Bacon and Supply/Demand Graphs. What a great breakfast combination.

A nice article to practice graphing Supply and Demand.  

America’s Lust for Bacon Is Pushing Pork Belly Prices to Records

(Article and Photo from the Wall Street Journal)

Excerpt for graphing:

""Some analysts say bacon, meanwhile, is becoming a yearlong staple that consumers are eager to procure. That voracious demand has left wholesalers in a squeeze. Retailers “have turned hand-to-mouth, buying only what they need, waiting for production to increase and prices to decline,” said Dennis Smith, a commodities broker at Archer Financial Services in Chicago. 

Pig farmers are struggling to keep up with demand. The national hog herd rose to a seasonal record of 71.7 million head in early June, according to the U.S. Department of Agriculture, up 3% from a year earlier. 

But it hasn’t been enough to satiate bacon demand. Stocks of pork bellies in commercial freezers fell to 31.6 million pounds in May, down 59% from a year earlier and the lowest figure for the month since the USDA began keeping track in the 1950s.""

Something's fishy in Alaska in the canned salmon market. Let's go to the graphs.

Another day, another easy pickin' economics lesson pulled from the headlines.

"Alaska Governor asks the Federal Government to buy Surplus Canned Salmon"

Gov. Sean Parnell has asked a federal agency to buy about 1 million cases of canned pink salmon to ease a glut that has weighed down prices for Alaska fishermen this year. 

Parnell made the request in a letter to U.S. Agriculture Secretary Tom Vilsack this week. He wants the USDA to purchase $37 million worth of canned pink salmon under a federal law that allows for buying surplus food from farmers and donating it to food banks or other programs. 

USDA purchased $20 million worth of salmon earlier this year, which Parnell called an important first step in reducing inventories to help slow a price decline that he said threatened the 2014 fishing season. 

He said remaining unsold inventories are driving prices to levels that threaten harvest activity this year and next, with the price of canned pink salmon 23 percent lower than a year ago and the advance price paid to fishermen down about 33 percent.

By purchasing the surplus canned salmon from Alaskan fish processors, the Governor is essentially asking for a de facto PRICE FLOOR be imposed on the market for Canned Salmon.

The thinking is this: Buy the surplus so the processors (1) don't have to unload it at lower prices (this is not mentioned in the article) and (2) the price the processors pay fisherman for their catch for the upcoming season will not decrease.  Easy, right?

Let's go to the graphs to see how this plays out.  Hope it helps you in understanding your lesson on this topic.

"I, Chocolate". Why is chocolate so cheap when SO MANY people have to get paid to get it to us?

I cannot answer that question. No one can (we can only suppose).  It is part of the miracle that is markets operating in as free an environment as possible.

The World Cocoa Foundation has this terrific report on the state of the Cocoa/Chocolate market.

One section of the report serves as a reminder of just how difficult and complex it is to bring a seemingly simple product to market for the masses to enjoy at a relatively low price.  If you start to list out ALL the steps and cooperation that is necessary to complete production it is mind boggling.

Read all the steps involved...and these are just an overview and only scratch the surface.  Many other steps and processes are not accounted for.

(Go here for an explanation of "I, Pencil" and "I, Smartphone")

Meanwhile after you read this think about it the next time you consume a good (durable or non-durable) and make a mental list of the processes involved in getting it to you.  You will run out of mental capacity before you run out of supply chain steps.  :)

Cocoa Value Chain

Growing: Cocoa trees grow on small farms in tropical environments,
within 15-20 degrees of latitude from the equator. Cocoa is a delicate
and sensitive crop, and farmers must protect trees from wind, sun,
pests, and disease. With proper care, cocoa trees begin to yield pods
at peak production levels by the fifth year, and they can continue at
this level for ten years.

Harvesting: Ripe pods may be found throughout the continuous
growing season; however, most countries have two peak production
harvests per year. Changes in weather patterns can dramatically affect
harvest times and yields, causing fluctuations from year to year.
Farmers remove pods from the trees using long-handled steel tools.
Pods are collected and split open with a sturdy stick or machete, and
the beans inside are removed. A farmer can expect 20 to 50 beans per
pod, depending on the variety of cocoa. Approximately 400 beans are
required to make one pound of chocolate.

