Opportunity Cost and migration back to city centers.

Here is a terrific analysis as to the reasons there is a nominal/notional increase in the movement people towards a central city.

While the info is extremely useful regarding this trend, I see it also as a lesson in Opportunity Cost(s).

Read it for the content but also for an economics lesson.

What's Driving Downtown Revitalizations?

Downtown areas across the country have been undergoing revitalizations in the last decade. While this has led to some concerns of bubbles, in reality it reflects a slower moving structural trend that extends back to the 1980s. New York City, for example, has come a long way. A 1981 film, Escape From New York, depicted the city's fictional near-term future, when a 400% increase in crime would lead the government to turn it into a giant prison. New research from the Census Bureau sheds some light on why the revitalizations that make Escape From New York seem less plausible today are occurring. 

First, it’s important to not exaggerate the extent of the downtown revival. As Jed Kolko has documented, as far as population and job growth go, the move toward more dense places is mostly about a relatively small number of higher-income, working-age, educated households. 

This is probably partly because of the inability of these places to get much denser, either because of regulatory or physical constraints. So instead of massively growing populations in downtown cores, we’re seeing slight population growth and significant price gains. 

The census research—from Lena Edlund, Cecilia Machado and Maria Sviatschi—swats down a few theories of urban revitalization. They point out that lower crime rates are an unlikely driver, as the start of the revitalization predates the drop in crime. In addition, downtown revitalizations have been occurring in European cities that never had much of a crime wave to begin with. Traffic congestion outside the core is also an unlikely explanation, as even cities with declining populations, such as Detroit, have experienced downtown revitalizations. 

They also point out that while amenities may play a role, many large urban downtowns have had a high level of cultural and other amenities for decades. Amenities are likely to amplify downtown revival, however, as increased purchasing power downtown increases amenities, which in turn draws in more high-income households that value the amenities. Amenities nevertheless are unlikely to be “ground zero," or a first mover, in the downtown revitalization trend. 

Instead, the authors argue that greater labor force participation and longer hours of work among high-skilled households are the main driver. In theory, they suggest, when work hours are short, the more affordable suburbs are desirable. But when work hours are long, leisure time becomes scarcer and more valuable, and the shorter commute makes the city more desirable. As a result, as hours worked have gone up for skilled households over time, they have come to prefer the city more. 

And indeed, hours worked have gone up for the rich. Educated women have entered the workforce in growing numbers, and skilled people are increasingly working long hours and consuming less leisure time. This scarcity of leisure time makes a shorter commute more important.The census analysis shows that house prices near the central business district of a city were lower than in the suburbs in 1980, but this has reversed over time. Since 1990, being close to downtown has had a stronger and stronger positive impact on prices. Their results also show that the value of being close to downtown has grown more in cities that experienced stronger growth in the demand for skilled labor. 

Overall, theories about the causes of downtown revitalizations are difficult to test and this study is unlikely to be the last word. This research at least suggests that the role of increasing work hours among the most-skilled deserves more consideration.

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...

San Francisco, Urban Farming and Housing Costs---a lesson in Opportunity Costs.

Another adventure in Opportunity Costs.

How Urban Farming Is Making San Francisco's Housing Crisis Worse (The Atlantic)

The City of San Francisco just passed a law giving property owners a subsidy for the operation of an "urban farm".  It is an incentive based on a recently passed State law giving more secure property rights to folks starting an urban farm.

I have no problem with that.

However, in a city where there is much debate and near rioting over "affordable housing" (whatever that means in high rent San Francisco) that is located in a State where 80% of the countrys fruits and vegetables come from (HERE) it seems like the LEAST likely place to promote urban farming.

Read the article and pick out the many other Opportunity Costs that arise from this policy. Fun times!

Fuel for Food in the Upper Mid-West. Caught in the Opportunity Cost trap.

The allocation of scarce railroad track from the transport of food to fuel has created a costly consequence for agricultural interests. The simultaneous boom in energy and food production necessitates choices.  It appears the fossil fuel (oil and gas) interests are winning out.  There is no escaping Opportunity Costs!

