What came first: the egg or the California regulation on cage sizes?

Washington Post: California could be on the verge of a severe egg shortage, and it will affect the whole country

A new regulation is set to take effect in California at the beginning of next year that will force hen houses to allocate significantly more room to each egg-laying chicken. 

Birds, long afforded a minimum of only 67 square inches a piece, will now need roughly 116 square inches—a more than 70 percent increase—if eggs are to be sold in the state. That extra space won't come free of charge, a cost that will almost certainly fall on consumers.

Lets say I have a hen house operation with 10,000 hens.  Prior to the passage of this law, I needed a building to house those hens that was at least 670,000 square inches. In square feet that would be 4,653 sqft.

With the new requirement of 116 sq inches, I would need a building that is 8,066 sqft---73% larger.

I could invest in expanding the building or constructing another, but the number of productive chickens I have would stay the same. More cost (however, only a "fixed cost"), same number of eggs.  I would have to receive a higher price for my eggs and/or cut expenses elsewhere to stay where I was before in terms of making a living.

I could make modifications to my existing building to make the cages bigger but I would have to reduce the number of egg-laying chickens I have by 4,224.  Now instead of 10,000 hens I have 5,776 to lay eggs for me. I would have to receive a higher price and/or cut expenses elsewhere to stay where I was before in terms of making a living.

What is chicken farmer (or is it rancher?) to do?

This is a terrific article with LOTS of opportunities to practice supply and demand and analyze the cost structure of a firm in a competitive business.

"Sugary Drinks" and Dead Weight Loss. Lets go to the graphs.

Many communities around the US  (and some other countries) have passed, or want to pass, a law that places a tax on "Sugary Drinks".  It is believed these types of products contribute to health problems and lost productivity within the economy.

The main argument is the production and consumption of sugary drinks does not explicitly include the tertiary costs to society in terms of treating conditions and diseases associated with these type of products. If we did include this cost, then the price would be higher and the market quantity would be lower.  I am going to use $.50 as the additional cost that is NOT considered in the private market production and consumption of these drinks.  This is known as an "external cost" that is not "internalized" in bringing this good to market.

The intent of the tax is to internalize ALL the costs of producing and consuming sugary drinks--even ones that have NO direct bearing on production and consumption.

Lets go to the graphs and see how this plays out.

Here is the market for "sugary drinks" in equilibrium where we ONLY consider the Private Market Demand (Marginl Private Benefit (MPB)) and Supply (Marginal Private Cost (MPC)) of this class of drink.  Right now the price of sugary drinks is $1.00 and the market quantity is "Qe".

The main policy goal is to DECREASE the market quantity produced and consumed in the marketplace.  Supporters of this policy believe the "Socially Optimal" amount of sugary drinks is LESS than what the market currently produces and consumes (graph below).

At the "Socially Optimal" market quantity, the cost to bring this good to market is $.75 (just go up to the Supply Curve) at Point "B".

However, if we include the $.50 not previously accounted for in production and consumption we see at the Socially Optimal market quantity, the producer would need at least $1.25 in order to supply that amount---Point "C" (look at the next TWO graphs to get this idea).

What is true between Points "B" and "C" is going to be true (certerus paribus) along all other points on Supply Curve "S* (MPC)---Points "A" to "D".

IMPORTANT POINT:  If we connect those new points we will derive a NEW market Supply Curve that now INCLUDES the external cost not previously included of producing sugary drinks.

We label this Supply Curve "S1 (MSC)"---MSC stands for Marginal Social Cost.  This curve includes the private costs of production and consumption AND the SOCIAL COSTS as well. Read that again!

Think of the original Supply Curve as "what is" and the new Supply Curve as "what should be". The difference between the two is the social cost.

The market is now in equilibrium at Point "C" where quantity demanded=quantity supplied---at a higher price ($1.25) and a lower market quantity (Q socially optimal).

The graph below is the same one only a little cleaned up.

Lets now consider Points "A", "D" and "C" and the neat triangle it forms.

Point "A" represents the market price and quantity as it "is". Point "C" represents the market as it "should be" if we internalized the exteranal cost of sugary drinks.  Point "D" represents at the private market quantity what the actual cost of producing each unit of sugary drink is---$1.50 as opposed to $1.00.

Graph below.  This triangle between "A", "B" and "D" represents the area of DEADWEIGHT LOSS (DWL) due to the under-pricing and over-production of these drinks.

In other words, when we include the external costs associated with the production and consumption of this good we can easily see that all the quanitities beween "Qe" and "Q socially optimal" now cost more to supply than consumers are willing to pay.

Prove it to yourself.  Pick any point on the horizontal axis between those to areas.   Go up staight up. You will hit the demand curve at at a lower price than you will hit the supply curve---cost to produce is greater than the price willing to be paid.

INEFFICIENT use of resources!

These units would not be produced if all costs associated with the good were included in the price paid and received!

Remember: The market IS at Point "A".  It is suggested that it SHOULD BE at Point "C". The difference is Dead Weight Loss.

Sorry for the repetition at times. I attempted to make this a step by step as possiblefor the beginning learner.  It can be a difficult concept to explain and learn in AP Microeconomics.

But is is a necessary one.  Guaranteed to be on the AP Test!