Fermenting and Drying: Farmers pack the fresh beans into boxes or
heap them into piles covered with mats or banana leaves. The layer of
pulp that naturally surrounds the beans heats up and ferments the
beans. Fermentation lasts three to seven days, and it is the critical
step that produces the familiar chocolate flavor. The beans then dry
for several days in the sun or under solar dryers.

Marketing: After the dried beans are packed into sacks, the farmer
sells them to a buying station or local agent, who transports the bags
to an exporting company. The exporter inspects the cocoa and
transports it to a warehouse near a port.

Packing and Transporting: The exporter ships the beans to the
processing location, where the cocoa is moved to a pier warehouse
until needed. Details of export process vary by country. The buyer
conducts a quality check to accept delivery and the cocoa is stored
until requested by the processor or manufacturer. Trucks or trains
carry the cocoa in large tote bags or loose in the trailer to the
manufacturer’s facility, on a “just-in-time” basis.

Roasting and Grinding: Before processing, the beans are thoroughly
inspected and cleaned. The inside of the cocoa bean is called the nib.
Depending on the manufacturer’s preferences, beans can be roasted
whole, or the nib can be roasted alone. Once the beans have been
shelled and roasted (or roasted and shelled), the nib is ground into a
paste. The heat generated by this process causes the cocoa butter in
the nib to melt, creating “cocoa liquor.”
Cocoa liquor does not contain alcohol and is solid at room
temperature. It can be further refined, sold as unsweetened baking
chocolate, or used in chocolate manufacturing.

Pressing: The cocoa liquor is fed into hydraulic presses that divide
liquor into cocoa butter and cocoa cakes. The cocoa cake can be sold
into the generic cocoa cake market, or ground into a fine powder.
The processor may pre-treat the cocoa liquor with an alkali solution
(alkalizing), which reduces acidity. This treatment is known as
“dutching” and produces Dutch processed cocoa when pressed.
Alkalized liquor becomes darker, develops a more robust chocolate
flavor, and stays in suspension longer in liquids such as milk.

Chocolate Making: To make chocolate, cocoa liquor is mixed with
cocoa butter, sugar, and sometimes milk. The mixture is poured into
conches—large agitators that stir and smooth the mixture under heat.
Generally, the longer chocolate is conched, the smoother it will be.
Conching can last from a few hours to three full days. After conching,
the liquid chocolate may be shipped in tanks or tempered and poured
into block molds for sale to confectioners, dairies, or bakers.

"Food Inflation" is on its way in 2014. But the reason for it is not what you may think it is.

"Food inflation" is likely on its way to the US, and the world for that matter.

When we here the word "inflation" the first thought is usually "too much money chasing too few goods (services)" and look to Monetary policy as the culprit. Maybe...but maybe not.  Sometimes the fundamentals of Supply and Demand in various markets are at play.

Here are data from the USDA ERS site that show the change in prices of the basic food groups for the past couple of years and projections for the remainder of this year.  Does not look encouraging at the checkout line.

If you go to the site they give a nice overview of the why prices in select categories are increasing.

The short story version is there seems to be a perfect storm of variables coming together to conspire to raise prices---weather and disease (plant and animal) working to limit or decrease supply on the Supply-Side. Demand from recovering developed economies (US, Europe) and emerging developing countries (China, India, etc) is putting upward pressure on the constrained food supply chain.

Source: USDA ERS

Here is one interesting point made in the USDA ERS analysis I think is important to understand as well.

Additionally, it appears as if supermarkets are maintaining minimal price inflation on packaged food products, possibly in an effort to keep prices competitive in light of rising cost pressures for most perishable items. Therefore, ERS has revised the forecast for sugar and sweets downward to 1 to 2 percent and for nonalcoholic beverages downward to 1.5 to 2.5 percent for 2014.

Competition serves to minimize, or at least soften, the REAL changes in prices of many goods at the actual point of purchase.

Grocery stores have to consider YOUR whole grocery basket of stuff you purchase when pricing their products AND what other stores are doing at the same time.  They may play a little "rob Peter to pay Paul" with the inventory.  In order to minimize the price increases of the perishable goods you see above, they will likely decrease prices of other non-perishable goods where they may have more pricing discretion.

So, market fundamentals are increasing the prices of many diverse individual food items at the same time, and competition between stores is working to minimize (albeit not stop) those price increases.