Millions in Agriculture Lost as Rails Neglect Grain Surplus (HT Morning Ag Cllips)

Farmers in North Dakota are experiencing millions of dollars in losses as their grain shipments — held up by rails’ prioritization of the transport of oil — have no way of getting to the companies that need them, like cereal producer General Mills. Production at such companies has slowed, and the grain, with nowhere to go, “is simply going to ground and rot,” farmer Bill Hejl told The New York Times. 

What’s more, farmers expect that the upcoming harvest will yield a record crop of wheat and soybeans, meaning that this problem is only expected to get worse. 

Farmers have long relied on railroads, “the backbone of North Dakota’s transportation system,” to help them move their crops across the country, and abroad. 

But lately, the region’s railroads are occupied by shipments of oil, which, along with gas, have become biggest contributor to North Dakota’s gross domestic product. As of August 22, reports indicate that the Burlington Northern Santa Fe Railway (the state’s largest railroad) had a backlog of 1,336 rail cars waiting to ship grain, while Canadian Pacific railroad had a backlog of 1,000 cars.

I found a Microeconomics Unicorn! See the chart here.

A rare treat for an economics teacher.  A chart that quantifies (not completely but enough) the difference between "Economic Costs" which include opportunity costs (implicit costs) as well as money costs (explicit costs), and "Accounting Costs" which include ONLY money costs. 

Source: USDA ERS

Costs of production for U.S. milk decline as the size of the dairy operation (measured by the number of cows) increases.  Based on 2013 data, average total economic costs of milk production—a measure that includes the opportunity costs of land, labor, and other owned resources—fell by nearly 60 percent, from an average of about $50 per hundredweight (cwt) for producers with fewer than 50 cows to about $20 per cwt for those with 1,000 cows or more. Average costs are lower on larger farms because fixed cost items, such as management, land, and other resource costs, are spread across a larger number of cows, and because average output per cow increases along with farm size. Mean output per cow was just over 15,000 pounds among operations with less than 50 cows, while operations with 1,000 or more head averaged more than 23,000 pounds per cow. Higher milk yields on larger farms stem from factors such as better breeding, nutrition, and health management, as well as the ability to access competitively priced supplies of high quality feed inputs.  This chart is based on data found in Milk Cost of Production Estimates. 

This is a key concept in AP Microeconomics that is somewhat difficult to convey to high school aged students.

The vertical difference between the RED and BLUE lines represents the Opportunity Costs to the producer for staying in business.

The price or Marginal Revenue (MR) or Average Revenue (AR), a producer receives must at least equal the RED line for her to "Break Even".  

However, she could still make an Accounting Profit at that price.  Is she?

According to the USDA ERS (HERE) the average price for "all classes of milk" was $20.05 per CWT) in 2013.  Now look back at the graph and draw a straight line across the $20.00 mark denoted on the vertical axis.  Compare that to the RED and BLUE lines.

At that price ONLY the large producers (1000 or more milk cows) are Breaking Even in "Economic" terms BUT making profit in "Accounting" terms.

Notice at about 300 cows the average costs start to drop at a relatively steep rate and production increases quickly.  I assume that is the inflection point where economies of scale really kick in.

Hope this helps with teaching and/or learning about this important concept when the topic of a firm that operates in a "Perfectly Competitive" market.

Increasing Opportunity Costs and the Farm Bill. Come visit my "Farm" to see what it is about.

Here is a very basic presentation to illustrate the concept of "Increasing Opportunity Costs".  This can be a difficult concept for the average high school student to intuitively understand (at least from my experience it is).

What prompted me to create this was an article I read recently (and cannot find now) about an "unintended consequence" of a Farm Bill provision regarding the subsidies paid to corn growers.

The subsidy was paid on a "per acre planted" basis with no regard as to HOW MUCH corn was harvested on that acre.

The article quoted a farmer as saying this policy encouraged the planting of corn on land "not necessarily suitable" for the growing of corn.  It took multiple acres planted to yield the same amount of corn from land that was more suitable for growing corn.

So, land that might have been more suitable (and efficient) for growing something else (potatoes? rice? grazing?) was put into use for growing corn instead.

