"To increase taxes on the rich, or to decrease deductions available to the rich, that is the question."--- I TRY to answer here...

The "game" of doing your taxes is to minimize the income that is subject to taxation.  People at all income levels do this.  What I would like to do with this post is to do a basic explanation of how taxes work within the framework of potential policy changes coming down the pike---changes in Marginal Tax Rates and/or deductions you can take to reduce your tax liability.  I tried to make this as simple as possible  and dont pretend to know all the issues.  Let me know where I am going wrong.

Marginal Tax Rates are the tax rates, expressed as a percent, assessed on "each additional dollar" of taxable income (wages and/or other sources of taxable income, i.e. interest on savings accounts).  In the US we have what is called a "Progressive Marginal Tax Rate System"--the more you earn, the more you pay in Federal Income Taxes.

It looks like this:

Confusing, isn't it.  Let's keep it simple and look at a Single Person who earns $600,000 per year (a bonified 1%-er) with all sources of taxable income accounted for.  Assume this person has qualified deductions equal to the average of those in his/her income range. This (2009) table shows those average deductions in the major categories that people typically take deductions. This is  the latest data I could find. Wont be completely accurate but we will get the message.

So, if this person was representative of the average in their income bracket, their qualified deductions would total ($38,149 + $48,317 + $25,527 + $18,488) $130,481.

 

Instead of having a taxable income of $600,000, they would have a taxable income of $469,515. See the difference?

 

If you look at the first table with the ascending Marginal Tax Rates (10%, 15%, 25%, 28%, 33%, 35%) you will see that our person earns more than $338,351 so this puts them in the 35% tax bracket, so all $469,515 is taxed at 35%, right? right?...Well, no. 

 

That is their Marginal Tax bracket, meaning ANY income OVER $388,351 is taxed at 35%,  The taxable income earned prior to $338,351 is taxed at (1) different marginal tax rates and (2) on different benchmarks of taxable income. 

 

Here is the math:

 

The first $8,700 of this persons taxable income is taxed at 10% ($8,700 minus 0 = $8,700 X 10% = $870).

 

The taxable income between $8,701 and $35,350 is taxed at 15% ($35,350 minus $8,701 = $26,649 X 15% = $3,997)

 

The taxable income between $35,351 and $85,650 is taxed at 20% ($85,650 minus $35,351 = $50,299 X 25% = $12,575)

 

The taxable income between $85,651 and $178,650 is taxed at 28% ($178,650 minus $85,651 = $92,999 X 28% = $26,040)

 

The taxable income between $178,651 and $388,350 is taxed at 33% ($388,350 minus $178,651 = $209,699 X 33% = $69,201) 

 

Any taxable income OVER $388,515 is taxed at 35% ($469,515 minus $388,515 = $81,000 X 35% = $28,350).

 

 If we add up all the numbers in bold we will get the TOTAL Federal taxes this person owes--$141,033.  (Assuming they had NO with holding throughout the year, this is the amount they would write a check for). Remember, this total was the result of taxing different levels of income at different marginal tax rates).

 

If we want to find the Average Tax Rate on our taxable income we would divide $141,033 by $469,515 = 30.03%. 

 

While this person is in the 35% marginal tax bracket, he effectively pays 30% of his taxable income in Federal taxes. The average is lower than the marginal because large chunks of his income is taxed at lower rates.

 

Now that we understand that, let's look at how a policy change on this taxpayer will effect him/her.

 

I believe it is likely, as a result of compromise, the Marginal Tax Rate for the 35% taxpayer will increase to 39.% ("Clinton era" marginal tax rate on the highest level of taxable income).  You can think of this as a 4.6 percentage point increase OR a 13% increase in the rate (39.6%-35% = 4.6%/35% = 13%).