That is what I call a reasonable explanation.  Maybe not one that makes us happy, but more reasonable than the one I started out with.

It only took a little more work.   :)

Since 1994 we receive 150 more TV channels and but only watch an additional 7. Progress?

The number of TV channels the average person can receive in their homes has increased 375% (189.1-40.4= 148.7/40.4 X 100)

The number the average person actually watches has increased by 72% (17.5-10.2 = 7.3/10.2 X 100).

To put in in simpler terms, we get about 150 more channels but only watch an additional 7, since 1994.

Where's the Beef? No, seriously, where is the beef!!

Here is a look at the past, present and future of the Supply Side of the meat industry. This data is from the USDA ERS for the years 2013, 2014 and 2015. Part of 2014 and all of 2015 are predictions based on known numbers in the herds, flocks, whatever. Numbers are in "millions".

Here are the percentage changes, from 2012 to 2015 in the potential "Quantity Supplied" (in millions of pounds of meat) of meat for consumption:

Beef:  -6.2%
Pork: +4.5%
Lamb/Mutton: -5.8%
Broilers (chickens): +6%
Turkeys: -.7%

Beef production has experienced a steady decline since 2012.  Pork is still below 2012 production levels but expected to rebound in 2015.  Chicken is a bright spot in that it has increased at a fairly steady rate.

While the supplies of chicken and pork will increase, prices will not likely decrease as you might expect.  As the price of beef is most assuredly going to be higher, the demand for chicken and pork as viable substitutes will increase and put upward pressure on the price of  both of those meats.

TANSTAAFL---Now I am hungry for lunch.  Will it be Chicken or Pork Fried Rice?

My response to a Social Media posting regarding a restaurant owner who pays his workers $21.00 per hour.

There is a posting going around on Social Media (I have seen it on Facebook) about a restaurant owner and how much he pays his staff/waitstaff. It is a place called "Zingerman's Roadhouse" located in Ann Arbor, Michigan.

He is an advocate of increasing the minimum wage. His workers make about $21.00 in wages and tips and they get other benefits as well.  He calls this a "thrivable-wage" as opposed to a "livable wage".  I assume he believes all businesses in the food service industry should do the same.

I am not opposed to increasing the minimum wage.  What I do oppose are demagogues who think their opinion of how someone else runs should run their business is morally superior.  Especially when they don't walk in the same shoes.

Curious about his establishment, I went and looked at his menu.  It can be found HERE.

Below I clipped and pasted what a BBQ sandwich and an order of fries would cost me.

$18.50.  Guess I will have a glass of water with that---I am tapped out. Look at the menu.  That is one of the better deals.

Oh, and the Social Media posting does not mention this is an UPSCALE establishment nor does it mention the prices. And you have to make a reservation.

Show me a restaurant owner who sells me a sandwich and fries for half (or more) than what Zingerman's does and I will listen to him and his argument for raising the minimum wage. Zinger-meister is NOT in the same business as the former one is.

Why don't people get that?

Source: Zingerman's Menu Board

Supply and Demand Extravaganza---Having fun with Lobster...

Nice blog entry from Business Insider on the price of Lobster in Maine. 

There are LOTS of microeconomics concepts embedded in this short discussion, i.e. basics of supply and demand, perfect competition (lobster men are "price takers", restaurants in competitive markets), monopolistic competition (restaurants in tourist areas), and there is even a little "opportunity cost" thrown in for good measure.

Excellent resource for students to dissect, draw graphs, and discuss. Good times...

The Price Of Lobster Has Dropped To A 40-Year Low

A proposed Soda Tax--- Is it a "Lump-Sum Tax" or a "Per Unit Tax" and how does it affect the market graph in Microeconomics...Nice real-life example here

Two cities in California are deciding whether or not to tax soft drinks of a particular sort. What will be interesting to teachers and students of Microeconomics is the type of tax and how it will affect a firms cost curves (full article is pasted below the fold). 

The operative paragraph is highlighted below.  It suggests that the tax will be a "lump-sum tax" and not a "per-unit tax".

""...The Richmond and El Monte levies are structured as business license fees imposed on merchants—not as taxes on each drink purchase—meaning it would be up to the sellers to decide how to pass along the added costs...."--WSJ

The question for students---how does this affect a firms Fixed Costs (FC), Average Fixed Costs (AFC), Variable Costs (VC), Average Variable Cost (AVC), Total Costs (TC), Average Total Cost (ATC), Marginal Costs (MC)?

