Saturday, December 31, 2011

Daily Review -- Supply and Demand

For teachers who want a worksheet on the variables that can move supply and demand, I have a Google document here.  The document is 10 pages and students can print off the document and work right on it.  This document is part of my FREE KINDLE FIRE app.

A quiz to determine mastery is here.

My website dedicated to this app and this concept is here.

What Is The Right Thing To Do?

Herman Cain had several alleged acts of sexual misconduct.  These allegations motivated Mr. Cain to drop out of the 2012 presidential race.  My question is "Why did these victims take so long to come forward?"

Economists say, "Incentives matter."  The Powell Center for Economic Literacy and the Council for Economic Education both list incentives as fundamental to the learning of economics.  I sometimes call my incentives, preferences or choice, but incentives motivate behavior.  Usually, an economic actor will respond to incentives when the benefit is greater than the cost.  So why did the women who were allegedly harassed take so long to come forward?

I think the answer to this question comes from philosophy, not economics.

When Mr. Cain started to raise in the polls and it became likely that he might win the GOP presidential nomination, I think these victims stepped forward on morality.  I think they felt that his behavior had to be stopped so that other women would not fall victim.  It certainly would not benefit them personally to come forward.  These women acted on principles that run deep.  They acted on what is right not what is in selfish self-interest.  And this, I believe, is for the greater good--an act of morality.

Friday, December 30, 2011

Toy Tax

This Slate article explains why toys "face" a lower tax than dolls.   So Transformer are action figures that are taxed lower than a Barbie.  Given that the elasticity for toys and dolls are greater than 1, it would seem to be a frivolous tax.  I think Logistics is the reason.

I know that less than $1 USD is needed to make a Barbie that sells for $9.99 in the States so the import duty is nothing.  So why have the duty?  Because shipping Barbies takes up valuable space for other more important goods.

If I ship a million dollars to the States, I can't ship food.  The tax represents the opportunity cost. (Hat Tip goes to Gene Hayward who makes a difference with his teaching.)

Thursday, December 29, 2011

Daily Review -- Unemployment Rate

Calculate the unemployment rate for June, July, Aug, Sept, Oct, and Nov.  Interpret the data.

My answers are in order my month: 6, 6,6.1, 6, 6, and 5.7.  It appears to me that Iowa's economy was in long run equilibrium at 6%.  The November unemployment rate was 5.7% as seasonal employment during the holidays might have lowered the unemployment rate.  It's also interesting to know that Iowa has the one of the lowest unemployment rates in the Midwest.

Wednesday, December 28, 2011

Daily Review -- Per Unit Tax

In order to boost consumer spending, the government removes the per-unit tax on Pep UP!  Print off this page and use a marker to show what happens to the market equilibrium for Pep UP!
(Clicking on the Image enlarges it.)

Your answer should show that the supply curve moves to the right.  You should verify that a lower price results and an increase in the quantity demanded for Pep UP!

As a result of the tax removal, the real buying power of the consumer rises so the budget curve moves out and the consumer is elevated to a higher indifference curve and higher utility.  Likewise, the consumers surplus increases.  

Supply and demand problems like these are on my FREE APP available here.

Tuesday, December 27, 2011

Kindle Fire

Look for my app on teaching supply and demand on the Android Mall soon.  The app is free to readers of this blog.

This app will eliminate a lot of the repetitive teaching that is required for acquisition of this concept.  I will also have a website for those without a tablet here.

As more and more education is online, I hope that you will adopt my apps as a way of enhancing your classroom or your life.

Daily Review -- Normal Goods

The data above was taken from the Bureau of Labor Statistics.  The households in each quintile, 20%, represents the results of survey about consumption patterns.  Which goods are normal goods?  My answer is Food away from home, and Transportation.  Food at home appears to be an inferior good.  I don't understand housing.  When I see Bill Gates and Tiger Woods building mansions, housing is a normal good to them.  Perhaps housing is luxury good.