 

Assume all the other Marginal Tax Rates stay the same (there is talk of moving the 33% rate to 36% too, but we will ignore that here).  The only new calculation will be on the income OVER $388,515, which was $81,000.  $81,000 X 39.6% = $32,076.  Before the increase it was $28,350, a difference of +$3,726 additional Federal Taxes due  and a new total of taxes due of  $144,759 ($141,033 + $3,726 = $144,759)

 

Now, our Average Tax Rate will be $144,759/$469,515 = 30.08%.  We raised the marginal tax rate on this person by 4.6% percentage points (or 13%), but increased the average tax rate paid by this person by LESS than 1 percentage point! 

 

What IF instead we implemented a policy that effectively decreased this person DEDUCTIONS by 13%, as opposed to increasing the marginal tax rate by that much. What effect would that have?

 

Refer back to the total deductions this person had---$130,481.  Decrease this by 13%, or $16,963, and our total qualified deductions will be $113,518.

 

Now, his/her taxable income will be $486,482 as opposed to $469,515. 

 

As before, all the numbers below $388,515 will stay the same.  We want to tax the amount OVER $388,515 at 35% ($486,482 minus 388,515 = $97,967 X 35% = $34,288).  Compare this to the change in taxes paid at the higher rate of 39.6%---$32,076. A difference of +$2,212. 

 

Our new Average Tax Rate is $146,971/$486,482 = 30.21%. 

 

If we do nothing and the Top Rate stays at 35%,  the 1%-er would pay $141,033 in Federal taxes (30.03% average tax rate).

 

If the Top Rate goes to 39.6% then he/she would pay $144,759 in Federal taxes (30.08% average tax rate).  An increase of $3,726.

 

If we kept the Top Rate at 35% but decrease (cap?) qualified deductions by 13%, then he/she would pay $146,971 in Federal taxes (30.21% average tax rate). An increase of $5,938.  This is 59.4% MORE in tax revenue than raising the marginal tax rate to 39.6%.

 

Seems to me that too much focus is perhaps put on Marginal Tax Rates, especially at the top.  Seems like it would be productive to address loopholes and deductions.  However, that would mean taking on powerful interest/lobbying groups. 

 

On second thought, never mind...

Cinemark stops discriminating for two days! Oh, you did not know they discriminated against you? They do so to the Third Degree. I took a picture to PROVE IT!!

Went to the movies tonight. This sign was on the door.

In this case, discrimination can  work out for you.  Movie theaters are an example used in Microeconomics to illustrate the concept of Price Discrimination.  If a business can segment its customers by their willingness and ability to pay, then it can capture some "consumer surplus". Some consumers will pay the posted market price, but some will pay less, depending on how the business chooses to efficiently segment their customer base.  Some do it through coupons, by age (Senior Citizen OR children under certain ages), or time of day (matinee pricing).

This strategy is worth it to the business because it fills seats that might go empty. People have lots of alternatives on a normal day (leisure or work).

Not so on Christmas Day.  No need to discount on a day that people will be looking to do something soon after the opening of presents. 

Plus after listening to Uncle Leo tell his same stories for the 20th time, you are willing to pay the going price (and more) for a ticket to escape.  Tell me it isn't true.  :)

Tariffs on Sugar-based Ethanol expire and the amount imported increases dramatically. This calls for some graphing and welfare analysis. Who is with me?!?!

There has been a dramatic increase in the importation of Sugar-based ethanol from Brazil since a long-standing tariff on this type of ethanol expired in January 2012.

Imports from Brazil, which distills most of its ethanol from sugar cane, have risen nearly nine fold this year through October, compared with the same period in 2011, according to the U.S. Department of Agriculture. U.S. demand for foreign-made ethanol jumped after an import tariff that had been on the books for three decades expired in January. U.S. ethanol imports are expected to surge again next year, with the vast majority coming from Brazil. ---WSJ

The graphic below shows the percentage increase in the quantity of sugar-based ethanol imported in 2012 from Brazil relative to how much imported in 2011---a 750% increase!

Source: Wall Street Journal

In AP Microeconomics, analyzing the effects of tariffs on social welfare is an important concept.  Let's use this real life example and see what happened in the Market for Sugar Based Ethanol (SBE).

The first graph shows the Domestic Market Price and Quantity in equilibrium BEFORE trade.  We are assuming this economy is a "closed economy" and does not trade (a state of "Autarky").

