Class 41 - Entrepreneurs

Society only cares about the distribution of wealth, not the accumulation.

Entrepreneurs

Factors of production = land, labor, capital

Land = explicit cost = rent

         = implicit cost = forgone opportunities

Labor = explicit cost = wages

           = implicit cost = forgone wages

Capital = explicit cost = rent (materials)

             = implicit cost = forgone rent

Profitability = rental rate + appreciation rate – interest rate

Benefits of buying assets = forgone rental payments

Annual [(rental payments) / (price)] + [(change in asset price) / (price)] – 10% = 2.5%

2.5% = how much richer you get each year by owning a car compared to renting it. Positive = buy it, negative = rent it.

Class 40 - Dead Weight

An excise tax makes sellers pay. The sellers send money to the government – legally. Putting a $1 tax on something causes the supply curve to shift out and the price rises by less than the dollar.

The cost of taxes is the value of forgone trades. The value (not money) of the products that don’t get sold due to the tax= dead weight loss.

Taxes are just transfers but they change people’s behaviors. Taxes make people substitute. They give sellers an incentive to sell other things.

Resources collect taxes inefficiently so America has a 30% dead weight loss.

Buyers pay sales tax = Taxes cause demand curves to shift by the amount of the tax.

Excise and sales tax graphs look the same. Legal incidence of taxes doesn’t matter; they’re independent of economic incidence.

Economic incidence is determine by relative elasticity of supply and demand. A steep demand curve is inelastic.

The party less sensitive to price change will bear the burden of the tax.
*More elastic = bare less burden

Economic burden is a function of the slopes!!!

ECONOMIC IMPACT OF TAX = how much worse off you are compared to beginning after taxed
buyers - how much more they pay for product
sellers - how much less they take home for product

Class 39 - Everything's Bigger in Taxes

An excise tax is where the legal liability for the tax is on the seller – they have to pay the government.

The tax may increase but the product’s price did not increase. The ultimate price increases.

Why do taxes not raise as much as they should? The make wedges between buyers and sellers.
-inefficient
-hurts the world

Taxes are bad = prevent socially beneficial transactions.

Taxes aren’t costly. The act of raising taxes is.

Fore!!!!

At Bethpage Golf Course in NYC, a public golf course, there is a shortage of tee times. As the demand of tee-times increase for avid golfers in a highly populated area, supply stays constant. The Golf Course has tried to ration off the scarce tee-times but the allocation has only resulted in the emergence of a black market. There are about 70,000 golfers trying to play the limited 35,000 rounds a year. The nygolfshuttle.com has been able to play the system and created a business of supplying tee-times to golfers for a very expensive price. This rationing system gives the tee-times to people who can afford it and not always to the persons who most value golfing. Bethpage has tried to deal with the scalping of the tee-times but the shuttle company operates under totally legal procedures. Bethpage has tried to institute rules to prevent scalping and people who go around the rules but has failed. Look I admire the shuttle company. Sure they are a horrible scalping company who is making money where they shouldn’t in a system much like rent control, but they are a good middleman and deserve to profit for being smart enough for instituting the shuttles and scalping system.

1.  Is there a better rationing mechanism for the tee-times? Can we give the tee-times to people who really value them and can’t purely just afford them?

2. Can we fix the system? Is there a way to eliminate the shuttle company and scalping system? Should we even fix it?

3. Is the shuttle system a good or bad thing? Is it ethical?

Supply cannot meet the increase in demand so a shortage emerges. Because of this a black (secondary) market develops as well.

End of the Semester....Need......Food!

So as we get closer to the end of the semester all students are facing one issue: we have very little declining left!

Look at the beginning of the semester I had $500 in my declining balance and used it without hesitation through the months. I have as of today $64 left in my declining balance. Now this is probably just enough to make it through the next 14 days I am here at school especially with my ability to use unlimited at Douglas and Danforth. However, I have noticed some things over the past week or so.

As people start losing declining and notice that their balance is getting under $100 or so they start spending less at the Pit and Starbucks. This has lessened my late night trips, study breaks, and just boredom to go get some Panda Express or coffee. And it could not have come at a worse time.

Look Danforth and Douglas are great, they have edible unlimited food, but it never changes and I'm sick of it, but the Pit has varieties and stuff from the "real world."Coffee is becoming more of an essential as finals near and I am up late writing papers or studying. So when I need my declining the most, I see I have the least available.