A normal good is one that consumption rises with income.  I think food is income inelastic so that the change in food demanded increases by far less than the change in income.

Many Moving Parts

The St. Louis Fed published their annual report, "Many Moving Parts" earlier this year.  In this video clip,  Mr. Waller explains flows into and out of the labor force.

Monday, December 26, 2011

Is the Statute of Limitations a Moral Hazard?

Recently, Hall of Fame baseball writer, Bill Conlin, was accused of molesting two girls almost 42 years ago.  The statute of limitations has run out so no charges can be filed against the Philadelphia Daily News columnist. The law looks at the time as a measure of the severity of the crime.  In this case, the time it took the girls to bring the charges implicitly showed that they were not damaged by the events.  If a perpetrator knows that he/she can get away with a crime before the statute of limitations expires, is this a moral hazard?


Utility in economics is ordinal.  That means that a person can rank the order of their preferences, but they can't assign a quantitative figure to the preferences.  For example, I know I like M & Ms more than Reeses Pieces, but I don't know how much more.  If I could assign a number to the preferences, then my utility would be cardinal.  Utility is a slippery slope.  In AP economics we say utility is anything that brings satisfaction.  Students are usually satisfied with that definition, but I wonder if the definition is too broad.

I think the definition should be changed to show that the utility is the net satisfaction of all costs and benefits that accrue in the consumption of the good.  Perhaps it is better to break the term down into different components like Logistics does.

In Logistics, utility can take several forms including time, form, place, and possession.  Let's briefly look at each.

FORM UTILITY: Enhancing the marketability of a product by changing its physical characteristics. For example, boxed detergent can be produced in liquid form, which may be more advantageous for certain consumer preferences.

TIME UTILITY: Enhancing a product's marketability by making it available at a convenient time. For example, a daily newspaper home delivered so that the customer has it available immediately when he/she awakes for the day.

PLACE UTILITY: Where the product or service is made available. For example, if it is a retail establishment, people should be provided with easy access. Mail order companies make it easy for customers to shop whenever they want and then have their purchases delivered to them.

POSSESSION UTILITY: Additional consumer value created by allowing easy transferring of a product's ownership. For example, various time payment, leasing, and credit purchase strategies can be important in making a product more attractive to a consumer.

I also think that utility is inter-temporal.  For example, if I hold tickets to the Iowa-Ohio State football game that will decide the Big 10 Title, then up until the game begins, utility will increase.  After the game wears on and the outcome becomes certain, then the utility will diminish.

Utility is the brain child of Jeremy Bentham who postulated that man pursues pleasure and avoids pain.  I have been questioning the utilitarianism of choice in light of all of the behavior research that shows that consumers are not rational.

Sunday, December 25, 2011

Daily Review -- Normal Goods

Print out the graph, Market for Pep UP! then use a pencil to sketch what happens to the market equilibrium when consumer incomes fall.  Assume that Pep UP! is a normal good.  

When consumer incomes fall, the demand shifts to the left.  Most goods are normal goods.  AP students might not see immediately why this happens.  Think of the quantity of a good you can buy with a fixed income of say $10.  If the price of the good is $1, you can buy ten items.  If the price the price of item jumps to $5, the consumer can only buy 2 items.  

In the rate case of a Giffen Good, then your answer would be different.

If you like this kind of work, check out my app, Exam Cram, on the Android and Amazon Market.  Or Click here.

First Amendment and Christmas

The Establishment Clause prohibits the government from espousing a religion.  Thus, schools can't have Christmas trees in the classroom, give out candy canes, and court houses can't have a marble Bible in the foyer.  If all religions are given a voice, society becomes more secular, there is not repression of ideas, and individuals in the minority can be assured that their viewpoints will be heard.

If government is not allowed to establish a religion, how can the White House have Christmas trees, egg rolling contests at Easter, and all of the religious adornments of Christianity?  I think the White House is violating the spirit of the constitution and is establishing a religion.  That is, unless there is a Santa Claus in the Bill of Rights.