Economists would say this policy leads to a less than optimal and inefficient allocation of societal resources.

Politicians would say this policy leads to an optimal allocation of special interest satisfaction.

Guess which of the two is in charge of things.

Ppf corn and rice from Gene Hayward

PPF illustration with maps of Corn and Soybean acreage. Nice real life example.

In the first week of an introductory Economics students encounter the Production Possibilities Frontier (PPF) as the first formal model used in both Micro and Macroeconomics.

The PPF illustrates the productive capacity of an economy if it were fully-employing all of its useful resources (Land, Labor, Capital, Entrepreneurship). The model is flexible and can be used in a Macro sense comparing the production of the broad categories of Capital and Consumer Goods or in a Micro sense comparing the production of two specific goods such as Corn and Soybeans.

If the economy is producing ON (does not matter where) the PPF it is achieving "Productive Efficiency". This means it is fully utilizing its productive resources in the the most efficient and lowest cost way.

WHERE on the PPF, or the particular bundle of the two goods, the economy produces is called "Allocative Efficiency".  That bundle a society produces and consumes is determined by the economic system (market vs socialist vs command) or some combination thereof.  In the US, the price mechanism and/or government policy determines the Allocatively Efficient bundle of goods in the market place.

Nowhere is this more evident than in Agriculture.

Let's look at the two-good model---Corn and Soybeans.

Both require roughly the same climate, terrain and soil to grow.  The Opportunity Cost of switching from growing one to the other is minimal--an acre of land for growing corn will produce a maximum yield in either corn or soybeans.

So, our PFF for Corn and Soybeans, shown below, illustrating the trade-off between growing one or the other would be a straight line representing "constant opportunity costs".  Assume our initial equilibrium point in the year 2001 was at combination of Corn and Soybean planted and harvested acreage---Point "A".

However, in the mid-2000's due to a policy change we had a relatively massive "Allocative Efficiency" change and a re-allocation of land resource from the production of Soybeans to Corn--Point "A" to Point "B".  How do I know this?

See the map below.  The RED areas on the map on the left show the DECREASE in acreage planted for Soybeans and the BLUE areas on the right map show the INCREASE in acreage planted to Corn.

Matches up pretty well, wouldn't you say?

Source:  From USDA Atlas Maps

What was the major the policy change that prompted this reallocation?  I will just leave you with a picture to ponder that one...

Explain-er with real life example: The difference between accounting costs and "economic" costs. This is why every one hates economists but love their accountant.

Here is a graph (HT: Big Picture Agriculture) that shows the relationship over time (1972-2012) between the Average Total Cost ("ATC") of producing a bushel of corn  (RED line) and its Market Price (BLUE line).

You can see at various times the ATC exceeds the price and vice versa.  Sometimes they make a profit, sometimes they lose money...So goes the agricultural commodities market and the roller coaster that is farming.

Look at the year 2006.  I inserted a dotted line to show in 2006 the price of a bushel of corn equaled the Average Total Cost of Producing a bushel of corn  The lines intersect at $2.50.  So, the farmer is "breaking even"...right?

Not so fast.  I believe I am making a correct assumption in assuming the creator of this chart included cost data that is ONLY comprised of "Accounting Costs" or "Money Costs".  This simply means explicit costs that are paid for with cash (or credit).  Accountants care only about accounting costs when they tally up the numbers and then subtract them from Revenue to obtain "Accounting Profits".

Economists, on the other hand, care about explicit accounting costs and IMPLICIT opportunity costs---are you surprised? Probably not...

Economists believe that the farmers accountant UNDERESTIMATES the cost of being a farmer because opportunity costs are not added to the the total cost of farming.

Simple example.  Lets say I make $50,000 per year as a teacher but decide to quit teaching and become a farmer.  In the first year I make enough in farming to pay myself $40,000.

This $40,000 is an accounting cost (real money paid to me!). However, economists take it one step further and suggest that I have to account for that lost $10,000 income I experience when I choose to farm.  

My total cost to farm is not $40,000, but $50,000.  Economists add in that $10,000 in foregone income as an implicit cost for me and my farming operation.