Let me know if you have any questions or can point out where I might have gone wrong.  Constructive criticism is always welcome.

The Russian Ruble (Rouble) turns to rubble. Apple Products edition.

This snapshot of the Russian Ruble (you see it spelled "Rouble" sometimes) value relative to the US dollar is from today's Bloomberg website:

Right now, the institutional market price (different (lower) than the market price we would pay) is $1.00US will exchange for 65.7746 Russian Rubles.

One year ago (look in red circled area) $1.00US exchanged for 32.4834 Rubles.

This means the US dollar can exchange for approx 33 more Rubles than it did one year ago. The dollar "buys" more Rubles than it did before, hence we can say the US dollar has APPRECIATED relative to the Ruble by about 102%  (rounded).

Exchange rates are reciprocal to each other.  If $1.00US exchanges for 65.7746 Rubles then 1.00 Ruble will exchange for 1.5 US cents

One year ago, Russians could exchange a Ruble and get 3.1 US cents. The Ruble "buys" fewer cents than it did before, hence we can say the Ruble has DEPRCIATED relative to the Dollar by 51% (rounded).

This has major consequences for US businesses that do business in Russia and want to expatriate profits or investments back into US dollars.

Simple example.  A year ago, a  business that earned 1,000 Rubles in profits could exchange those Rubles and receive $30.78US (1,000 Rubles/32.4834 Rubles per Dollar).

Today 1,000 Rubles would exchange for $15.20US (1,000Rubles/65.7745 Rubles per dollar).

Exchange rates matter because they can change the relative value of goods and services across borders WITHOUT changing the properties of those goods and services.

While writing this post, I checked the BBC and coincidently they have this story:

Rouble turmoil leads to Apple halting online sales in Russia

The company stopped sales of its iPhones, iPads and other products in the country after a day in which the currency went into free-fall. 

The rouble has lost more than 20% this week, despite a dramatic decision to raise interest rates from 10.5% to 17%. 

By afternoon trade the rouble was flat with one dollar buying 68 roubles.Continue reading the main storyUS Dollar v Russian Rouble 

LAST UPDATED AT 17 DEC 2014, 09:20 ET*CHART SHOWS LOCAL TIME

$1 buys	change	%
64.8427	- -3.34	- -4.90

Its all time low, set on Wednesday, saw one dollar buying as many as 79 roubles. 

Apple last month increased its prices in Russia by 20% after the weakening rouble left products in the country cheaper than in the rest of Europe.

Timely! I hope this helps you understand exchange rates a little better.

Cranberry production is out of control....

The supply of Cranberrys is almost double the amount the global market commands.  Bet you did not know that.  I didn't.

Here is an article and a short PPT I put together using supply and demand analysis to illustrate what is going on and the role govenments could play in this scenario.

The US govt is not buying all the surplus in the presentation below, but collectively governments in Cranberry producing countries could do so.

Feds buying surplus cranberries

The federal government’s decision to spend $55 million on cranberries may dent a global glut, support prices and speed up payments to growers. 

The purchase, however, won’t address production continuing to outpace demand, a step the U.S. Department of Agriculture declined to take this year.

“We have a very serious problem,” Long Beach Peninsula cranberry grower Malcolm McPhail said. “You don’t want anyone to have a crop failure. But you’d like to see average crops to keep things in perspective.”

U.S. and Canadian cranberry farmers produced this year a crop expected to be nearly as big as last year’s record harvest of 12 million barrels.

Between this year’s cranberries and fruit still unsold from 2013, the global cranberry supply stands at 16 million barrels (1.6 billion pounds). Demand over the next year is expected to be about 8.2 million barrels, according to the U.S. Cranberry Marketing Committee.

Cranberries--what happens to the Surplus? from Gene Hayward

Losing your Cool over COOL. It is (insert any time of day)--Do you know where your food comes from?

Here is an excellent example of a "Non-Tariff Barrier"(overt, non-monetary tax or quota) a country can impose on a good (or class of goods) coming into a country to (1) increase the price of that good or (2) discourage the importation of it.

The "Country Of Origin Labeling ("COOL")" requirement, part of the 2008 Farm Bill, on various food items is one such barrier.   

People like to know where their food comes from in the supply chain.

This imposes a financial burden on certain importers of food items. In this case it is beef producers:

Country of origin label for meat cuts endangered

The U.S. is running out of options in its effort to tell consumers where fresh cuts of meat originated after a successful challenge to package labeling by Canada and Mexico. 

A 2008 farm law requires that packages of steaks, ribs and other cuts of meat identify where the animals were born, raised and slaughtered. A label might say the meat was "born in Canada, raised and slaughtered in the United States" or "born, raised and slaughtered in the United States." 

The World Trade Organization agreed more than once with Canada and Mexico that the labels give the U.S. livestock industry an advantage. In a ruling Oct. 20, the WTO said the labeling requirement forced meatpackers to segregate and keep detailed records on imported livestock, giving them an incentive to favor U.S. livestock. 

The trade organization ruled in 2011 that an earlier version of the labels was discriminatory. That ruling was upheld in 2012 after a U.S. appeal.

 Canada filed a compliant with the World Trade Organization (WTO) and they prevailed.