Asset Demand

HANOI—Some Vietnamese government officials are teed off over golf. Transport Minister Dinh La Thang recently banned his staff from playing the game because he said it encourages gambling and makes them late for work.
This is from a WSJ article, Vietnamese Investors Sink Savings into Golf Memberships, by James Hookway. The article reminds me that investors consider alternate uses of their money including whether to hold the money in an asset or in bonds.

Standard economics theory suggests that investors consider the return, the liquidity, and the risk when making a decision in financial markets.  Here Vietnamese investors think it's safer to store their money in property rather than risk inflation eroding the nominal interest rate of their investment.

Of course, if investors don't buy government bonds then fiscal policy will become ineffective.

Saturday, December 24, 2011

North Korea

North Korea isolates themselves from the rest of the world with the exception of border help from China. This is a country that is self sufficient. I believe this country is an example of what can happen when free trade is non existent. According to the CNN report I watched authored by Wolf Blitzer, North Korea has frequent power outages as many as five times a day. I saw workers maning computers in winter coats breathing plumes of air that frosted in the non heated areas. Snow removal was completed manually. The subway system was beautiful and also served as a bomb shelter. Maybe the country could shift production from military goods to consumer goods and have a higher standard of living. I am just pointing to the country as an example of what might happen if a country tries to produce everything itself.

Friday, December 23, 2011

Daily Review -- Supply and Demand

On the graph, Market for Pep UP! show what happens to the market equilibrium when the price of sugar donuts increases.  Assume that sugar donuts and Pep UP! Soda are complements. 

Print out this graph, decide which curve moves, and draw the new curve.  Check your answer below.

The answer expected for the AP exam is that the demand curve shifts to the left, the price falls as less is demanded.  The logic is as follows.  Juan consumes both soda and donuts.  If donuts cost more then he can afford less soda so his demand shifts.  There's a deeper logic going on here.  Economists assume that complementary goods have indifference curve that form a right angle.  When the price of one good falls, the consumer falls to a lower indifference curve because they have to consume less of both goods.  Here's another take.

Say Juan as $10 to spend on either donuts or soda and the price of each good is $1.  Juan can buy 5 of each good.  Now, if the price of donuts raise to $9, Juan only has enough money to buy 1 soda.  Juan's choices are constrained by his income.  Higher prices reduce his real buying power for both goods.  For more on complementary goods, click here.

If you like the Daily Review, you can get it on FREE on the Android market.  Click here for links to all of my apps.

Optimal Consumption of Two Goods

Juan consumes two goods, X1 and X2.  His utility function is U(X1,X2) = 4X1^.5 + X2.  If the price of X1 is $1 and the price of X2 is $2, and his income is $24, then the optimal consumption of these goods will be the point where the indifference curve equals the budget constraint curve.  This point occurs when 16 of X1 and 4 of X2 are consumed.  Any other point Juan cannot afford.  (The math is given in the graph where the MRS = -Px1/Px2.)

This consumption maximizes Juan's utility.  The question I have is, "Is this consumption moral?"

Mill would argue that the consumption point is moral if the consumption did not make another person worse off.  Since economists argue that every decision has an opportunity cost, then this choice has to have consequences.  Some of the consequences might be unintended and there might be externalities.    Adam Smith might argue that Juan acting in his own self interest is doing what's best for himself and for society.  Juan's consumption provides income in both the factor and product markets and expands GDP so society might have a higher living standard.  Juan's actions minimizes his pain because they satisfy his unlimited wants and needs.  Looking at all of the costs and benefits might yield a conclusion where the benefits are greater than the costs.  As such, the most good was done for the most people.  Some might consider this moral.

Daily Review -- Supply and Demand

On the graph, Market for Pep UP! show what happens to the market equilibrium for Pep UP! when the price of Yea! Cola increases.  Assume that Pep UP! and Yea! Cola are substitutes.  

Print out the graph and draw your response.  Write about your answer.