Once I add in the additional implicit cost of $10,000 that accountants do not, then my ATC of producing is going to be HIGHER than what you see at ANY POINT in the above graph.

The RED line will shift UP at every given price. 

So, for the most part, profits will be LESS in economic terms as opposed to accounting terms because of the inclusion of implicit opportunity costs.

Go back to 2006 on the graph. If we add in the opportunity cost then the ATC of producing corn will be something MORE than $2.50 and instead of breaking even as accounts would figure. The farmer will experience "economic losses".

My labor is not the only implicit cost economists like to account for.  Go here for a more comprehensive look at the topic.

There has to be an accountant vs economist joke in here somewhere. Because I teach economics I don't have much of a sense of humor, so you tell me a good one.  :)

A short lesson on the difference between a "Constant Cost" and "Increasing Cost" Production Possibilities Frontier. A must know for AP Econ!!

Understanding the difference between a "Constant Cost (Straight Line)" and an "Increasing Cost (Concave)" Production Possibilities Frontier (PPF) is not necessarily a difficult concept, but it one that does seem to be-devil the student in an introductory economics class.

I put together a series of slides that takes you through the differences step by step.

The main purpose for the PPF is to illustrate the principle of Opportunity Cost when it comes to resource allocation. If an economy is at Full-employment to get more of one thing then something has to be given up.

Sometimes that trade-off may be "constant"--the resources taken away from the production of one good are "perfectly adaptable" to produce more of another good.  A simple example is a farmer who has land where he can grow Corn and/or Soybeans. The land suitable for growing corn is the same as the land for growing soybeans (I live in Central Ohio--I see this just down the street). One the same acre of land, the farmer can get a maximum yield in corn or soybeans. Switching from one to the other entails virtually no cost in resource allocation for the farmer.  How it affects society is another question.

However, if the crop mix is different and the resources used are NOT easily adaptable for a different use, then the opportunity costs are not constant but "increasing".

I use Corn and Rice as an example below.  The land use for either is not identical.  If I want to grow Corn where I once grew Rice then it may take 2 acres of rice field acreage in order to get corn yield equivalent to what I would get out of land perfectly suitable for corn production.  My opportunity cost for more rice is not just one acre or rice production (Constant Cost) but two acres (Increasing Cost).

If the farmer persists in converting more of the rice field into corn production, then it may take 3 acres to get the equivalent in Corn. So on and so forth.

TINSTAAFL!   Corn and Rice---now I am hungry.  My opportunity cost of doing this blog entry is a delayed breakfast. You gave up eating lunch to read it.   I hope it was worth it to you.  Was for me.  :)

Soft drinks and Federal Food Assistance ("Food Stamps"). See here why Coca Cola is so interested in this relationship...

Just doing some reading and came across an article on Coca-Cola's lobbying effort to make sure soft drinks are not excluded from purchase under the SNAP program (formerly known as "food stamps).  SNAP stands for Supplemental Nutrition Assistance Program. 

I wondered why they would be so interested.

The lobbying group Science in the Public Interest estimates that $4 Billion of the $80 Billion allocated to the SNAP program (that's 5%)  is spent on carbonated soft drinks by recipients. This total does NOT include non-carbonated drinks like Monsters, Gatorade, etc, so the total on high sugar content drinks is likely significantly higher.

I was curious about how much this $4 Billion in transfer payments was as a percent of total soft drink sales.

In 2012 total soft drink sales were about $60 Billion, however that includes all outlets where soft drinks can be purchased such as restaurants, vending machines, sporting venues, grocery and convenience stores.

SNAP benefits cannot be used at all these locations. They can only be used at grocery and convenience stores primarily.  According to a WSJ article total sales in grocery stores and convenience stores are about $28.7 Billion of the $60 Billion.

$4 Billion as a percent of $28.7 Billion is 14% of total soft drink sales that are derived from the SNAP program.

NOW I know why they are so interested---that is substantial for the industry...and Coke.

Let the special interest money flow...

Entitlement Spending and Public Investment in 3 easy graphs. Hey, this is not a flashy subject but none more important...