This second graph shows the World Price of SBE and how it would effect the Domestic market IF it were to open up, or come out of the state of Autarky.  For this lesson, we are assuming the World Price is BELOW the domestic, closed market price but it COULD BE higher. We will save that for another day.

Because "P world" is lower than "P domestic" the quantity supplied by domestic producers decreases to "Qs domestic" (Point "B") BUT at the lower "P world" price the quantity demanded by domestic consumers increases to "Qd domestic" (Point "C").  This is an excellent example illustrating the respective Laws of Demand and Supply--When the price of the good changes (inc or dec) the quantity demanded and/or supplied increases and/or decreases. There is movement ALONG the demand and/or supply curves NOT a shift in either curve! We moved from "A" to "C" along the demand curve and from "A" to "B" on the supply curve.

As it stands right now, Quantity Demanded domestically ("Qd domestic") exceeds Quantity Supplied domestically ("Qs domestic").  If we were to open up to trade, the difference would be made up with imports as shown in this next graph.

Domestic producers would supply a quantity from "0 to Qs domestic" and imports would Qd domestic minus Qs domestic.

Happy people are consumers who get to enjoy more of this good at a lower price--Consumer welfare has increased.  Unhappy people are producers who produce LESS of the good at a lower price-- Producer welfare has decreased. 

Producers will not be pleased about this foreign competition. Producers have A LOT to lose! They will possibly/likely lobby for "something to be done" and that something will probably be the levying of a Tariff on this good through the political process.

As shown in the next graph, assume the amount of the tariff increases the price from "P world" to "P world + tariff" BUT not quite enough to go back to the original equilibrium point "A".

Now, at "P world + tariff"quantity supplied domestically is "Qs 1" and quantity demanded domestically is "Qd 2". 

Domestic producers increase their quantity supplied in response to the higher price (Law of Supply) and Domestic consumers decrease their quantity demanded in response to the higer price (Law of Demand).  Imports are now less than what they were before---Qd 2 minus Qs 1.

Who was helped in this scenario and who was hurt?

First to gain was the Federal treasury in terms of tariff revenue.  To calculate the tariff revenue you would multiply whatever the dollar amount of the tariff is times the quantity of imports--"Qd 2 minus Qs 1".  The RED box shows the area of tariff revenue.

A net loser #1 is the consumer.  They get to enjoy LESS of the good at a HIGHER price than they did before--as the price increases from "C" to "E" the quantity demanded decreased from Qd domestic to Qd 2. The graph below shows consumer welfare loss (Dead Weight Loss) equal to the area of the BLUE triangle.

Net loser #2 is Society as a whole. The "Dead Weight Loss to Society" is represented by GOLD box below.

 Why is this area considered DWL to society and not a gain for producer welfare?

It is because, as a result of the tariff, domestic societal resources are now employed to produce more of this good than otherwise would have been produced absent the tariff.  This is the opportunity cost of the tariff.  Resources are use to make a good that is already available to purchase, albeit produced by a "foreigner".  Economists ask: Could those resources have been used in a more efficient way?

Reason number 10,999 why people hate economists.

This story ends better.  The original focus of was the expiration of the tariff. The result?  Everything snaps back to the graph that shows the domestic economy coming out of Autarky.  Consumer welfare restored, tax revenue to the government gone and reduced producer welfare. 

 Hope this helps understanding the effects of a tariff---when assessed and when rescinded.

"Maple Syrup National Reservoir Dogs"---I hope things end better for these guys..

In $18 Million Theft, Victim Was a Canadian Maple Syrup Cartel

"...On Tuesday, the police in Quebec arrested three men in connection with the theft from the warehouse, which is southwest of Quebec City. The authorities are searching for five others suspected of being involved, and law enforcement agencies in other parts of Canada and the United States are trying to recover some of the stolen syrup..."