My answer is that the demand curve will shift to the left.  Now a higher price results for a larger quantity of Pep UP! Cola.  In the AP Microeconomics lingo, there was a change in demand because of a change in the price of a related good.  In addition, there was a change in the quantity supplied.  a change in the quantity supplied infers that it now takes more land, labor, and capital to make the caffeine-rich cola and the use of the resources comes at a higher opportunity cost which is reflected in the higher price.

These two goods are a related good.  Specifically, they are substitute goods.

It is my opinion, that the price of Pep UP! cola and Yea! Cola will equate and a long-run equilibrium will be restored.

One might argue that these soft drinks are produced in an Oligopoly market and that Pep UP! was the price leader.

This analysis was taken from my new app for the Kindle Fire which will appear on soon.  For all of my apps, click here.

Thursday, December 22, 2011

"Tectonic Shifts" in Employment - Technology Review

This article, "Tectonic Shifts" in Employment - Technology Review, discusses how structural unemployment will give rise to a protracted change in the unemployment rate. This is an idea often written about on this blog.

Monday, December 19, 2011

Monday's Journal

Click on the "share" above to see an interview about me in the Muscatine Journal.The picture above was taken by Mr. Jason Walker discussing marginal utility. 


Sunday, December 18, 2011

Economies of Scale and Christmas

While shopping for a toy train in Toys-R-Us I was struck with the size of the store.  A store enjoys economies of scale when the store can increase its output while lowering average total costs.  At Toys-R-Us the square footage was so large that the selection of toys was overwhelming.  My wife started to tell me about all of the magical times shopping at toy stores when she was a child growing up in Davenport.

Where have all of the toy stores gone?  My anecdotal data suggests that the lower costs of the Toy-R-Us was able to compete against the other stores on price.  In addition, the larger selection of choice lowered the cost for the consumer too.  The larger store drove the smaller stores who operate at higher costs out of the market.  I also believe that that Toys-R-Us enjoys barriers to entry such as cozy relationships with suppliers and logistics firms.  The store can keep other stores out of the market and compete on price.

Every year Blaine's Farm and Fleet has a Christmas toy selection that is awesome, but doesn't compete against Wal-Mart and Toys-R-Us every day and just uses the toys as a loss leader.  When it comes to toys, Toys-R-Us is not a firm to play with.

Daily Review -- Externalities

Max the Mouse is thinking about cheese.  For Max, cheese is under produced. Label each curve shown and discuss the externality.

Starting from the upper right and working in sequence, the curves are MSC, MSB, and MPB.  For Max, cheese would be a positive externality since MSB > MPB and would require a subsidy to entice producers to make more cheese.

From a homeowner's perspective, the cheese might be a negative externality so any economic situation must be viewed in the context of the user.  I believe that utilitarianism must be view by the act and not a categorical rule such as the one Kant required.

In this case, does providing more cheese benefit society as a whole?  If it doesn't then the subsidy should not be included in the production.

The Daily Review promotes my app.  My apps can easily be found here.

Look for my new app on Supply and Demand on Amazon within a week. I'm waiting for approval.  The app will be called Exam Cram.

Saturday, December 17, 2011

Kindle Fire APP

My new app will be on supply and demand and available on next week.  This app costs a $1 and will teach you about supply and demand.  I'm proud of this app because the user interacts with the screen.

A user can move the demand and supply curves, swipe screens, and tap to see the answers.

A major thanks goes to SSS Computing in Vietnam for unrelenting work and changes made over the last 30 days.

Teachers who use will be able to download the app for free to use in their classrooms.  The link is here.

Wednesday, December 14, 2011

Economic Bad

What does an indifference curve for an economic bad look like?

This is from Hal Varian's Intermediate Microeconomics textbook.  The slop of the indifference curve is positive for a couple of reasons.  One, in order to tolerate more anchovies, the bad, the consumer must be given more pepperoni to be compensated.  Two, an economic bad has a marginal utility less than zero.  this means that the change in the consumption of the bad is negative.  As I show in the hand drawn graph above Figure 3.5, a negative MU of -2 minus a negative three is a positive.  Thus, the slope of the indifference curve is positive.