MOST IMPORTANTLY: What will happen to the ATC Curve (if anything)? The MC curve (if anything)? The profit-maximizing level of output (if anything)?

This is a very important concept in AP Microeconomics and is almost always tested on the AP Microeconomics test in May.  Hope it helps.

Who would you rather see after a natural disaster---A FEMA official or a Walmart Associate?

  

I have seen many stories on TV this morning about communities preparing for potential disaster on the East coast.  Much of the focus is on how local, State and Federal governments are responding, as it should be at this point.

The story below from NPR is a reminder of how businesses (Walmart, Home Depot) are also busy preparing for post-hurricane scenarios to ensure that basic needs are met and there are minimal shortages of staple goods. Good logistics (HT: Mikeroeconomics) and coordination between the public and private sectors will hopefully create an outcome that limits human suffering and property damage. (HT: Carpe Diem)

Big-Box Stores' Hurricane Prep Starts Early

""Forecasters don't expect Hurricane Irene to make landfall until Saturday. But for nearly a week now, big-box retailers like Walmart and Home Depot have been getting ready.

They've deployed hundreds of trucks carrying everything from plywood to Pop-Tarts to stores in the storm's path. It's all possible because these retailers have turned hurricane preparation into a science — one that government emergency agencies have begun to embrace.""

A simple, inexpensive product is saving lives in Somalia...Why do the inventors of this product NOT have a Nobel Prize?

I learned something new today. It is one of those things that makes me wonder why the inventors of this product have not won an Nobel Prize.  At the minimum, they should be featured on "Oprah"!!!

The product is called "Plumpy'Nut" and it is an easy to administer, peanut base food, that is fed to extremely malnourished people.  It is playing a major role in the current human tragedy in Somalia. It is very inexpensive and easy to prepare and feed to children.  Apparently it actually tastes good too.

 Anderson Cooper interviewed someone about this product (he may have been a rep for the company, but I don't remember). Anderson asked him about the dangers for a child that might have a peanut allergy.  The person said something that really surprised me AND Anderson too: Peanut allergies are an issue in developed countries and not in under-developed, especially very poor ones.  I had never heard this before.  I could not find a definitive reason for this, but the "Hygiene Hypothesis" seemed to make sense to me, but I cannot vouch for its veracity:

""In medicine, the Hygiene Hypothesis states that a lack of early childhood exposure to infectious agents, symbiotic microorganisms (e.g., gut flora or probiotics), and parasites increases susceptibility to allergic diseases by suppressing natural development of the immune system.^[1] The rise of autoimmune diseases and acute lymphoblastic leukemia in young people in the developed world has also been linked to the hygiene hypothesis...""

In other words, a high(er) level of hygiene makes us less immune to potential allergies of all types.

Whatever...This is a good lesson for students and how they can impact people with science and technology.  You may not be a "Do-Gooder" in the classic sense of helping people directly, but your research and development skills/knowledge may do more good than anything else.

Look around your house. Do you have more living space then your really need? Do you have room(s) that are glorified storage spaces? Now you see the problem with our national housing policy.

Yes, I do too...
Before I became a teacher, I had a furniture upholstery business (Dallas/Ft Worth Area).  I was amazed at the number of houses I would visit where residents would have rooms they did not use at all. It always perplexed me...until I could afford to move into a upper-middle class neighborhood.  Now I understand....

Source: Carpe Diem

The period 1986-87 seems to be the birth year for the slope of the square footage to become very steep only to be interrupted by recessions/slowdowns (line flattens out 1990-95, 2001-2003, 2007--?).  I don't think there is one particular reason for this, seems like a combination of housing policies (mortage interest deduction, low-to-no down payments, interest only loans, etc) PLUS Americans attitude towards homeowership (a "right") and "conspicuous consumption". All contribute to an over-allocation of societal resources towards this one sector of the economy, which makes the whole economy vulnerable to housing slowdowns. 

 I look around my own house and see wasted room and space (what is the purpose of vaulted ceilings?). This "extra" space is full of natural resources that are unproductive (wood, metal, etc) and it takes energy to cool or heat it---GAH!  Look around your residence---do you notice the same thing? 