The US can either ignore it and face retaliation in the form of tariffs on US exports to Canada and Mexico or Congress can modifiy the requirement to meet standards.

Advocates for keeping  COOL as it is are a strong group and it is in the interest of the Public to know where their food supply comes from. Lobbying groups for the goods that will face tariffs will put up a fight as well.  Exports and jobs are at stake.

Who will prevail?

Nice map showing the devolution of farm dependency in the US.

This image is via Big Picture Agriculture from a report by the Kansas City Federal Reserve Bank.

It shows how the US economy has devolved from dependency on agriculture. The Blueish Green areas represent, at the county level, that dependency in 1950 and 2000 (that is the latest date).

Observation: In the earlier time period agricultural interests and affects spread to far more people in rural areas.  Lets say it was more democratic in nature. This served as a counter-weight to the shifting power bases to/in urban areas.

Fast-forward to today. The politics of agriculture affect fewer people (nominally) and corporate interests have replaced the democratic nature of rural politics.

Policies of the bygone era had to appeal to tens of thousands of small business owners (farmers) with varied interests.  Today they have to only appeal to a concentrated number of large corporate farms with homogeneous interests.

Image via Big Picture Agriculture from a report by the Kansas City Federal Reserve Bank

The Lottery--How much does your State payout in Prizes and gain in Revenue for the State Budget?

Over at  Five-Thirty-Eight Mona Chalabi has a blog entry on how much States receive in Lottery money (year 2012 is the latest data availble). She also shows, on a per capita basis, how much of the money goes to prizes, administrative costs, and into the State budgets as general revenue.

I went to the data source and created the simple table below to show, in percentage terms, how much each State pays out in prizes and how much goes into the State budget to be spent on...You take a guess.

How does your State do in terms of using the lottery as a revenue generating acitivity?

One observation: If the Lottery is played, in general, by low(er) income people (I think that is what the research shows) then in States where there are high pay-outs in prizes seem to be just re-distributing money within that subset. The Lottery is promoted as a way to raise money to advance some social policy---usually that is education which presumably benefits everyone rich or poor.

I have not played the Lottery in 20 years. I think I am richer, literally and figuratively, for it.

(Note: Numbers do not round up to 100%.  The balance percentage is from "Administrative Costs" to run the Lottery (Salaries, advertising, etc).

Nice Real Life Example of "The Rental Rate of Capital". An important Micro Econ concept.

One of the more difficult (and frustrating, I think) concepts in the Microeconomics Unit on Firm structure is figuring out what is an implicit (opportunity) cost when calculating economic profit.

One determinant of implicit opportunity cost is "the Rental Rate of Capital". In short, the rental rate of capital is the dollar amount I could receive for a physical input (i.e. tools, machinery, land) if I rented it to someone else to use instead of using it myself.

This is important to economists because it helps to determine if resources are being employed in the most efficient way possible. If a piece of capital could be rented out to someone else for more than what it could produce for you, then this would (could) be considered a mis-allocation of resources.

Assume I can use a barn on my property and it contributes $1,000 to my income.  What if instead I could rent it out for some other purpose for $1,200?  An economist would suggest that is an inefficient allocation of resources to the tune of a net $200.00.

I know, that can be VERY subjective, but let's go with it.

Here is an excerpt from a very short article on an effort to help farmers put a dollar value on some "dead capital" they possess that could be employed in an alternative use.

Survey could help determine fair prices for farm-building rentals (HT:Morning AG Clips)

Farmers, producers and landowners who have agricultural buildings on their property they are no longer using can turn the vacant space into extra farm income, according to experts with Ohio State University’s College of Food, Agricultural, and Environmental Sciences. 

Whether it is a farm building or livestock facility, farmers who want to put unused space into service to generate additional farm income first need to know how to go about creating a leasing arrangement and how to determine an appropriate rental price, said David Marrison, an Ohio State University Extension educator. OSU Extension is the outreach arm of the college. 

“Many farmers may want to rent out buildings on their properties, but sometimes it’s hard to put a number on that, so it’s good to know what the going rates are on buildings in the region,” Marrison said. “Farmers need to know how to utilize those old buildings, whether it be to rent them out to another farmer or producer for extra hay space or to milk dairy cows.” (emphasis mine)

Here is a link to the PDF that gives prices for a wide variety of physical capital that my be laying dormant down on the farm.

Putting a price of these things can help a farmer make more income but, more importantly for economists, see to it that there is a mechanism for a more optimal allocation of societal resources.

The price of oil relative to the cost of producing oil. Nice graphic to help with graphing!

This is a follow up to yesterdays posting on the Break-Even point for oil drillers in different geographic areas of the US.

The point of that post was to use a firms costs curves (AVC + AFC =ATC) to show how low the price would have to go in order for firms to exit the industry.

Today in Business Insider they had this bar graph that helps clarify the point.  I inserted a horizontal RED bar to show the current price drillers are receiving for each barrel of oil produced.

Together they give you an indication of how drillers, at the current price, are faring in terms of profitability.

I think teachers and students alike can use info to plot on a graph of the firm that is a "Price Taker" in the marketplace.  Small drillers are relatively numerous and they must take the given market price (for the most part) for each barrel of oil the bring up.