Another take-down by me of an important aspect of the "Fiscal Cliff"---Using the Chain-Weighted CPI as opposed to the CPI....Stay Awake!! This is important

One of the latest proposals to rein in the increasing cost of Social Security is to substitute (an appropos word as you will see in a moment) the currently used "Consumer Price Index (CPI)" with a measure called the "Chain-Weighted CPI" (go HERE for an explanation in full of this measure). First, a tiny explanation of the CPI.

The Bureau of Labor Statistics (BLS) measures changes in the price of stuff by pricing a "fixed market basket of goods and services" that are available in the economy. Consider it a shopping list on steriods.  It lists thousands of goods and/or services  that individuals might on a purchase daily, weekly, monthly, or yearly basis. 

The key point with this measure is that it prices ONLY specific, narrowly defined things on "the list" and records the change in price of the good/service with no regard to any change in consumer behavior towards the purchase of that good/service.  If the price of a pound of hamburger increases 10% the CPI will reflect that change---boom, 10% inflation (note--because one good increases in price does not indicate inflation---just keeping it simple for now).

The "Chain-Weighted CPI" is an additional measure that takes into account consumers choices in purchasing a good/service based on "relative prices" and their ability to substitute other less expensive goods/services for the one that increased in price.  If the price of hamburger increased 10% then a price sensitive consumer can subsitute a less expensive chicken or pork or spam (assume the price of these items did not increase in price at all, or something less than 10%). 

In other words, because of the presence of substitutes the consumer may not have lost as much purchasing power as the CPI suggests they did.

When measured over time, the "Chain-Weighted CPI" tends to record a lower level of inflation than does the CPI.  Why is this important?

Congress is required to adjust Social Security benefits every two years and are indexed to (tied to) the inflation rate recorded by the CPI.  If the CPI increases by 5% in the span of two years, then Congress increases Social Security checks by 5%.

However, if they switch and use the Chain-Weighted CPI, it might show that the inflation rate is only, say, 2%.  Checks would increase by only 2% rather than 5%.  A savings of 3 percentage points, which translates into BIG dollars (keep in mind, I TOTALLY made up these numbers for illustration purposes).

The move would save money but here is the biggest criticism.

Both of these market baskets measure items that senior citizens buy and young people dont buy, and vice versa. Young people buy lots of technology and entertainment that have LOTS of subsitutes.  Older people buy lots of healthcare and medicines that don't have lots of viable substitutes.  The Chain-Weighted CPI might be biased IN FAVOR of the choices available to young people in what they buy, but might be biased AGAINST older people in their purchases.

Both of these measures do not take into account the "real life" weight each demographic puts on the the selected goods/services in the measured market basket.  This specific information is not disaggregated from the whole.

This was a very simple explanation and there is MUCH more to it. For more detailed info vist the link to the Chain-Weighted CPI.  GOOD READIN'!!!!

Nice graph showing a major source of wage stagnation in the US--It is all about healthcare costs...

Well, maybe not all, but...The graph below tells part (don't know if it is a big or small part) of the story regarding income inequality and stagnant wages for workers. 

The orange line (+147% to the right--since year 2000) shows the percentage change in employee contributions to maintain their health insurance policies.  The blue line shows the percentage change in the actual cost of those policies (+114%  since year 2000).  The black line shows the percentage change in wages (36% since 2000). The gray line shows the Consumer Price Index percentage change (27% since 2000).


Source: Kaiser Foundation

The employer paid portion of health insurance is considered a "non-wage" benefit .  You pay some of the cost of your health insurance  (it comes out of your wages/salary) and your employer pays some of it (a non-wage benefit to you).  Example: a policy to cover you and your family has a total cost of $5,000.  You pay $100 per month out of your paycheck for the policy ($1,200 per year total) and your employer pays the remaining $3,800 on your behalf.  $3,800--your non wage benefit BUT a cost to your employer to employ you.

The difference between the orange and blue lines represents "cost shifting" of the total cost of employer provided health insurance.  Employees are paying more for health insurance from their wages (that IS clear) since 2000 and employers are either (1) paying less than they did before or more likely (2) passing the increasing cost of providing health insurance to employees in total or in part.

Two ways of looking at this.