The following sets of graphs illustrate the "Emperor has no clothes" in terms of the Federal Budget. Everyone knows the problem but no one does much about it.
Mandatory, or non-discretionary, Federal spending is concentrated in 3 major areas--Social Security, Medicare and Medicaid (and its subprograms). As illustrated in the first graph, these programs over time have steadily consumed a larger part of the Federal budget---approx. 47%!

Other parts of the budget consist of non-mandatory, or discretionary, spending.  Within this category you have "Investment Spending" by the Federal government. The following is a definition of Federal Investment from HERE:

"Federal investment is the portion of Federal spending intended to yield long-term benefits for the economy and the country. It promotes improved efficiency within Federal agencies, as well as growth in the national economy by increasing the overall stock of capital. Investment spending can take the form of direct Federal spending or of grants to State and local governments. It can be designated for physical capital, which creates a tangible asset that yields a stream of services over a period of years. It also can be for research and development, education, or training, all of which are intangible but still increase income in the future or provide other long-term benefits."

The graph below shows the decline over time of Federal Investment as a percentage of the Federal budget.  The implication is that there is significantly less funding for public works projects that confer benefits on everyone that the private market does not supply.

The last graph puts these two areas of the Federal budget together.  Budget dollars are not unlimited.  Over time, mandatory transfer payments to senior citizens and the poor have significantly surpassed non-mandatory public expenditures/investment in infrastructure. 

The Federal government does not do much of anything anymore in terms of physical public goods. They pretty much just write checks.  Think about that.

How do we address this issue? I dunno, I am just a high school economics teacher.  You will have to ask the Emperor and the Court Jesters we call the Executive and Legislative branches.

I have planted many a golf ball in a corn field but have not planted much corn on a golf course. See here WHY Iowa farmers are doing just that. How do you say "FORE!" in corn lingo??

A nice article in the NYTIMES today about farmers in Iowa  using every bit of land they can to grow crops, even land that previously had been deemed not worthy of cultivation.  This is an excellent example of increasing opportunity costs as it related to the Production Possibilities Frontier:

"Across much of the Midwest the sharp increase in farm earnings has driven the price of farmland to previously unimaginable — and, some say, unsustainable — levels. But in the process, to much less fanfare, the financial rewards have also encouraged farmers to put ever more land into production, including parcels that until recently were too small or too poor in quality to warrant a second glance."     

Most of the land they currently grow crops on could be labeled "low hanging fruit" which means that relatively little, other than the basics to cultivate, plant, maintain, has to be done to harvest the crop.  It is the most suitable land for growing crops.  However, this fertile land is not unlimited and "at the margins" of the acreage land is going to become less suitable, hence more expensive to convert to growing crops. 

The "opportunity cost" (explicit and implicit costs) of converting this land to grow food is too high relative to (1) the price they might receive for any food grown on it, or (2) an alternative use this land might have may be more suitable for the production of some other good:

A splash of green on a solid beige horizon, the golf course at the edge of this tiny town promised residents nine modest holes of refuge from corn country. Decades earlier the spot had been farmed, too, but the rocky soil was so poor, the saying went, that you couldn’t raise hell there with a fifth of whiskey.         

“The rottenest piece of land there is,” said Mick Elbert, a local car dealer who served on the golf association board. “All it is good for is a golf course. That’s why we built it there.” As Crop Prices Soar, Iowa Farms Add Acreage

Now that there appears to be sustained higher prices for various agricultural commodities, farmers and the communities they live in,  are willing and able to spend additional money and resources (equipment, time, etc) to cultivate this less suitable land because the opportunity cost of NOT doing so (foregone profit for farming relative to the profit, or lack there of, for the golf course) is now greater. 

""But this year, over a chorus of objections, the greens and fairways were plowed under. The course had been losing money, and crop prices had been breaking records, so the new owner did the type of quick calculation that is quietly reshaping the region and determined that it was more valuable as farmland. The first harvest took place this fall..."

For extra credit, draw a Production Possibilities Frontier showing the production of only two goods, Food and Golf Courses.  Show on the graph the result of the landowners decision about what to do with his land ("resource").  Explain why you drew your PPF curve the way you did (straight line or bowed). 


Read the whole article below the fold: