Saturday, August 26, 2017

Dwayne "The Rock " Johnson understands TANSTAAFL. Video proof!

This from his Facebook page.  He is acknowledging a young mans heroics (rightly so!) but at the end of this video (about the 50 second mark) he makes a remark that stunned me.

A pretty solid reference to a basic economic concept we learn the fist day in economics! While he does not identify it directly, "TANSTAAFL", the intent is clear.

Made me smile.  Only a minute long. Worth it!

Friday, August 25, 2017

Potential Real GDP vs Actual Real GDP and the PPF.

Here is a  nice illustration of "Potential Real GDP" vs "Actual Real GDP.  Potential GDP is an estimate at a given point in time of an economy's potential to produce Real GDP given its available resources (Land, Labor, Capital, Entrepreneurship).  Gives me an opportunity to show how two important AP Macroeconomic concepts are related to each other.

The Congressional Budget Office (CBO) publishes a forward looking projection of Potential RGDP years in advance.  This graphic gives the estimated trajectory of Potential RGDP that was calculated in a given year (2007,09,11,13,15, and 2017).  The heavy BLACK line is the trajectory of the "Actual RGDP" that was recorded in the respective year.

It is evident Actual RGDP, since the advent of the 2008 recession has been below the projected Potential---the difference is known as the "Output Gap".

It is noteworthy that after 2008 the CBO consistently lowered the estimate of the US economy's potential to produce Real GDP.
Source: VOXEU
Below I paired this graphic with the Production Possibilities Frontier (PPF).  The PPF is an important model in AP Macro.

I color coded the PPF frontiers in a similar color as the one in the graphic to show the contraction of the US PPF over time (as calculated by the CBO).  I used Point "A" to represent the heavy black line and a consistent under-utilization of societal resources, shown as a point inside the PPF.

Both of these models show the same thing---an output gap that suggests more resources could be put into use before we reach our economic potential.

Sunday, August 20, 2017

Hotel price surge for the Eclipse: Price Gouging or Revenue Smoothing? Easy call for me...

If you are looking for a last minute hotel room in the path of the eclipse you will either find no availability or a shockingly high price for a one night stay.

Below is the price for a stay at a Days Inn hotel I found on in rural Kentucky.

The first price is the "normal" price they charge for a room, the second is for Sunday, August 20th (eclipse is Monday afternoon).  A mark-up of 5.66 times the regular price.

Is this price gouging or revenue smoothing?   Is it "fair"?

One justification is that the hotel business is seasonal.  Special events that a preponderance of people are "willing and able" to pay a premium over the regular market price to attend are one way hotel operators are able to reap extra revenue that allows them to keep prices lower (or even stay in business) for the rest of the year.

I believe in this case, the informed opinion is revenue smoothing and the, well, ignorant one is price gouging.

Think of it as "robbing rich Peter" (the the person who values the special event a lot) to "pay poor Paul" (the person who gets to enjoy a lower price during non-special event times which is most of the year).
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