(1) Any discretionary income gains that might have accrued to workers in the form of higher wages since 2000 have been absorbed by overall rising health insurance costs.  Employers are held harmless in this situation.

(2) Corporations have been shifting the cost of insurance onto workers and are not carrying more of the burden.  Paying less in non-wage benefits means more money going to the bottom line.

You tell me.  I can't figure it out.

Congress wants to "Put a Cap in Yo Deductions"---Yes, it is as threatening as it sounds.

One such deduction (among several) is the "Mortgage Interest Deduction".  Here is a quick explanation and example.

If I get a loan to buy a house my payment consists of two things: Principal and Interest. 

There are potentially other things included in your payment (i.e. State and Local taxes, mortgage insurance, etc--but we are going to ignore those for now to keep it simple).

The principal is the portion of the loan I actually borrowed and interest is the portion of the loan that compensates the lender for lending me that money. Below is an example of someone taking out a loan for $200,000 at an interest rate of 5% and is going to pay back the loan over a 30 year period.


Source: GMAC

Notice in the "Loan Summary" the "Total of Payments" are $386,513.24. Remember, I borrowed only $200,000 so the difference between these two numbers represents the "Total Interest Paid" on the loan in 30 years--$186,513.24.  ALMOST as much as I borrowed in the first place!!

Over time, in each monthly mortgage payment I make, I pay a portion of the principal and a portion of the interest to the lender.  This is reflected in the data below the Loan Summary.

I listed the first year of payments, 1-12.  Each month the borrower made a monthly payment of $1,073.64.  Each month part of that payment is Principal and part is Interest. You can see that in the early stages of a loan, the interest is MUCH higher than the principal you pay back.  This is called a "front loaded" loan where you pay most of the interest up front and as you make payments the payback for principal increases and interest payback decreases.

In the first year you pay a total of approx $9,930.00 (I rounded) interest alone (Principal was only $2,946.00)

As incentive to buy homes, Congress allows homeowners to deduct the amount of interest from their taxable income.

For this homeowner, if they have enough other deductions to qualify to itemize these deductions (like the charitable deduction or deduction for State and Local Taxes), then they can DEDUCT from their total income the amount of interest paid---$9,930.00.

This effectively reduces the income that will be subject to the Federal Income Tax by $9,930.00, hence their tax bill be less as well.  This is a GOOD thing for the homeowner.  However, it reduces the amount of Federal tax revenue received by the Federal Government.  Consider it a "subsidy" for home ownership.  Renters do not get a similar subsidy. Neither do people who pay cash for their houses.

The larger the home loan, the larger the interest paid, the larger the deduction and the more that homeowner "saves" on taxes. 

The mortgage deduction is a popular "middle class" to upper class tax break. 

There is some talk about limiting this deduction to a smaller amount or getting rid of it altogether.  This will increase taxes on people with home loans, especially those in the early stages of a home purchase with a substantial home loan.

I don't think the total elimination will happen.  Probably a "cap" on TOTAL deductions will be put into place (the home mortgage PLUS charitable, state and local taxes, etc). 

Hope it helps you understand this issue a little better.

"Disruption" in the corporate boardroom is a good thing. Especially when the source of the disruption is how to better serve consumers. Amazon.com---Retail is not quite ready to surrender!

Stores offer same-day delivery to compete with Amazon

""Tired of competing on price with online retailers, bricks-and-mortar chains are experimenting with same-day delivery. So far, few such services are available in sprawling Southern California....""

Businesses are in existence to serve customers.  At least they are supposed to.  When a business is not faced with significant competition they tend to get "fat and happy" and start to serve their own interests.  Perhaps not on purpose, but inertia seems to push them in that direction.

It usually takes some "disruptive" idea, technology or improvement in efficiency by a competitor to shake them up.

Lots of talk about how Amazon.com is crushing "brick and mortar" retail.  Probably inevitable that they will. 

But I like that storefront retail IS at fighting back.  This takes effort, investment and new thinking regarding resources on the part of management to serve its customers.

Intense competition forces businesses to think about how to get their products into the hands of customers in the least expensive and most expeditious manner possible. 

