Class Summary #42 for 12/12/11

Today was our last day of class, and Prof. Rizzo spoke about profits, losses and entrepreneurs. Below is all that we learned about in class today

• Definition of profit: The difference between your total revenues and total costs…
•  Total revenues - total costs = profit
• A wage is nothing more than a contract. A contract between worker and firm that specifies exactly what I’ll be doing and what I’ll not be allowed to do and in exchange it says how and what ill be compensated. In advance I know what I’ll earn, they know it advance what it will cost them. The whole point of a wage is to eliminate uncertainty.

Rent- The reason rents are paid are to eliminate uncertainty. You know you will get a good and they know how much they will get. In short, the point of both a wage and rent is to eliminate uncertainty.

Then we learned about interest. Interest is a price. Where do prices come from? They come from supply/demand. What supply/demand process does it come from? The market for loanable funds. Interest emerges from the fact that people want to attain purchasing power that they haven’t quite earned. The price of attaining unearned resources= interest.

In short, we learned that profits are not wages, rent or interest. They are an economic calculation of how much someone gains from doing something.

Prof. Rizzo used an example of his wife to represent a mathematical example of how to derive a profit. Here it is:

Rachel used to earn $30k as a secretary

-       also owns a building that rents for $6k a year

-       Also owns a savings account at bank with $23k in it, and it pays 10% interest

Suppose she quits job and then opens up a pizza shop. She works full time for herself and uses her own building and sells her savings account (cashes it out). She also borrows $20k for pizza parlor equipment.

Profit= total revenues – total costs

P= $85,000- ($23,000+$20,000+$20,000 * (10%) ) = $40k in an accounting sense, she has made $40k as profits. 

But is this the number she should use to weigh whether she made a good decision? No, she must consider opportunity costs as well. She must subtract “implicit costs” in profit formula, which are lost salary from another job, lost chance to rent building to someone else for more money. She also loses $23k *10% for taking money out of bank.

Therefore, real economic profits = total revenues – total explicit costs – total implicit costs

Profits = $1,700  = “price”

That’s what Rachel is left over with after she spends all of her resources on working

That’s her economic return to being an entrepreneur in pizza industry. Doesn’t mean how much cash you have, it means if you make decision to open pizza parlor, that’s how much profit you make over next best cost.

Bottom line: profits exist only in a world where we have uncertainty  because we just don't know exactly what will happen economically speaking. Therefore if I incorrectly predict, could still make money but profit economically speaking could still be negative.

Then, Prof. Rizzo concluded class by talking to us about markets and stuff relating to markets, specifically relating to pizza parlor industry.

When new firms enter market, profits are pushed down, which thus lowers prices. The more aggressively people compete in pizza market, prices fall. Inefficient produces get rationed out of market, efficient ones get ushered in to market. Consumers and producers are better off.

Thus in cheese market, demand will increase, supply will increase, price will increase for cheese.

Big problem with economic losses:  They destroy resources, burning up carpets, destroying environment and building, etc.. Taking resources from valuable uses and putting them towards destructive uses is what happens when they are economic losses.

Finally, Prof. Rizzo ended class with the following words: 

Capitalism is all based on individual decision making

No system in history has encouraged economic activity quite as well as capitalism.

Class Summary #41 for 12/9/11

Today we learned about Profits, Losses and Entrepreneurs. Rizzo covered a number of interesting topics relating to entrepreneurship and what we as a society consider unethical and ethical.

Rizzo started class by pointing out that we don't celebrate accumulation of wealth but we do celebrate when a person disperses wealth. This brings up the question: Are we better off when Bill Gates produces for Microsoft and makes more money then when he gives money away? The answer could be yes, because if he is making money, it means he is producing effectively as an entrepreneur.

Then we talked about making money at the expense of someone's misfortune. As Rizzo explained, this could be: clothing companies making money off my nakedness, and builders making money off my homelessness. If it is wrong to take advantage of money opportunities at someone's misfortune, then it is also wrong to do the above mentioned things.

The key to consider is how these companies take advantage of our misfortunes. Doctors, for example, do make money off our sicknesses, but how do they do it? They do it by helping us, not by making us sick. Therefore, how is this immoral? They help us fix our problems, what is wrong about that?

You have to look at it like this: money is the motivation for people to do work. For a doctor, it motivates them to do their best to save us. Without the incentive of money, no one would be motivated to work.