Ebola Update: Last week was not a good one in this fight.

The data-base for Ebola reporting (found HERE) is updated to Oct 27th.  You can see in the graph below that the week of October 21st to 27th (Circled in black) was not a good one in the fight against this virus.  HERE is the latest World Health Organization(Oct 31) report on the status of Ebola.

This is a record of "Reported,Suspected and Confirmed Cases".

A noticable jump in all three of the afffected courntries, but Liberia and Sierra Leon the most frightening.

PPT on Firm Cost Curves as it relates to the price of oil.

I love it when the media post(s) helpful resources.

The graphic below comes from a Wall Street Journal article:   Energy Boom Can Withstand Steeper Oil-Price Drop

Source: Wall Street Journal

It gives a range of "Break-Even" price points for barrels of oil from different shale formations throughout the US and compares it to the current price of a barrel of oil, $82.20 (Wednesday, Oct 29).

In AP Microeconomics, "Break-Even" is defined when the price the firm receives for a good equals the Average Total Cost (ATC) or producing that good.  ATC is the sum of the firms "Explicit" money costs (dollars paid out in expenses) and its "Implicit" Opportunity Costs.

The article has a couple of relevant quotes that help in the analysis I put together in the form of a PPT to helps students understand this concept.

"U.S. crude closed Wednesday at $82.20 a barrel, and far less in some parts of the country where few pipelines are available to move it to refineries. Lower oil prices mean drillers will have less cash to cover their borrowings, especially if crude prices tumble more."

"Borrowings would be considered "Fixed Costs" as they have to be paid back regardless of production.

 "To be sure, even small price drops could begin to affect production around the margins. “The clear losers in a low-price environment are going to be smaller companies that are overleveraged,” said Daniel Katzenberg, a Baird analyst. The downturn will be particularly toughon companies drilling in areas without much history of oil production. Costs tend to be high in these areas, which include the Tuscaloosa Marine Shale in Louisiana and Mississippi and some relatively unexplored shale formations in Oklahoma.

The current price environment is a bit like a stress test to determine which companies have their financial and operating houses in order. Those that spent too much to lease property to drill, or have high operating costs, are most likely to suffer."

 Keep these things in mind as you view the PPT.  Visual the price of oil you see in the graphic moving to the left (decreasing) and encroaching on the Break-Even points.  Hopefully it will help!  Let me know of anything I might have missed.  Thanks!

Oil and costs from Gene Hayward

Prices of things the day I was born.

Looking though the archives of the New York Times today.  Thought I would see what happened on my birthday (April 6, 1960).

Saw this advertisement for a reconditioned calculator and typewriter.

In today's dollars $199.50 for the calculator would be $1,604.30 and the typewriter would be $956.95.

I think I will take today's technology, thank you.

This was a fun excercise, by the way.  The site has all the issues prior to 1980---no charge!

Do Danish Fast Food Workers REALLY earn $20 per hour? It depends on how you define $20

A popular article making the rounds in the Econ and Politics blogoshere is this one:

Living Wages, Rarity for U.S. Fast-Food Workers, Served Up in Denmark

COPENHAGEN — On a recent afternoon, Hampus Elofsson ended his 40-hour workweek at a Burger King and prepared for a movie and beer with friends. He had paid his rent and all his bills, stashed away some savings, yet still had money for nights out. is because he earns the equivalent of $20 an hour — the base wage for fast-food workers throughout Denmark and two and a half times what many fast-food workers earn in the United States. can make a decent living here working in fast food,” said Mr. Elofsson, 24. “You don’t have to struggle to get by.”With an eye to workers like Mr. Elofsson, some American labor activists and liberal scholars are posing a provocative question: If Danish chains can pay $20 an hour, why can’t those in the United States pay the $15 an hour that many fast-food workers have been clamoring for?

The quoted dollar amount of $20 is in current market exchange rates between the Danish Kroner and the US dollar.  However, people don't buy exchange rates with their earnings they buy "stuff" in their local economies.

Saying a Danish worker earns the equivalent of $20 US dollars per hour says nothing about the purchasing power of their earnings.

At this link you will find Comparable Price Levels among developed countries as measured by the OECD for August 2014.  If you locate Denmark and the US you will find an index of "149".  This means that comparable goods and services are 49% more expensive in Denmark than they are in the US.

I found some examples of minimum wages in the Restaurant and Hospitality sector that were negotiated between the unions and industry in Demark.

See graphic below.  Along with those minimum wages in Kroners I converted them to US dollars at the current exchange rate (middle column) AND deflated them by 49% to equalize purchasing power between Danish workers and US workers in US dollars (Yellow highlights).

Example.  An unskilled chef in Denmark earn an minimum of  114.47 Kroner per hour. When exchanged at the current exchange rate that comes to $19.23. Sounds like a lot, but remember we don't buy exchange rates we buy "stuff".

When we control for the price level difference of 49% that Danish workers wage has the same purchasing power as an unskilled chef in the US earning $12.91.

I am not judging this.  Just providing some perspective on the wage differential.

That is all...

Supply and Demand: Ebola Protective Gear edition.

The tragedy of Ebola has created issues in the supply chain for the protective gear we have come to know so well from watching the news.