A consumer  will chose less anchovies and more pepperoni until the indifference curve is tangent to the budget constraint curve.  As I have shown, that point comes where there are zero anchovies.  I believe this also shows that the consumer is moving to a higher indifference curve.

The indifference curve for an economic bad means something larger to me.  It shows the conflict between good and bad and that sometimes, the good actually wins.  In the same vein, man pursues those interests that maximize pleasure and minimizes pain.  This can be shown by the rightward movement of the curves.  Looks like Jeremy Bentham was right.

Monday, December 12, 2011

ICE cocoa futures

The graphic to the left ran in today's WSJ.  According the Journal, Vital Signs, a bumper crop increased the supply of cocoa and consumer demand in Europe has declined.  Both supply and demand effects have caused the price to decline from $3,774 to $1,936 a metric ton since March, 2011.

I think this graphic reinforces 101 economic theory.  Profits attract suppliers and drive the price down.  Cocoa is probably a normal good so when income declines so does the demand for the product.  Since these are futures being traded, future expectations of a lower price also shifts demand to the left.

All micro fundamentals aside, everyone is buying less.  At this rate, Willy Wonka will find it hard to stay in business.

Poetry and Economics

Sometimes I digress and study literature.  I have been writing a monograph on Hatun Surucu's honor killing based on David Gould's Two Sides of the Moon.  I found myself waxing poetically and thought of this poem, by Robert Frost.  How many economic concepts can you find in this poem thinking about his life as he lays dying?

My long two-pointed ladder's sticking through a tree
Toward heaven still,
And there's a barrel that I didn't fill
Beside it, and there may be two or three
Apples I didn't pick upon some bough.
But I am done with apple-picking now.
Essence of winter sleep is on the night,
The scent of apples: I am drowsing off.
I cannot rub the strangeness from my sight
I got from looking through a pane of glass
I skimmed this morning from the drinking trough
And held against the world of hoary grass.
It melted, and I let it fall and break.
But I was well
Upon my way to sleep before it fell,
And I could tell
What form my dreaming was about to take.
Magnified apples appear and disappear,
Stem end and blossom end,
And every fleck of russet showing clear.
My instep arch not only keeps the ache,
It keeps the pressure of a ladder-round.
I feel the ladder sway as the boughs bend.

And I keep hearing from the cellar bin
The rumbling sound
Of load on load of apples coming in.
For I have had too much
Of apple-picking: I am overtired
Of the great harvest I myself desired.
There were ten thousand thousand fruit to touch,
Cherish in hand, lift down, and not let fall.
For all
That struck the earth,
No matter if not bruised or spiked with stubble,
Went surely to the cider-apple heap
As of no worth.
One can see what will trouble
This sleep of mine, whatever sleep it is.
Were he not gone,
The woodchuck could say whether it's like his
Long sleep, as I describe its coming on,
Or just some human sleep.

Some of the economics I found were: wants are unlimited and resources are limited; marginal productivity diminishes as more and more of a variable input is added to a fixed; incentives matter; choices have a cost; in the long run we are all dead.

Sunday, December 11, 2011

Derivied Demand and Ethanol

Derived demand is a term used in the factor market used to explain that the demand for a resource such as labor is "derived" from the product demand. For example, suppose that consumers suddenly want more apps for their mobile devices. Businesses will now hire more programmers to make apps. In other words, the demand for programmers is directly related to the demand for the product that programmers make--apps. When the price of a product increases, the product becomes more valuable and the firm produces more. In order to produce more output, the firm has to hire more labor, use more land and capital. If the programmers become more proficient in production, then the firm can produce more output.