Simply put, it is moral and fair to charge people for their misfortunes because if we don't, then their well-being will come at our expense. If I am a doctor and don't get paid for doing work and save someone for free, then I am helping someone but not getting any benefit for my labor. That, if anything, is not moral.

Rizzo also defined the meaning of entrepreneur as a person whose job it is to find what we as a society value/want and create that thing.

Then we learned about Factors of Production, which are:

1. Land
2. Labor
3. Capital

We also learned about profitability. 

The mathematical equation for profitability is Rental rate + appreciation rate - interest cost

Rental Rate = Annual rent / price of good

Appreciation rate = change in asset price / price

Interest cost is whatever the interest is.

If the answer in the profitability equation turns out positive, it means we are better off/richer by buying something as opposed to renting it. If it is negative, the opposite holds true.

This equation can help us determine whether or not it makes sense to buy or lease a car, for example. The example Rizzo gave us in class surrounded whether or not we should buy or lease a car. The profitability turned out to be 2.5%, so this in turn told us we'd be better off buying the car than leasing it.

Reading Assignment #14-The Sumptuary Manifesto

A.
I found a couple things in this article to be interesting and I am happy I chose this article because it made me think of a ton of economic related topics we have learned this year. Specifically, I think the reading very well articulated how a society should NOT be run to promote economic growth. Most, if not all, of the laws presented in this article would be bad for economic growth and go against what we have learned this semester to be "good economics."

First a foremost, I found it interesting how this society/governing body felt that wasting resources was so bad that it was necessary to enact such specific regulations so as to control exactly what a person can and cannot do.

All semester long, we have learned how over regulation is a bad thing, that is prevents possible transactions from taking place that could very well be productive. I just found it interesting how convinced the governing body seemed to be that their ridiculous regulatory behaviors would lead society to more success than harm. As we have learned in class, this couldn't be farther from the truth.

I also found the rules and regulations presented in this article to be completely hypocritical. In the article, it says that no one should "propagandize" against them. Meanwhile, this entire article is complete propaganda, spitting out ridiculous and oppressing regulations for people to follow.

Finally, the last thing I found interesting about this article was the ridiculousness of some of these rules. I don't even understand the goal in some of them- does the governing body really think enacting some of these rules will do anything to help society? Some of the rules I am talking about are:

1. You can't live in a dwelling of more than 400 square feet.
2. You can't own a car with a wheelbase over 72 inches.
3. Drink whiskey aged more than 60 days. 

The article hints at that such regulations are in order to minimize wasteful consumption of things. My question is how do these regulations help anybody? What if people enjoy whiskey aged 70 days? Why shouldn't they be able to drink it? By taking whiskey and the other items above off the market, they are removing potential transactions that could take place, which effectively makes the society poorer and worse off.

Also, to go back to the whiskey example, think about what making whiskey aged over 60 days illegal might do. It might increase crime. As we have learned in class about drugs, making stuff illegal incetivizes people to commit crimes. If whiskey over 60 days old becomes illegal, people who want aged whiskey might be willing to harm someone in order to get it or prevent themselves from getting in trouble for having it. Thus, to me at least, most, if not all, of these regulations seem completely counter productive to me.

B.
1. Why do they think such a large amount of regulation will lead to success in society?
2. Did they ever stop to consider the ramifications of regulating so much? Did they consider how much production they are losing by regulating so much?
3. Is there any chance for this society to thrive, or is it almost a guarantee that it will become stagnant at one point or another? Is it possible for a society to not be stagnant and thrive even if it has so much regulation that it prevents productive transactions from taking place?


C.
After reading this week's reading assignment, I thought of one thing: how everything in this article basically represents bad economics and goes against what we have learned this semester as being good economics.

The article starts out explaining how the society is trying to minimize "wasteful" consumption. To do this, the society is enacting a myriad of laws. Here are some of them:

It is a capital offense to:

1. Live in a dwelling of more than 400 square feet.
2. Own an automobile with a wheelbase over 72 inches.
3. Drink whiskey aged more than 60 days.
4. Smoke more than one cigarette in one day
5. Appear in public clean shaven (if a male)

There are countless more laws in order like this. The whole point of this, as the reading points out, is to minimize waste in society so as to reconstruct their "greedy wasteful society".

As a side- here was my reaction: Who is actually being the greedy one? I say the government for enacting these rules. They are limiting what people can and cannot do. Who says if someone smokes more than 10 cigarettes a day they are wasting? By doing all of the "offenses" above, economic growth happens. If people have a need to do the above things, they should be allowed.