So people have responded. People buy less. They use declining less often. People (yes I have seen it) steal. And the Pit and Starbucks have done NOTHING! As a company, these restaurants should be ashamed. Here's what I say: We should have a system where we save about $50 for finals week when we want to use our declining the most. Also turn off the light up screens that say our balance when we check out. We can easily have a system where we check a price online if we care that much and we just get a bill at the end of a semester telling us how much we owe for our declining spent. This way people won't stop their spending in a time that spending is most encouraged and companies will prosper.

Class 38 - Minimum Wage and Rarity

The world needs no regulation...what?

Minimum wage
Companies respond to increases in minimum wage - hire less.

Rarity and Scarcity
Rarity is something we don't have a lot of (absolute concept)
Scarcity is something that is not enough to go around (relative concept)
Rare but not scarce or scarce but not rare.

Surplus and Scarcity
In a surplus, Qs > Qd. Scarcity means there are tradeoffs to get things. Surpluses describe how much supply and demand there is at a particular price.


Making things illegal:
1. Producers keep making the goods. You make a lot more when its illegal - inelastic.

Class 37 - Rent Control

There are things in our world that are unearned and we shouldn't profit from them. Unearned rent is rent that people pay to you that isn't a result of your own productive activities.

Rent control - price ceilings

Consequences of Rent Controls
1. Reduced availability and goods are harder to get - still have competition/rationing
2. Lower quality
3. Money is paid other places - black markets
4. Misallocations - people who want goods don't get them
5. Impact other markets
6. Fairness
7. Discrimination
8. Monitoring/Enforcement Costs - costs associated with regulating leads to costs
            -intrusions reduce incentives to keep apartments in the long run and the supply curve shifts/flattens
            -monitoring doesn't produces goods/services
            -raises taxes

Class 36 - A World of Prices

People economize because of prices so when rationing, only people who want goods get them.

Centralization vs decentralization
Central planner decides the producer, who gets the good, and how much to make. But no one has all the information for this.

Price Fixing
A good's price shows what is happening in the economy. Buyers hate high prices/sellers hate low prices. Price changes.

When gas prices go up it is price gouging. When prices go down, they are exploiting workers and competing. When prices are equal the companies are collaborating.
Price fixing = rent control

"Duked" Out of A Dorm Room

In Mungowitz’ blog post, he talks about how the Duke University housing lottery is unfair and a bad rationing mechanism. According to his story, Duke put the Iota Tappa Kegga (ITK) frat in a spot that the Baseball Stats Study Group (BSSG) while BSSG was in a spot that ITK wanted. The University refused to allow ITK to pay BSSG to switch dorms but would allow them to trade. Mungowitz addresses the fact that the University should not prevent this exchange because it makes the two parties better and no one worse off. But still the University says (in a vague and badly written letter that inspires contradiction) that the monetary exchange goes against the “intent and spirit” of the University and the housing committee and only a money-free trade would be allowed.

1. If the monetary exchange were to happen, what negative effects would plague Duke and the housing lottery in the future?

2. Should Duke replace the housing lottery with a better rationing mechanism? What if the system came on a first come first serve or force rationing mechanism?

3. Did the University officials do the right thing and if so what were the real reason they prevented the exchange?

This blog post article looks at how a “fair” rationing mechanism of the lottery can turn into a horrible rationing mechanism when “the assignment of a group to a space allocation has zero, zilch, bagel, nada to do with how much that group VALUES that location." In this case the lottery is a bad rationing mechanism. There is no doubt behind this.

Some people say the exchange should have money involved. When people are forced to barter, the trade will take a long time (if ever). ITK would have to go find some group who is willing to trade with no money involved. This time spent is an opportunity cost of time wasted, especially in college. With money involved in the trade, bartering is not needed and a trade can occur easily.

So why did Duke prevent a monetary exchange but allow a trade? The administrators at Duke University are smart enough to realize the law of unintended consequences. If groups are only allowed to trade dorms then there will be very little consequences, all transactions would require a majority vote for a trade. However, if the exchange was monetarily based then there would surely be unintended consequences. The first pick in the lottery would pick the most popular spot on campus or a spot they know someone wants (even though they do not want it) and force people to pay them for the switch. The housing lottery would turn into a game where the first picks in the lottery would attempt to get money. When we put money on a transaction that originally was based off of wants and a need to trade (like paying for Kidneys) there are unintended consequences that follow. Things become a market. Also, the marginal value behind the "best" house that the first pick in the lottery has is amazing and many people will want the dorm. A monetary exchange will cause students to drive up the price as they compete for the best house and the people who won the house in the lottery would gladly charge a high price that they know people are willing to pay. Look there may be many other unintended consequences but Duke still should have come up with a better reason than the exchange goes against “the intent and spirit” of the University. Come on!