This article from Bloomberg has two components to it that provide an opportunity to look at this situation from a basic supply and demand perspective. The portions in bold and underlined are my emphasis as this is what I would like to analyze in the graphs below:

Ebola Response Suits in Short Supply Amid Demand

The International Association of Fire Fighters said some local fire units are being forced to wait until next year to get the personal-protective gear that shields workers from being exposed to bodily fluids, the only way to contract Ebola. Dupont Co. and Medline Industries Inc., makers of the products, say demand has surged as health departments and hospitals respond to the threat. 

“The administration should put pressure on manufacturers to increase production to meet the growing demand,” Harold Schaitberger, president of the 300,000-member union, said in a letter to Obama. The group met in recent days with officials about the response to the deadly virus, and said supplemental funding from the federal government is needed to help local governments pay for the gear and training.

 This sudden increase in demand has ramifications for both the buyers and producers of this highly specialized protective gear.

In these graphs I created I want to illustrate both of the highlighted points---how the increase in demand affects producers and ultimately the price for the gear, and how the request for government funding might impact the market as well.

Ebola Update: Graphs of Cases and Deaths. Not a good trend.

Here is a graph of the Number of Cases of Ebola that have been identified in each of the 4 countries where there has been a significant outbreak.  You can see Nigeria has it under-control, but the other 3 are still on an upward trend. The data was last updated on Oct 14-17.

Here is the Data Set.  It is being compiled from data/reports provided by the affected countries.

Using the same data source, here is a graph of the Number of Deaths thus far in the most affected countries.

The trend is still upward.  Until we see a plateauing this will only get worse.

Ebola: Latest WHO report suggests deterioration in affected areas in NW Africa

For any of my readers interested in the latest regarding the Ebloa situation in Northwest Africa, here is an excellent resource for you or your students.  It is from the World Health Organization (WHO) and is dated October 15, so it is very recent.

All you need to do is read the first page of the report (and only the 3rd paragraph) to get the idea that at this point the virus is not close to being contained in either Liberia, Sierra Leon or Guinea Bissau.

The international community is going to be playing "Whack-a-Mole" with this for the foreseeable future. Not a good situation.

Also, if you are a data hound, here is a link to a source that is doing yeomans work by combing through unorganized data provided by the respective host countries and putting it on Github.

NYT column on water in CA. Nice graphic that I think I make more clear.

Eduardo Porter at the New York Times has an excellent column on water policy in California. I highly recommend it.  It discusses many economic concepts, with prices and opportunity costs most prominent.

He includes this first graph that shows water consumption at different prices for several different developed countries:

Notice the "Quantity" is on the vertical axis and "Price" is on the horizontal axis.  In economics (by tradition) when we plot demand (or supply) we do the reverse---Price on the vertical, Quantity on the Horizontal.

To put it terms that an introductory econ student can better visualize, I took the plotted points on the graph, reversed the axis, and replotted the points to derive a traditional demand curve as we would recognize from a textbook.  That is below.

The Demand Curve DOES slope downward!

PLEASE NOTE:  I did this by hand "eyeballing" the points so it is not absolutely correct but I hope relatively correct for the most part.  Also, the RED Demand curve I drew is not necessarily mathematically correct either---eyeballed as well.  I accept there is a margin of error! :)

Three countries are outliers compared to the rest: the US, Australia and Canada.

Side by side, both of these help me visualize the issue better.  I hope it does for you as well.

Netflix and Elasticity of Demand. Nice article for illustration.

Rarely do I come across an article or commentary (like the one below) that is a great help in giving life to relatively difficult introductory economics concepts.  This from Slate regarding Netflix is a gift for teaching Elasticity of Demand:

Netflix Says a $1 Price Increase Crushed Its Subscriber Growth

Netflix tacked on about 3 million new users across the globe over the last three months, undershooting its forecast of 3.7 million. But perhaps more worrisome, it’s growth in the U.S. fell year over year, reaching just 1 million net new signups, down from 1.3 million in the third quarter of 2013. The company is blaming its $1 price hike in May, which raised the cost of a subscription to $8.99 per month.(emphasis mine) “As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago," management said in its letter to shareholders. "Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US.”  

What is happening here is that subscriber growth is increasing (1 million more) BUT it is increasing at a decreasing rate (1.3 million last year). This works out to a year-over-year decrease in quantity demanded, relative to the prior year, of 300,000 subscribers.  In percentage terms that is a decrease of 23% (1.3M-300,000 divided by 1.3 M X100).

Over that period of time the price increased from  $7.99 to $8.99, an increase of 12.5%.

Using the simple Elasticity of Demand formula:

%Change in Quantity Demanded divided by %Change in Price

Doing the math, we have 23%/12.5% = 1.84.

An elasticity greater than 1.00 suggests the demand for a good or service is relatively ELASTIC. The higher the number the MORE sensitive consumers are to changes in the price of the good/service.

"Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US."

Elasticity measures changes along an EXISTING Demand curve.  In order to counter this movement up and along its Demand curve, Netflix will have to figure out a way to shift that Demand curve to the RIGHT (an increase in Demand):

"Slightly less growth" is a bit of an understatement. The slowdown suggests that streaming customers might be more cost-conscious than it previously seemed. When prices first went up in the spring, subscription growth didn't seem to take a hit. But now, the company thinks that may have been due to  "the large positive reception to Season Two of Orange is the New Black." 