The article then goes on to say how these rules will be enforced through monitoring techniques/jobs such as judges, policemen, detectives, etc. As we learned in class, this is also ridiculously unproductive. Instead of going out and producing more goods for society to use and benefit from, these monitors will be wasting their time monitoring when, in reality, they may very well not be necessary at all (if people were just allowed to do as they pleased). 

Thus, all of the rules/enactments in this society go against what we have learned to be good economics. 

The reading then concludes with presenting more rules and regulations, such as taxing certain things and having price ceilings in certain markets.

Once again, as we have learned in class, these regulations can be bad as well to economic growth because they prevent transactions that would be beneficial to sellers and buyers from taking place.

The reading also concludes with saying that freedom/a free market is an enemy and that real consumer freedom should be, and possibly is, what the governing body is proposing as laws.

This is comical, and, as we have learned in Econ 108 this semester, not logical one bit.

EWOT Goggles #14

Surprise, surprise, I have another EWOT from my Sports Business Journal. I apologize for the repetition but the articles really do apply to what we are learning in class.

The name of this article is "Practice facilities heat up construction market" and was written by staff writer Don Muret.

Yesterday, I was reading an article about how many Division I universities are investing in multi-million dollar practice facilities for their basketball teams. For this EWOT, I am going to specifically focus on what I read regarding the West Virginia University (WVU) basketball program.

In early January, WVU will open its newly made $23.6 million basketball practice facility. Basketball practice facilities are the newest fad among college basketball powerhouses- teams want them to aid in recruiting (practice facilities clearly are something desirable to have for potential recruits) as well as to have an exclusive place for which only student-athletes can practice and is not open to the general student population.

In the article, it talks about all the many reasons why WVU decided to invest. The one thing I want to mention to connect it to class is the reason that covers the topic of the demand curve.

In the article, it talks about how WVU began construction and paid for the construction of its new practice facility during the recent economic recession. Specifically, the article says "The Great Recession took hold and the bottom dropped out of the construction market, reducing labor and material costs to bargain-basement prices. WVU took advantage of the economic downturn for its [basketball practice facility] project that began four years ago..."

Basically, what the above quote is showing is that the entire demand curve shifted in. Because of the economic recession, people had less money to spend and thus there was less of a demand for construction as a whole (it wasn't just one price that changed. People had less money to spend, so therefore, the entire demand curve shifts in).

Since WVU was not directly impacted by the recession (seems like colleges like WVU were not hit so hard during the recession), WVU made a very smart economic decision. Since prices were down for construction, they bought. They figured that once the economy returned to its normal form, prices would increase. Thus, by buying during the recession, they would be saving money. If they waited until the recession was over, they would have to pay more money. So they decided to buy during the recession.

Now that the economy has begun to return to shape, the demand curve for construction may be shifting back up to where it once was, thus increasing prices for construction. So, as the article states, it does appear that WVU made a very good economic decision- by buying during the recession, when the demand curve shifted down, the school ended up having to pay less money for a very expensive practice facility than they would have if they waited to pay for the building after the recession was over.

Class Summary #40 for 12/7/11

Today's class involved reviewing another S+D curve, once again covering the market for bubble gum.

Equilibrium is the price that is exchanged at cash register. The supply curve will shift down when there are taxes since prices increase everywhere. It is also important to note that taxes prevent mutually beneficial transactions from taking place. This, and this only, is why economists often refer to taxes as bad. Because, net gains of society could be greater without many taxes.

An example of how taxes are bad is that they make us waste time. Rizzo spent 15 hours last year working on organizing and preparing his taxes. As seen by the amount of time he spent, this took up a lot of time and effort that could have been better used to produce. We lose $400 billion a year because of time wasted in this fashion to prepare taxes. This is not a good use of time and this relates back to #8 from class a few days ago. Simply put, in a world where we get more production/benefits from taxing, this would be a social good. But must note that these types of things do no show up in the S + D curve.

Sales taxes refer to when companies pay taxes.

Notes on graph: Buyers are affected in the bubble gum market because the demand curve shifts down and thus they are less likely to buy because the taxation causes prices to increase. There is also a new equilibrium. The new equilibrium is simply where the lines cross. As a result of the taxation and new EQ, less gum is sold. Since Qr falls, you know society is not thriving like it could if there was no tax.