Rationing Mechanisms on Black Friday

On Black Friday people line up in the middle of the night to get the best deals at stores with amazing sales. While everyone in America is starting to think about buying gifts for the holidays (and there is a fixed amount of goods in stores) the goods are rewarded to the Americans who camp outside stores on a fake holiday that comes the day after Thanksgiving.

The rationing mechanism for Black Friday is that of queues - it is first come fist serve. This mechanism is the most costly as people must pay the opportunity cost of standing in line. While people are standing in line and not dining other useful things (like sleeping), the fail of this mechanism is the fact that there is no sense of value.

Stores believe that if people truly valued a good then they would get in line but this isn't the case. Just because a rich person in front of me wants to buy one of twenty toys for their kid doesn't mean they should get it. What if the only thing my kid wants is that toy? Who values it more and who should get it? - Me. But who is in line first? - Mr Rich man.

So even prices fail to be a rationing mechanism here. Queues have taken over Black Friday and there is no sense of value that comes into play during this holiday. We have failed.

Class 35 - Decentralized Knowledge

Today we talked about the advantages of decentralized knowledge.

Centralized knowledge is an impossible dream but decentralized knowledge can work (doesn’t always) and well functioning markets and democracies help combine decentralized knowledge.

For example if on a supply curve: if it’s easy to find titanium and the price of titanium increases, then producers will dig up a lot of titanium. But if it’s hard to find titanium then the supply curve will be steeper.

Czar of titanium – needs to know everything about titanium – all the stuff he doesn’t and will never know.

The solution to the failure of the czar = prices.

Prices show that someone can make adjustments.

If you change your behavior, the price increases less and the quantity supplied doesn’t increase as much when demand is elastic.

Class 34 - Confucius Says: Be at Equilibrium

Today we looked at what happens when there are changes in supply and demand. We ask ourselves two questions: How the buyers and sellers respond to the changes and whose plans are satisfied?

These changes create either:

Surplus – quantity supplied > quantity demanded at a particular price

Shortage – quantity demanded > quantity supplied at a particular price

When these two conditions happen, forces work to reestablish equilibrium.

The high prices signify scarce goods. Prices increase to relieve a shortage.

The low prices signify non-scarce goods. Price decrease to relieve a surplus.

Scarcity talks about relative abundance – not absolute abundance.

Equilibrium is where neither buyers nor sellers have the incentive to change their behavior at a certain price.

There is market clearing equilibrium (good) where quantity demanded = quantity supplied.

Also there is non-market clearing (not good).

WWII Propaganda Posters

The first poster tells consumers to conserve materials because "waste helps the enemy." By decreasing demand for citizens on materials, the supply of the military will increase. The second poster tells consumers to use less gas by carpooling because "when you ride alone you ride with Hitler." If citizens decrease their gas supply, the military can have more gas. The third poster tells people that the world can't be half slave and half free; this poster appeals to American principles and ideals and tries to get people to enlist in the military. The fourth poster tells people to pay no more than the price of rationed goods and also to not accept free rationed goods. This is an attempt to protect America from inflation by keeping equilibrium price steady.

I can see what these posters are trying to do to people but could the people in the 1940s? Did they recognize that these posters were trying to help them? Also who made these posters? Did the government or did private businesses and companies or a mix of the two? And finally, did these posters work? Did the propaganda work and is there data to support this?

We looked at WWII propaganda posters because they show economic principles of supply and demand where we try and increase military goods while rationing civilians'.

Defying Gravity and the Law of Supply

There is probably some elasticity rule or other factor of supply curves that I haven't realized yet but I may have found something defies the law of supply.

Supply curves show that as price increases, there is more production and more quantity supplied. Supply curves slope up due to the law of diminishing returns - its harder to make more/cheaper goods after the first set of goods.

However, I had my OBOC (Off Broadway On Campus) show this weekend and we ordered shirts with a 4 colored print of "Defying Gravity" (a Wicked song). The shirts cost each person $17 and costed the producer some price to make. But here's the thing with tshirt prints. It costs MORE to make that first tshirt. After the print is made for that first shirt, the price decreases for each shirt produced - it's easier to make tshirts. This defies the law of diminishing returns.

So when the quantity supplied increases, the price actually decreases for the producer. This doesn't follow the Law Of Supply!

Again I may be missing some factor or law of elasticity, but do printed tshirts defy the law of supply and diminishing returns?

Class 33 - Kidneys! Kidneys! Getcha Kidneys Right Here!

Market economies goal = get goods to people who value them the most.