But maybe that's the silver lining here: If it just manages to come up with a few more decent programs, investors might buck up." (emphasis mine)

This suggests if Netflix produced more programs that people as a whole wanted to view, then the quantity demanded will increase at the new price.  Demand curve shifts right and revenues, ceterus paribus, will recover.

At least Netflix hopes so. Creative Destruction with new streaming services are just around the corner.

The New UK Minimum Wage in current and PPP exchange rates compared to US Minimum Wage.

The UK has different minimum wages for different age groups and for those who are classified as "apprentices".

Th numbers below are from the UK.gov website.

The wages are in current, nominal British Pounds Sterling.  I highlighted the 2014 rate that took affect this month (October).

For comparison to the US minimum wage of $7.25 here are the conversions in current market exchange rates and in the Purchasing Power Parity (PPP) exchange rate.  Go HERE for an excellent explanation of PPP, if you need it.

Economists, in general, prefer the PPP exchange rate because it more accurately measures the actual purchasing power of currencies and is less volitile than the market exchange rates that can flucuate for transient reasons.

Current Market Exchange Rates (1 British Pound Sterling exchanges for $1.61 US dollars).

   21 and over: 6.50 Pounds X $1.61 = $10.47
   18-20 : 5.13 Pounds X $1.61 = $8.26
   Under 18: 3.79 Pounds X $1.61 = $6.10
   Apprentice: 2.73 Pouns X $1.61 = $4.40

Purchasing Power Parity (PPP) (1 British Pound Sterling exchanges for $1.36--source OECD)

   21 and over: 6.50 Pounds X $1.36 = $8.84
   18-20 : 5.13 Pounds X $1.36 = $6.98
   Under 18: 3.79 Pounds X $1.36 = $5.15
   Apprentice: 2.73 Pounds X $1.36 = $3.71

In either measure, the minimum wage for those over 21 in the UK is higher than the US minimum wage.

However, below that level using PPP the effective minimum wage falls below that of the US. US teens are "better off" in terms of the wage (I am NOT factoring in other benefits or costs  that exist--just comparing the absolute wage rate).

When reading media accounts of the differences in Minimum Wages around the world it is important to know if they are reporting in actual exchange rates or in PPP.

As you can see, it makes a BIG difference.

NOTE: Here is a link to an entry I did like this for AUSTRALIA.

China vs the US in GDP measurement. I try to explain it using actual vs PPP exchange rates.

China reported its Gross Domestic Product to be 56.88 trillion Yuan in 2013. I am going to assume this is "Nominal GDP", not adjusted for inflation, but I do not know that for certain.  I got this from a Chinese newspaper Zinhuanet HERE.  On January 1st of 2014 the official exchange rate was 1 Renminbi (Yuan and Renminbi are used interchangeably, sort of) exchanged for $.16529 US cents.

So, putting the GDP in Yuan in dollar terms at the market exchange rate we would take 56.88 Trillion Yuan multiplied by $.16529 and that would equal $9.4 Trillion US dollars.

At the end of 2013 the US Real GDP was $16.768 Trillion dollars (Nominal dollars)

Either way you figure it US GDP is about $7 Trillion more than China's using current (Jan 1, 2014) market exchange rates.

What about many/most economists preferred measure of exchange rates: the Purchasing Power Parity (PPP)?

According to theWorld Bank, the PPP exchange rate (2011 is the latest calculation) is 1 Renminbi exchanges for $.28 US cents.

If we take 56.88 Trillion Yuan and multiply by $.28 US cents, the PPPexchange rate, we get $15.926 Trillion US dollars, about $800 million shy of the US GDP at the end of 2013.

The big picture here suggests the Yuan is UNDERVALUED relative to the US dollar.  Instead of the actual market exchange rate where $1.00 US dollar "buys" 6.04 Yuan (or 1 Yuan buys $.16529 US cents) it should buy only 3.57 Yuan ( or 1 Yuan buys $.28 US Cents) based on PPP.

In other words, the dollar should be weaker (depreciate) and the Yuan should be stronger (Appreciate).

But it is not, hence the difference in nominal GDP's based on actual exchange rates as compared to PPP.

I hope that makes some sense. Quite the difficult concept to walk through!

Depreciation and Small businesses in Japan. My example.

Here is a nice article on how swings in currency exchange rates are having an adverse affect on small businesses in Japan. Here is an excerpt and below that I do a simple example to show how this works in "real life".  Exchange Rates MATTER!

Data Show More Smaller Companies Succumbing to Weak Yen

"The failed businesses, many of them small, were struck by the higher costs of imported materials such as fuel, minerals and food as the exchange rate shifted from less than ¥80 per dollar two years ago to as high as ¥110 in recent days.(*emphasis mine).

Hit hardest was the transportation industry, including trucking companies, which saw 81 companies go bankrupt. The number of insolvencies totaled 44 in manufacturing, 41 in wholesale and 19 in services, the research company said."

Example:

I am a Japanese small business-person.  I produce a "widget" that sells for $100 Yen in Tokyo.