Theory suggests that the firm will hire more programmers. An excellent review of derived demand can be found here. In early 2000, the state of Iowa required Ethanol blending in gasoline. Lawmakers wanted to reduce dependence on foreign oil. As I remember the law, each year required a greater amount of Ethanol blending. To induce producers to grow corn for Ethanol, farmers were given a $0.51 subsidy. As a result, there was an increase in the price of corn through a change in demand, and an increase in the amount of land devoted to corn. As one Lake-View Auburn farmer told me, "There's only been two times in my life where I've seen corn prices increase and corn production increase at the same time."

What the 83-year old farmer meant was that an increase in the production of corn would mean an increase in supply that would decrease the price of corn. So all of the activity in the corn market had to be the result of government legislation. The legislation worked. Corn was being intensively grown and production techniques that required the use of pesticides increased productivity. Crops were not being rotated so that less wheat and soybeans were planted. Soil erosion and genetically modified foods became a world issue. The result was an increase in demand for the factor that produced corn. This is an example of derived demand.

Ethanol is produced in Midwest states and sold in Iowa, Illinois, Wisconsin, Minnesota, and Nebraska.  There may be other states, but I know Ethanol is not sold nation wide because it's too costly to transport.  Likewise, if the price of crude oil drops, Ethanol is more expensive so consumers will switch to another octane to save money.  Since Ethanol only helps consumers and producers in the Midwest, one must question the distributive, income, and ethical effects of the subsidy.  Like any law, the effects have unintended consequences such as unjustly enriching the Midwest.

One could make the argument that foods prices that use corn increased.  Some argue that the price of tortillas increased in Latin America so much that famine forced starving kids in Haiti to each dirt.

A fundamental concept in economics is that choices have a cost.  The Ethanol subsidy provided many benefits but also contained many costs.  Economist Jeremy Bentham believed that an action was moral if that action created the most good for the most people.  Clearly, the Ethanol subsidy violates that belief.  In fact, Bentham would argue for the removal of the subsidies.  That argument would fall on deaf "ears."

Saturday, December 10, 2011

Dirty Secrets

In a WSJ article, Procter & Gamble and Colgate-Palmolive are accused of forming a cartel to set the price of laundry detergent. One of the price fixing strategies was to never advertise "Buy one and get one free." According to the article, the cartel met four times a year in clandestine places. The giants used code names to avoid detection. The cartel broke down when one of the conspirators, Unilever,turned state's evidence when granted immunity. A Business Week article is here. In an oligopoly, competitors can compete on price, but prices tend to be driven to their marginal cost where profits are non existent. Industry participants are better off competing on non-price factors such as quality. In the laundry soap industry, there are few areas to compete and the good tends to be income inelastic. Fixing prices would ensure each firm a place in the market. When markets are left alone, a price results that is best for consumers. In the U. S. competition is a hallmark characteristic of Capitalism. To defeat this free price mechanism is to hurt the members of society and as a result, is illegal.


In the model, the price of labor is $2 and about 2 million are going to be hired. In labor markets where markets are monopolized by a company hiring additional labor comes at a higher marginal cost, the firm can pay a lower wage. The firm will maximize profits equating at the point where MFC equals MRP and making the price along the supply curve. In markets like nursing where workers can only work at the local hospital or teachers can only work at the local elementary school, workers are paid less than their marginal product. This could be one reason why women are paid less than men.

Freedom of Choice

In the game matrix above, both players have the choice of raising the price,lowering the price, or keeping the price the same. Raising or lowering the price would lower the utility of either player. The only choice left to the players is to keep the prices constant. In a society that values free choice, no choice at all isn't free choice.

Wednesday, December 07, 2011

Regression to the Mean

In wrestling practice today, I noticed that when I yelled at a kid, his performance would improve. When I complemented a kid, his performance would get worse. The book, "Fast and Slow thinking" explains statistically why this behavior occurs.

Daily Review -- W/MP

This graph shows a relationship between Marginal Product and Wage. 

Dividing W/ MP will equal the Marginal Cost.  Can you explain why?

There are three ways to find MC.  One is to divide the change in total cost by the change in output.  In the table, this is shown as the change in column G divided by the change in column C.

Another way, is to take the change in Variable Cost divided by the changed in output.  In the table, this is shown as the change in column F divided by the change in column C.