The chart below shows the rather stark difference in living space between the US and Europe (this chart included houses as well as apartments, whereas the one above is just houses). Even US residents classified as poor apparently require 33% more living space than the average European.  Why do we need so much personal space?

Source: Carpe Diem

I am not advocating pro-active government policy to discourage the building of larger, wasteful homes--better known as "social engineering" by my conservative friends.  I would advocate government doing less--by that I mean discontinuing subsidies/policies that encourage over-building and over-spending on homes.  If you want a bigger house, don't ask me or any other taxpayer to subsidize it.

If you are going to take a conservative/libertarian stance, my friends, then you must be willing to pay for it yourself. Don't say yes unless you REALLY mean it.  Otherwise, we should not bag on someone else's subsidy/deduction...That is only "fair", right?

If you are a liberal/environmentalist-type, you don't escape criticism either.  Why do you have some much extra space soaking up societal resources?  The little bit of recycling you do to feel good is more than off-set by the extra housing you consume relative to what is sufficient for "sustainability".  Kinda  forgot about that, didn't ya?

There! I bagged on both sides of the spectrum. Guess that makes me the morally superior one, doesn't it?

Glad I am so perfect! :)

Airlines are currently NOT collecting Federal Taxes on tickets you purchase. The price of your ticket should decrease by the amount of the tax, RIGHT? HA! Let me 'splain' to you what is happening---My graphs included for no charge---or tax.

Because Congress did not fully fund the Federal Aviation Administration (FAA) in a bill last week, the FAA is NOT collecting some taxes that are levied on your purchase of a plane ticket. WOW! I guess that means the ticket price SHOULD decrease, right? Not so fast:

U.S. airlines raise fares as taxes lapse

Many U.S. airlines have raised fares in recent days to take advantage of a lapse in U.S. ticket tax collection after Congress failed last week to fully fund the Federal Aviation Administration budget, but passengers are not likely to notice any price difference.


The expiration of the FAA reauthorization on Friday means some aviation taxes are no longer being collected. These include a 7.5 percent sales tax on U.S. air transportation and a 7.5 percent sales tax on the purchase of air miles, said fare watcher FareCompare.com. Additionally, taxes on jet fuel are also reduced.


"Friday evening we adjusted prices so the bottom line price of a ticket remains the same as it was before prior to the expiration of federal excise taxes, etc.," American Airlines (AMR.N) spokesman Tim Smith said by email.

Let's look at this graphically. Assumptions: We look at one plane only with 200 seats. No matter what the price, there are only 200 seats REGARDLESS of what the price of the ticket is. Supply of tickets is Perfectly INELASTIC. The price of the ticket for the customer is $100 (see 1st graph) which includes the taxes levied BEFORE the latest event happened. 

Assume the taxes submitted to the govt totals $20 of the $100 final ticket price.  So, the price the airline actually receives for the flight is $80 ("Point B". This is illustrated in the graph below.

Without the $20 in taxes included in the ticket, the market price of the ticket SHOULD drop to $80 (Point "C"). Because the price of the ticket DECREASED ("ceterus paribus")  we move ALONG the existing demand curve, downward and to the right to Point "C". According to our market demand curve ("Demand*") at $80 the QUANTITY DEMANDED is 240 seats.  We can see that the QUANTITY SUPPLIED of seats is still 200. Our market is in dis-equilibrium where Quantity Demanded is GREATER than Quantity Supplied---we have a SHORTAGE of seats

It is clear that the market clearing price is $100 (Ceterus Paribus--assuming DEMAND does not increase or decrease).  The quantity demanded will decrease as the price increases to clear the market and ration the 200 seats.

Yes, theoretically 40 people will be rationed off the plane as we move back to the previous market equilibrium price of $100 and 200 seats:



The key difference is that the airline is the beneficiary of this lapse in policy. In the short term, they reap an additional $20 per ticket.  In economic terms, they are earning some "economic profits", profits over and above "normal profits"--Total Revenues - Total Costs (fixed costs + variable costs + opportunity costs).

We SHOULD expect competition to take care of these economic profits. The presence of economic profits sends a signal to the market that more seats are needed. An additional plane will be called into service and the SUPPLY of Airline Seats will INCREASE. The supply curve will shift to the right and the market price will decease to $80--the price of assumed "normal profits"...