Assume half the cost of producing and selling one widget comes from inputs I must import from the US--50 Yen. Prior to the weakening of the Yen against the dollar, one US dollar exchanged for 80 Yen or, inversely, one Yen exchanged for 1.3 US cents.

So, for me to purchase my inputs from the US I took 50 Yen and sold them for 1.3 cents each for a total of 6.5 US cents. Remember, this is half the cost for me to produce and sell the widget. This means the price for my widget, in US currency, is 13 US cents.

Now, the exchange rate moves to one US dollar exchanges for 110 Yen or, inversely, one Yen exchanges for .9 US cents (9/10ths of a cent/penny).  The Yen does not "buy" as much US currency as it did before.  So I am going to have to give up MORE Yen in order to pay for the 6.5 US cents worth of inputs I need.

How many Yen do I need at the exchange rate of one Yen buys 9/10th of a cent to get 6.5 US cents?

YEN ("X") Times .09 US cents = 6.5 US Cents.  Solve for YEN "X" and you get 72.22 Yen.

Through no fault of my own, events beyond my control, my cost of production using US inputs has increased from 50 Yen to 72.22 Yen, a 44% increase.

Assuming I have little pricing power domestically because of competition and cannot raise the price, it is easy to see how small companies in Japan are under pressure. If they cannot cut costs elsewhere to off-set the currency swing, then they risk going out of business.

I hope this simple example helps you understand better how changes in exchanges rates can affect big AND small businesses.

Lower gas prices and higher consumer welfare for the win.

I read the following passage at Carpe Diem (emphasis mine):

According to the Department of Energy, Americans buy 365 million gallons of gasoline every day, so every one cent drop in prices at the pump saves consumers $3.65 million per day, and $1.33 billion dollars over a year. Therefore, the 42 cent drop in prices since April will save US consumers almost $56 billion over the next year compared to what they would have paid if gas remained at $3.70 per gallon.

Think of an increase or decrease in the price of a good (or service) as a transfer of purchasing power from producer to consumer and vice versa.

When the price of something that is effectively a fixed "need" in the short term (gasoline, some food items, a utility bill, etc) changes is has a large impact on our individual welfare and consumption possibilities for other goods/servics that are more "luxuries" (by way of a very lenient definition) to us.

Those saved dollars from lower gas prices might not be explicit to us but they do appear elsewhere in the bundle of goods/services we consume on a regular basis.

I would think a good portion of that $56 billion shows up in retail spending such as food away from home, entertainment, and whatever you might buy at the Mall/Walmart after you fill up the tank.

In terms of GDP it is a wash.  Either the fuel companies get the money or you do and in turn other businesses get it when you spend it.

However, in terms of our standard of living, individually we are better off because we get to purchase other stuff with the extra money from lower gasoline prices.

This "surplus" welfare for consumers is not captured in the GDP accounting.

However, it is captured in my heart.  I LOVE MY SURPLUS!

NFL prices in 1989 and today. Nice lesson on Inflation.

I found this on Twitter (I do not have the original link).

Shows how much a Season Ticket Package for all the NFL teams cost in 1989 (or it could be 1990, it does not show) in the far right column.

I am assuming the numbers for each year are the number of season ticket packages that were sold then the percent change from 1988 to 1989.

Divide each package by 8 games and you will get the single game price.

Below is a price list for 2013. The yellow highlighted section is for average individual, single game tickets.

Compare the single game price average in 1989 (divide the season package price by 8) with the prices below.

General inflation has increase 92% since 1989 (put $1.00 in the BLS calculator for 1989)

The 1988 (season) Super Bowl Champion was the SF 49ers.

A single game ticket now costs about $84 on average ($275 for a premium ticket).  In 1989 you could get an 8 game season ticket for $250.00, for an average game price of $31.25.  Depending on how much of a break one gets today on the season ticket cost for that seat it may very well work out that a ticket to a 49ers game has kept up with inflation (more likely it has fell behind, though).  We would have to compare a comparable seat.

Have fun with your favorite team and see how much prices have increased relative to inflation.

Source: HERE

Sometimes Appreciation is not appreciated at all: The currency edtion

Companies that do business internationally care about movements in currency exchange rates.  They can affect the bottom line in a way the corporation has little control.

Latest Threat to Corporate Earnings: The Almighty Dollar

"While U.S. executives must be pleased with encouraging news about the economy—including Friday’s strong jobs report—it may prove a mixed blessing for their bottom lines. That is because American corporations, as represented by the S&P 500, aren’t that American. Over 40% of sales come from outside the country. 

The problem isn’t only the absence of similar momentum abroad, but that the U.S. increasingly looks like it will soon be on the road to higher interest rates. 

That makes the dollar relatively attractive. In just the past three months, the greenback has gained 8.4% against the euro and 7.5% against the yen, big moves in the foreign-exchange market." (Emphasis mine)

 A simple example to illustrate this.

Assume the US dollar and the Euro are trading at parity:  $1.00 exchanges for 1.00 Euro, 1.00 Euro exchanges for $1.00 (they are not, but go with it).

So, profits of 1,000,000 Euros will exchange back into $1,000,000US dollars.