But the way to calculate MC in factor markets is to divide the Wage, W, by the Marginal Product, MP.  One can observe from the table, that the change in variable is $10, or W and that the Marginal Product is the change in output.  I don't think is is obvious. 

The Daily Review is for my FREE App which can be downloaded for the Android Device here.  Look for my app on supply and demand very soon on the Amazon market.

Ethanol Subsidies -- Deaf Ear

            “Only twice in my life have I ever seen a record corn crop and prices rise,” says Don Smith, and octogenarian farmer in lake View, Iowa. With federal mandates requiring 9 billion gallons of ethanol production and ethanol subsidies of 51 per gallon, farmers in Iowa are finding it profitable to plant corn instead of beans and wheat. Don had a small farm and plants 80 acres of corn and 80 acres of beans rotating his acreage so his land remains fertile. “for some, it’s corn, corn, and corn,” says Smith.  “Soon the land will become so dry from all of the chemicals that the ground will become like a road.”
With over $25 billion in agricultural subsidies this year, the crops in Iowa’s fields are beginning to look like that yellow brick road.
Corn and wheat are few of commodities that have seen their price increase as part of America’s push to be free from dependence on foreign oil. The effect has been a spike in corn and wheat prices. Iowa’s farmers have responded to these signals by planting more corn even in low-lying flood plains near the Mississippi River. Corn yield have increased from 40% by using chemicals like Roundup and corn drilling plant rows closer together. “Uses to be that you could drive at night and the corn borers were so thick that you’d have to use your windshield wipers to clear them off. They go (insecticides) built right into the corn now, you don’t see corn bores anymore,” says Smith. With corn production up 15%, prices should be falling—no growing.
Smith received subsidies even though corn prices are up. “Why I got a subsidy with the corn prices the way they are, I don’t know,” he says. Politic al action groups like Iowa Corn Growers Association lobby for subsidies to protect farmers like Smith. In 202, President Bush signed the Farm Security Bill to protect Smith and other small farmers.
            Agriculture has a long history of using subsidies in insulate the family farm form spikes in commodity prices due to severe weather and to protect and American institution that teaches the value of hard work, honestly, thrift, and family values.
The price supports created a surplus of corn and other agricultural commodities. Often the surplus was placed on the world market. Recently, the surplus has been used in ethanol to reduce U.S. dependence on foreign oil. Federal mandates to blend more ethanol, subsidies, import tariffs, and depreciating U.S. dollar have pushed the price of a bushel of corn well over $5.
Legislator pint out that the U.S. imposes an import tax of 54 cents per gallon on ethanol imported for fuel. The tariff, then, pays for the subsidies. The farm subsidies protect the small farmer like don Smith form large-scale corporations that farm thousands of acres.
Critics of farm subsidies argue that federal initiatives has lead the world wide increase in food prices and using growing genetically manufactured food had adverse environmental effects that are nonpecuniary.
The tariffs also lead to a higher domestic price critics argue and encourage a greater portion of land devoted to corn and away form wheat. The net effect is higher food prices for both commodities.
Farm subsidies have had unintended consequences on food prices and distribution of income yet legislators turn a deaf ear to the market.  


Tuesday, December 06, 2011

Daily Review -- How Many Workers to Hire

If the MP curve equals the demand for labor, how many workers will the firm hire to make Frekles if the wage is $4?  If the wage is $6?

At a Marginal Resource Cost of $4, the firm will hire 4.  At a Wage of $6, the firm will hire 3.  In Micro, workers are hired to the point where MRP = MRC.  Here, the price of the product was equal to $1 so the MRP was equal to MP.

Look for my Kindle Fire App on the Amazon Market place within a week.  It'll be called Exam Cram.

Sunday, December 04, 2011

Kinked Demand Curve

Harry's and Larry's are two producers selling Ferkles in a market characterized by strategic interaction.  The payoff matrix for the firms are shown above and the kinked demand curve for the market is shown at the left.  At a constant marginal cost of $8 the firms are stuck at producing 4 units at $9.  Can you explain why one firm can't lower or raise their prices?  Why is industry stuck in a Nash Equilibrium?

