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