Price system
-ration by price system = people decide/ration for themselves = economize
-prices = consumers look at values and tradeoffs

Can healthcare be independent of consumer characteristics?
-equal access = coin flip chance
-illegal to sell kidneys = higher marginal value on a kidney

transactions = money changes the nature of a transaction
-batering is ineffiecient - hard to find people to barter with
-prices allocate goods - assign values to goods (lowers transaction costs)

Class 32 - Rationing Mechanisms - Not Fair

The challenge we are dealing with is scarcity. We use the price system to ration scarce goods. The costs are opportunity costs and they are what other consumers are willing to pay for a product is a cost for the producer.

Rationing Mechanisms:

1. Need - neediest gets it first. This seems very appealing but it's too vague. Who determines need levels?

2. Queues - first come first serve. This is the most costly. The length of the line = price/cost

3. Lottery - fairest. However, the people who value/need it more might not get the good. Basketball lottery isn't fair. In 2007 the Celtics were the 2nd worse team but got the 5th pick in the draft because of the lottery and didn't get Kevin Durant for this reason.

4. Equal shares - communism. Cutting up makes some things worth nothing and not all parts/time cut up aren't worth the same.

5. Force/Kicking Ass/Might Makes Right - costly. You can't plan and it's not fair - same people never win

6. Merit - good moral connotations but hard to say who earns merit


Evaluation Rationing Mechanisms:

Competition comes from scarcity.

1. What is the nature of competition?
-is it destructive or constructive?
-price system is the only one not destructive.
-when people focus on competition they don't focus on other things
      -but with the price system - competition focuses people on productive benefits

Class 31 - Supply!

Supply
Each point on the curve: the cost of producing a unit. Price increases = more production = more quantity supplied (it costs more to make more).

Supply curves slope UP!
-This is because of the law of diminishing returns - its harder to make more/cheaper to grow the first 10 acres of corn than the next 10 (more fertilizer/water)
-Other factors - other factors that have law of diminishing returns

What changes supply?
-Price of the good changes as you move along the existing supply curve. Change in supply shifts curve.

-changes in factor (input) prices
-expectations
-technology
-changes in other markets
-elasticity

Price Elasticity of Supply - How much more will I produce when the price goes up?
m = %change in quantity supplied / %change in price of good

The Theory of the Leisure Class

Giffen and Veblen Goods

Economists are convinced that nothing "breaks" the law of demand which says that when price increases, demand decreases. Their way of explaining price increase with quantity demand increase is by claims of elasticity, substitution, and complimentary goods. But there are some goods that defy the law of demand.

Giffen goods are a type of inferior good where quantity demand increases with a price increase. These goods are a legend first thought of by Sir R. Giffen, but don't exist - to what we believe. Sir Giffen showed that for example: "a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits." This in reality is just because all prices have risen and not just bread - and bread is still the cheapest.

Veblen goods seem more feasible. They are also known as goods of ostentation - basically showing that you have wealth. Why should a person desire more expensive goods? Even when the price is outrageous and income doesn't change (or may even decrease) the quantity demanded is still high because it is a symbol of social status. These aren't just normal goods - they are superior goods. It is hard to prove that these goods exist.

For both goods, it is hard to prove they exist. It is very hard to prove that Giffen goods are real, but Veblen goods seem more reasonable. When looking at things in a social class context, goods do seem to increase in price and quantity demand at the same time.

source:
http://kadicamardese.blogspot.com/2007/10/what-are-giffen-goods-what-are-veblen.html

Class 30 - Elasticity and Supply

 Income Elasticity of Demand:

%change in QD / %change in income

-how much consumption changes with income

            -income goes up, number is positive = normal good – buy more as income goes up

            -income goes up, number is negative = inferior good – buy less when income goes up

Ex. Income is $50,000 and you spend $500 on a good and M =2.

            If income increases by 20%, you spend 40% more on that good

            If change in income is $10,000, you spend $200 more on that good.

Cross Price Elasticity:

Cross price elasticity = positive = goods are substitutes

                                  = negative = goods are inferior

Pizza / burritos. Price of pizza increases = demand for burritos increases. = substitutes

SUPPLY

More money = produce more

            Cost = tied to an action (not just a thing)

                    = tied to a person

It costs more to make a bike than a table because bike resources are valued more and the people who make bikes have an easier time finding jobs. Opportunity cost of table resources are less than the bike because people bid away resources.

Quantity supplied vs law of supply:

Quantity supply = amount of good that firms are willing/able to produce at a particular price

Law of Supply = price of a good rises = sellers make more.