The Dollar "gains" or appreciates 8.4% as the excerpt above suggests.  This means that $1.00US will exchange for 1.084 Euros and 1.00 Euro will exchange for $.923 US cents ($1.00/1.084 Euros--a simple reciprocal).

So, our 1,000,000 in profits in Euros will exchange into $923,000US dollars (1M Euros X $.923)---a loss through the exchange rate change of $77,000 US dollars.

However, there is a flip side for a European firm making profits in the US.

If they take profits of $1,000,000 US dollars and exchange it back into Euros they will receive 1,084,000 Euros---a gain of 84,000 Euros as a result of the currency change.

Exchange rate swings can be a blessing or a curse for a corporation expatriating profits. It just depends on which side of the fence you are standing on as to how you will be affected.

The War on Salmon! Smoke dope, eat almonds, kill fish.

Two articles I read this morning have the same thing in common---the plight of salmon in California due to a severe water shortage.  Nice examples of scarcity of a resource (water) and how opportunity costs arise in allocating that resource (for salmon? almonds? marijuana?).

Each article cites a different culprit for the suffering salmon (emphasis mine):

Cannabis farming in California using so much water it could wipe out salmon population, biologists warn

"Water use and other actions by the marijuana industry in the Emerald Triangle of Northern California and Southern Oregon are threatening salmon already in danger of extinction, US biologists have said."

California Drought Has Wild Salmon Competing With Almonds For Water

"The ongoing California drought has pitted wild salmon against farmers in a fight for water. While growers of almonds, one of the state's biggest and most lucrative crops, enjoy booming production and skyrocketing sales to China, the fish, it seems, might be left high and dry this summer—and maybe even dead."

Use marijuana, quench the munchies with almonds, kill salmon.

Save the salmon, but don't smoke dope and/or eat almonds.

Change the order, but the lesson remains the same:  Choices, choices...

How are Complementary Goods like Unicorns?

Sometimes is it hard to come up with good examples of Complements when studying the basics of supply and demand.  They can be elusive, like unicorns.

Complementary Goods are generally taught as a demand-side function.  It describes the relationship between two goods that are separate and distinct but often (or always) used together. There is an INVERSE relationship between the change the price of one good and the demand for the other.

Here is an example (source HERE)

Low meat supply, low spice demand

You may remember hearing about a shortage of certain meat products at fast-food restaurants in China over the summer, due to the news that a major supplier was handling meat improperly and selling expired meat to restaurants. 

The impact reached across oceans, certainly to the fast-food chains like McDonald’s, which changed suppliers and couldn’t keep up with the demand because of the news. 

But less meat to eat also means less meat to season, so McCormick & Co. Inc. also lost out. The Baltimore-based spice maker acknowledged the effects in its quarterly report Thursday. 

“Our quick service restaurant customers in the Asia-Pacific region are currently being impacted by well-publicized supply issues,” said President and CEO Alan Wilson. “This is affecting our sales results in the region and has us cautious in our near term outlook.” 

That region showed a 1 percent decrease in industrial sales as a result.

With a decrease in supply of beef the price of beef increases.  When the price deceases the quantity demanded for beef decreases (movement ALONG the Demand Curve).

With less beef being produced and consumed there is less need for complementary goods, like spices. The Demand for spices will decrease as a result.

Notice the inverse relationship:  Price of Beef Increases, the Demand for Spices  Decreases.  

That is characteristic of Complementary goods (and services).

Having fun with 1938 prices.

Nice graphic showing a cross-section of prices in 1938 (Link HERE).  How have things changed?

Source: Classic Pics on Twitter

Here are the same prices with the inflation adjusted figure in parenthesis.  In other words, if these individual 1938 prices kept pace with overall inflation then the amount in parenthesis would be what those items would cost in today's dollars.

          New House:  $3,900.00 ($65,788.85)

          Average Income: $1,731.00/year ($29,200.13)

          New Car: $860 ($14,507.29)

          Average Rent: $27.00/month ($455.46)

          Tuition to Harvard University: $420.00/year ($7,084.95)

          Movie Ticket: $.25 ($4.22)

          Gasoline: $.10/gallon ($1.69)

          US Postage Stamp: $.10 ($1.69)

          Granulated Sugar: $.59 for 10 pounds ($9.95)

          Vitamin D Milk: $.50/gallon ($8.43)

          Ground Coffee: $.39/pound ($6.58)

          Bacon: $.32/pound ($5.40)

          Eggs: $.18/dozen ($3.04)

One way to look at this:  If the number in parenthesis is GREATER than what you would pay for that good today, then over time the price of that good has risen LESS than inflation.  You can look at this as a good thing.

Couple of observations:

A stamp to mail a letter today is $.49.  If it had increased with general rate of inflation since 1938 it would be $1.69 today.

I am pretty sure just ONE class at Harvard costs $7,000 today so the cost of Harvard has increase MUCH more than the general rate of inflation.

A movie ticket (general admission, not discounted) is more than $4.22 today.

You might say the price of a new car has stayed the same.  You could buy a car today for $14,507 that one could argue is BETTER than a car built in 1938 in terms of features.

Probably gets beat on style, though! :)

It is interesting to me to look at history through the prism of prices. What do you see?