Ethanol Subsidy

How do Ethanol subsidies work?  I wrote to Dr. Walter Nicholson, author of my favorite intermediate textbooks on Microeconomics.  This post reflects what I believe he replied.

Ethanol receives a $.051 subsidy in Iowa.  On the graph I have shown a fifty cent subsidy driven as a wedge between supply and demand.  If market forces were allowed to operate, the market would clear around a quantity of 4 and a price $3.75.  But legislators, like Chuck Grassley, Rep., Iowa, want to encourage the use of Ethanol as a way to reduce dependence of foreign oil.  In order to induce more farmers to plant corn, a $0.51 subsidy is given to producers.

A wedge of $0.51 is driven between supply and demand as shown as the green right triangle.  Now producers will produce a quantity of 6 and be given a price of $4 per unit.  This price is higher than the market clearing price.  At the market clearing price of $3.75 total revenue was equal to $3.75 times 4 or $15.  Now total revenue is $24 and the quantity is 6.  There is now more corn for Ethanol blending.

The price control distorts market incentives.  Farmers now change the quantity supplied in response to the subsidy.  They now plant more corn and less wheat and soybeans.  The prices in these markets increases.  It can be argued that the price of bread might rise.  Our exports of wheat and soybeans will decline.  People dependent on these products will suffer.

For consumers and producers in the Midwest, the Ethanol subsidies are great.  As an Iowan, I get the benefit of lower prices.  Our farmers, now earn a higher income which they can use to invest in new capital.  As always the effects of a program are unequal and the total costs and benefits have to be considered before  evaluating any policy.

Daily Review -- Income Elasticity

Can a good be both income inelastic and a normal good?

My answer is "yes."

If my income raises, I might buy more laundry detergent, but I doubt if I would buy so much that my purchases would be greater than my percentage change in income.

Last week, I observed gas prices falling daily.  In Iowa, I saw prices fall to $3.14 from $3.29.  Gas prices are volatile and so is food.  Both food and energy are omitted from CPI calculations when reporting to the general public.  But changes in food and energy prices are exogenous.  I was wondering if ag-subsidies on Ethanol were being removed.  Subsidies artificially prop up prices by $0.51 in Iowa.  According to this post by Sahil Kapur, Ethanol subsidies are not going to be removed largely because of political reasons.  The price changes we are seeing are a reflection of supply and demand fundamentals in the spot market.

So far, my analysis is incomplete and incoherent, but food tends to be income inelastic.  But prices tend to be volatile for food.  Subsidies were given to Midwestern farmers to induce them to plant corn to be used for Ethanol. A subsidy is a price support.  As real income is increasing while gas prices are falling, does this mean that gas is an inferior good?

I think the answer depends on the consumer.  For me, my gas consumption does not change as my income changes, but I might be in a minority.  I've painted myself in a corner on this post, so it's time to move on.

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Thursday, December 01, 2011

Another Moral Hazard

Andy House has been accused of driving his Bugatti Veyron, a rare French car, into a marsh to collect fraudulently on insurance.  According to this site, Mr. house took out a $2 million dollar insurance plan on the $1 million dollar collectible.  While driving his car, Mr. House swerved to avoid hitting a pelican.  The case in now in a federal district trial court. 

Insurance companies seldom insurance an item for more than what it's worth because that action creates perverse incentives.  Economists would say that a moral hazard is created.  That is, the owner of the car would have an incentive to act recklessly because the value of the insurance payout is greater than the worth of the car.  So wrecking the car would actually be profitable.  If the facts of this case are accurate, a clear moral hazard was created by issuing an insurance contract for a greater value than the worth of the car. 

Mr. House should have been required to have a huge deductible and a large premium on his car. In the absence of both, Mr. House took a risk and wrecked his car, in my opinion.