Disruption in the corporate boardroom because of competitive forces is a GOOD thing for the consumer.  Make them sweat to better serve us.  Works for me.

This seems like another way the Postal Service can improve its situation as well.  They already have the routes, vehicles and people in place to serve this niche (but so does UPS and FedEx!).  If they can move quickly perhaps they can get a large share of this market.  As the article notes, there are companies already lining up that would like to have this business. 

""...Next week, the U.S. Postal Service begins an experiment in San Francisco. It's partnering with about 10 retailers, which have yet to be announced, to offer same-story delivery around the city, said spokesman John Friess....""

The number of people turning 65 revisited. How much in Social Security is that going to cost? See the analysis of the 2011 to 2012 bump here...

I am revisiting this graph because it fascinates me.

Just eyeballing it (and inserting two somewhat straight lines) and looking at the change from 2011 to 2012 astounds me. 

There is roughly a daily average change in the number of people turning 65 of 1,500 people. That translates into 547,000 newly minted 65 year olds OVER the number minted in 2011.

If ALL those people filed for and received Social Security checks (the average check SS check for 2012 is $1,230 according to the SSA) that would require a little over $8 billion dollars to be added to the budget in one year on top of what is already paid in Social Security benefits in prior years.

Now, Medicare kicks in too. See how it adds up quickly.

States with large outward migration patterns have the most generous State employee pay and benefits. States that have high inbound migration have less generous State employee pay and benefits. Correlation =Causation??

Correlation is not necessarily causation...but is this a coincidence?

Yesterday I posted the first graphic below showing population losses and gains for US States over the last few years.  California, Illinois, Michigan, Ohio, New York, Massachusetts, and New Jersey and large net losers of population. 

The graphic below the map is one I found today.  It shows compensation levels, from highest to lowest, for State employees from the 10 most populated States. 

Notice the list I made above of high outward migration States and the top 5 States in the compensation graphic.  Any similarities?  I think so.  Do they matter? Not sure.

Large States with high inbound migration have lower levels of State employee compensation.

States with high level of State employee pay and benefits are losing tax base. States with lower (relatively speaking) levels of State employee pay and benefits are gaining tax base.

Which States are going to be more fiscally sound and attractive places to live and work?

Correlation is not causation, but is this a coincidence? Or is it a lack of prioritizing between private and public policy goals?  Not sure. I am open to suggestions.

Source: Bloomberg

Nice graphic on migration patterns in the US among the States. See where people are leaving and going to. All I can say is Texas is doing something right and California is not.

People on the move...Migration patterns in the US in the past few years.  California, New York, Michigan, Ilinois and Louisiana are all net losers in terms of migration.  Texas, Arizona, Georgia, and North Carolina are all gainers.

People go to where there are opportunities and businesses locate to States that have hospitable business climates and responsible government.

Kinda simple...

Two excellent graphs showing the difference in the cost of producing an iPhone in the US and China and the profit margin associated with that difference.

I came across a research paper while reading about Apples announcement that it was going to move some of its production back to the US (article HERE). The paper is HERE. There were two graphs that I thought were interesting.

The first one show the cost of the component parts and labor (inputs) that go into producing an Apple 4G iPhone in China (keep in mind these are JUST the costs associated with these inputs. It does not include many other costs associated with making the phone and getting into your hands) and the second one shows the cost of producing it in the US.

Notice all component costs stay the same BUT the labor cost is the big variable between the countries.

I have no big point to make here. Just something to make you go "Hmmmm".... :)

 

 

Nice graph showing the number of people turning 65 on a daily basis. This is important in the discussion of Social Security and Medicare. It is a numbers game---in terms of people and dollars.

Lately I have been talking to students about the fact that everyday there are greater numbers of Baby Boomers turning 65 years old, but I have never seen any actual numbers.  There is lots of talk about the "leading edge" of this generation that is going to put a financial strain on the Social Security and Medicare systems. This is a numbers game--in people and dollars.

I think I see that leading edge in the graph below--the year 2012. 

