SUV's, for example. With complements there is an inverse relationship between price and demand---If the price of gasoline INCREASES, the demand for cars, trucks and SUV's tends to DECREASE.  Is this what is happening in the passage below?

Panic buying raises prices on Prius, Fit
Americans have begun snapping up Toyota Prius, Honda Fit and other fuel-efficient models made only in Japan almost the way shoppers denude bread and milk shelves in a supermarket when a storm is predicted.

The intensity first spurred by rising gas prices has been amplified by predicted shortages of many models as the Japanese auto industry remains disrupted by the March 11 earthquake and its aftermath.
No! The price of gasoline is increasing BUT the demand for hybrids and electric vehicle is also increasing. If the price of one good, gasoline, INCREASES and the demand for a related good INCREASES (vehicles) then the goods are considered SUBSTITUTES.

Gasoline and cars substitutes?

Did I not just say they were Complements? Can they be both at the same time? Well, not really.  In this case you have to link gasoline with the alternative that a hybrid vehicle offers.

As the cost of operating  gas-powered vehicles INCREASES because of higher gas prices, the demand for hybrids/electric-powered cars INCREASES.  You are substituting a portion of your gasoline consumption with a hybrid that operates on something OTHER THAN gasoline---batteriers and/or electricity.

This is not normally and example I use when introducing students to the concepts of Complements and Substitutes because, well, it muddies the water.  Welcome to the next level in Economics...Do you feel elevated??? :)

Sunday, March 20, 2011

A State tries to re-write the rules on Elasticity of Demand. Smoke em' if you have em'...

Here is a nice article loaded with Microeconomic concepts, such as taxes, elasticity, subsitutes and complements (hotel rooms and cigarettes are complements?). Read the article below the fold, but I am going to focus on elasticity.

New Hampshire Debates a Reduced Tax on Cigarettes

Legislators in New Hampshire believe if they reduce the tax on cigarettes (hence the retail price) they will gain more in revenues.  The tax currently is $1.78 and they propose a decrease of $.10 to $1.68.
""The bill passed by the House would cut the rate 10 cents to $1.68 a pack. The taxes are $2.51 in neighboring Massachusetts, $2 in Maine and $2.24 in Vermont.""
Against much research to the contrary, they believe the demand for cigarettes is relatively ELASTIC. Elasticity determines how sensitive demanders are to changes in the price of a good relative to their quantity demanded of that good. There is an inverse relationship between price and quantity demanded (Law of Demand), but how intense that relationship is helps determine elasticity.

A pack of cigarettes costs about $6.17 (google search) with tax included, in New Hampshire.  A $.10 drop in the price would represent a decrease of 1.6% in the price ($10 divided by $6.17 times 100).  For revenues to increase, there would have to be an increase in quantity demanded greater than 1.6%. Presumably from new smokers induced to take up the habit because the price is now cheaper (by a dime) OR it is smokers from neighboring states (Massachusettes, Vermont, Maine, etc) driving to NH to buy cigarettes at the lower price.

Applying the 
Revenue Test for Elasticity of Demand, a good is elastic if the percent decrease in price(-1.6%) induces a greater increase in quantity demanded (more than 1.6%) then total revenues will increase, to the delight of the NH lawmakers.

However, it is generally accepted that the demand for cigarettes is relatively
INELASTIC.  Using the example above, this means that quantity demand will indeed increase when the price decreases but it will increase by LESS THAN the 1.6% decrease in price. In other words, it will tend to not induce more people to smoke and given the price of gasoline (with no hard evidence) I dont believe people will drive even short distances to save $.10 for a pack of cigarettes. 

The taxes are ALREADY much lower than two of the three surrounding states, so I don't see how this will produce additional revenue..

This reminds me of a quote from Thomas Sowell:

""The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.""

In general, the divide between understanding basic economic principles and politics remains wide...

How close are you to a nuclear power plant? Are there others near-by? Easy link to find out.

Click HERE to go to CNN Money and enter your zip code to find the nuclear power plant nearest you and how far others are away from you...

Which source of energy is statistically the deadliest?...Are you sure about that?

Source: Carpe Diem
 Note: TWH stands for "Terra-watt per hour".
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