Again, I made lots of simplifying assumptions, but overall this how the process works. I hope this helps you understand microeconomics a little better. :)

"Do you want fries with that?" will soon be a phrase of the past...Is this a good thing???

McDonald's is adopting point of sale technology in it's European restaurants that will reduce the need for labor, at the margin.  Touchscreens for ordering and swipe card technology for payment will be installed.  It is inevitable that in the near future we will order our fast food in this manner.  The writing (or source code) is on the wall for low-skilled labor in this country.  The nature of work is changing and I am not sure as a nation we fully get that yet...

McDonald’s to shake up food ordering system

""McDonald’s is to change the way customers order its meals in Europe, partly replacing cashiers and the use of banknotes at its 7,000 fast-food restaurants in the region with touchscreen terminals and swipe cards.

Mr Easterbrook said that the changes would make life easier for consumers as well as improve efficiency, with average transactions three to four seconds shorter for each customer. McDonald’s European stores serve 2m customers a day.

Weiky Filho, a student enjoying a burger at McDonald’s in Wimbledon, London, was in favour of the changes. “You don’t need to communicate with staff and it would be much quicker,” he said.

But Joe Surkitz, 21, was less convinced. “I’m looking for work and if there’s more machines doing jobs I’ll find it harder. Plus you won’t get service with a smile.”

Do not buy your next airline ticket until you read this article! If may save you money...

Buying an airline ticket has to be one of the most frustrating and mysterious purchases one can make. In economics it is best explained through Price Discrimination, segmenting customers according to their willingness to pay.  We have been lead to believe that purchasing in well in advance is the best way to get a lower fare. Turns out, it may actually be the DAY and TIME you purchase your ticket is the key to getting a "deal" rather than the time lag.

WSJ: Whatever You Do, Don't Buy an Airline Ticket On …

""Rick Seaney, chief executive of FareCompare.com, studied three years worth of airline prices and concluded that 3 p.m. Eastern time Tuesday was the best time to buy. "That's when the maximum number of cheapest seats are in the marketplace," he said.""

This graph shows the dip in prices to major destinations during mid-week. I hope this helps you plan your next trip!

Wall Street Journal

This is only one part of this article. Click below to read the rest...I learned alot and hopefully I will be a more  educated ticket buyer the next time I fly!

Forget Egypt and Oil Prices---What is happening in the Ivory Coast is REALLY going to hurt you personally

Will there be a chocolate drought? World’s supply of sustainable cocoa could run out by 2014

""The world faces a chocolate ‘drought’ over the next few years, an expert warned yesterday.

Political unrest in the Ivory Coast, where 40 per cent of the world’s cocoa beans are grown, has ‘significantly’ depleted the number of certified fair trade cocoa farmers.

Many have fled the West ­African country, while fair trade training programmes have also come to a halt.

Fairtrade training programmes have ground to a halt because of the danger farmers face in rural areas.

The situation is already affecting chocolate manufacturers, who are facing the highest cocoa prices for over 30 years....""

Political turmoil far away continues to affect YOU at a personal level. Problems in the West African counrty Ivory Coast are wreaking havoc on the world's SUPPLY of cocoa beans. The Ivory Coast is a major supplier of fair-trade cocoa beans to chocolate producers who have committed to only buying certified fair-trade cocoa beans for their finished products. This is an easy one---no graph needed---Demand EXCEEDS Supply, so what happens to the price? Go buy your chocolate now...oh, wait, that increases demand (consumer expectations) and increases the price too---Dang it! You really CAN'T escape the laws of demand and supply...

Find a niche and fill it...Rent the same Christmas tree for multiple years...

I never heard of this before---you can "rent" a live Christmas tree AND have the same one year after year!! It is delivered, picked up and stored for next year. See a niche and fill it--a virtue of the market-system...

LivngChristmas.com

""RENT A LIVING TREE THIS CHRISTMAS and have a live, potted tree delivered to your doorstep. It's fun, it's easy, and it's great for your home and the environment. Simply choose one of our varieties of locally-grown trees and we'll deliver it to your home or business. After Christmas we will pick up your tree and return it to our nursery until next year. You can even watch your tree grow as your family grows by adopting the same tree year-after-year.""