This graph shows, over time and on a DAILY basis, the number of people turning 65. For instance, in 2000, a little over 5,000 people had their 65th birthday.   In 2007-2008 there was a bump up in the number that was sustained for 4-5 years.  BUT notice what happens in 2012. The daily number leaps up to 8,000 per day and you can see what happens from that point forward. One giant step for the birth of mankind!

So, what year was so special that in 2012 we have so many more people turning 65 at the same time. Well, subtract 65 from 2012 and you get 1947.  Just after "The Big One". 

My cohort is 2025 (I was born in 1960).  We have our own special little bump in the daily retirement rate. Wonder what was going on then??



Source: The Economix

"Manufacturing is Alive, Manufacturing jobs are Dead". Still hoping some politician somewhere will adopt this honest slogan for a campaign. See graph here on manufacturing employment

Jobs in the manufacturing (specifically, the goods producing sector), relative to other jobs in the economy, have been in decline for a long time. Now, it certainly is possible that there are more jobs in manufacturing overall BUT the number of other jobs has grown at a faster rate--hence manufacturing jobs as a percent of the total is smaller.

Well, I tried to make it look better, but I suspect this is not the case.

Remind me again why politicians spend so much political capital and ACTUAL capital trying to "save" manufacturing jobs?  I don't mean the manufacturing jobs of the future, but they are trying to rescue the jobs of the past, for the most part.

If you need a reminder from the Onion about this, please go HERE (caution---the video contains some inapproriate language!)

Maybe I am missing something. Help me out.



Source: HERE

Why has the price of computers decreased but the price of broadband internet connection increased (or HAS it?). If you need an analysis for a Microeconomics class this will be helpful.

...or a Macroeconomics class as well...

The author of this blog entry (found HERE and also pasted in full below the fold at the bottom of this entry) uses a graph to show how, in the last 5 years, the price of computers (BLACK arrow) has decreased over 40%  but the price of Broadband (RED arrow) has increased (slight, but an increase).

While the blog entry is very short it suggests (explicitly and implicitly) 2 Microeconomic and 1 Macroeconomic concept that are important for students to know.

(1) In Microeconomics, two goods are considered Complements if they are used together. They are separate and distinct goods, each with their own market price and cost of producing. They are largely dependent on each other to function profitably in the market place. 

When the PRICE of one of the complementary goods DECREASES (in this case computers), the DEMAND for the other good used with it INCREASES (Broadband Internet connection).  This makes sense.  People buy more computers so they need more internet access. This could be the reason, but...

(2) The computer market is vast and their are lots of competitors.  With more competition, prices tend to gravitate closer to the actual cost of production (this is a characteristic of a "perfectly competitive firm").  In broadband "production" this is less so:

"The high, fixed costs of broadband means that there hasn’t been a big rise in competition among providers, according to Scott Wallsten, Vice President for Research and Senior Fellow at Technology Policy Institute. Indeed, most Americans don’t have more than two options when it comes to wireline broadband providers...."

High fixed costs serve as a barrier to entry in markets. It takes very large upfront investments that may take years to re-cover.  Hence competition is more limited AND the producer is able to charge a price, dictated by the market demand for the good/service, that is something greater than the cost of producing.  In other words, the producer has pricing power ABOVE the Marginal Cost of producing extra units of the good/service.  This could be the answer, but...

The Macroeconomic concept comes from one the commenter's on the blog entry in regards as to how the Consumer Price Index is calculated and its accommodation for changes in the quality of a good or service over time. 

Is the price consumers paid for broadband in 2007 the SAME broadband they pay for in 2012?

If the price of broadband (consider it just a single good/service) has increased 10% since 2007  BUT the amount of speed, quality of the connection, and places I can access it has increased, say 50% or more, am I not better off per dollar spent?

Has the BLS fully accounted for this quality change and it is built into the price change noted in the chart, so in real terms broadband has increased 10%?  This could be the reason, but...

This is why I love Economics! All three answers COULD be correct!

What do you think?  Which one seems the likely culprit or am I missing a piece of the puzzle?