Whether or not the buyer or seller pays the tax, there is still an economic burden. This is because even though the government may intend to tax a certain party, no one can decide who reaps the burden of a tax. It is all an economic power/phenomenon that decides. Simply put, it is the relative elasticity of supply and demand that decides who pays the most of a tax.

Specifically, if the demand curve shifts down, buyers face the burden. If sellers curve is more vertical, sellers face the burden.

So this brings up the question: What should we tax? The best thing we could do is find markets with low elasticity where change in prices wont affect supply and demand drastically! For example, Jibbitz would not be a good thing to tax because it is a very elastic market. A small price increase could theoretically destroy the market. The market for water, however, is very inelastic because there are few substitutes and it is a requisite for life. Thus, if a tax was placed on water, it would not impact our consumer decision all that much.

Then, Prof. Rizzo concluded class by talking a little bit about subsidies. Comparative to taxation, subsidies have the same result. It doesn't matter who we subsidize because it all has to do with relative elasticity of supply and demand.

For example, take the ethanol market. Say the government was going to subsidize firms that sell ethanol. We'd all be better off. Here's why:

• Supply curve shifts out. Assume firms get 53 cents per unit of ethanol sold. So a firm can lower the price for consumers and still make more money. If example, if firm lowers price for ethanol from $3 to $2.90, they will increase sales and make more money because old price =$3, so now with tax, they will make $3.43. Plus buyers get to get ethanol at a cheaper price, so they very well could be more demand. In this world, both buyers and sellers are better off.
• Even though we are better off, the economy is worse off. Prof. Rizzo said he would go over exactly what he meant by this next class.

Class Summary #39 for 12/5/11

Today, we finished up our discussion on the economics of making certain things illegal. Then, Prof. Rizzo began to get in to the study of economics and taxation. He posted two supply and demand curves on the blackboard to discuss, but only had time to go over one of them. We'll be going over the other on Wednesday.

To start with the Drug Market and making drugs illegal:

1. When drugs become illegal, buyer behavior doesn't change. Seller's behavior does. Thus, the supply curve would become more elastic and the curve would become more vertical.
2. A perfect comparison as to why the potency of drugs increases when drugs are made illegal: look at 1920s prohibition. The potency of alcohol in the 1920s was much stronger during that time than it is now.
3. There are two main costs that go into effect for people to maintain illegality of a drug (having police forces, etc. to monitor and make sure no one does anything illegal).
1. Increase in taxes.
2. Millions of people are engaged in preventing bad behavior. Rizzo did not say this was wrong but it is indeed costly to do this (like #8 from our list in class from last week). It is costly (huge opportunity cost) because people are wasting time monitoring when if everyone just did what they were supposed to do, these monitors could be out producing and making things better for us in society.
4. An interesting statistic:
1. The US government spends $33 billion (this is not taking into account added opportunity costs) and arrests 1.5 million people annually to fight against illegal drug use.
5. On the other hand, maybe it is good to ban drug use: When drugs are illegal, there is no cost of production anymore. In other words, there are no jobs necessary for making marijuana, etc. So this saves money and those people can go do more productive jobs. This could cost the supply curve to shift out.
6. There is also a strong correlation with drug enforcement and violence. There is more violence with more drug enforcement. Some studies suggest we could reduce homicides by 75% in US if we legalized drugs.
1. Possible reasoning for why there is more violence with more drug enforcement? It is because it changes incentives. Take a look at the 3 strike policy in California. If you are caught doing something bad on 3 separate occasions, you automatically go to jail for 15-20 years regardless of what you did wrong. So, let's say a person is smoking marijuana in the bathroom and someone comes in to the bathroom and says he is going to report the marijuana smoker to authorities. Well, now look what happens: the marijuana smoker does not want to risk getting in trouble and get a strike, so he beats the crap out of the other guy. He does this because there is ultimately no marginal cost to, as Rizzo puts it, "beating his ass". If he "beats his ass", the man might go to jail for a year. If he lets him go tell on him though, he will go to jail for 15-20 years. Thus, violence increases.

Then we learned about "The Economic Incidence of Supply and Demand Changes.

Here is a table we wrote out for graph A that tells a lot about the impact of taxation:

                               Buyers                              Sellers

Initial Price               $3.00                                 $3.00

Final P                     $3.75                                $3.75

Tax paid                       ----                                $1.00, so make 2.75

Economic burden     75 cents                              25 cents

So here was the scenario: the government wants to levy a tax on bubble gum sales. They decide to charge a $1 tax per pack of gum sold, but the tax has to be paid by the companies selling the gum, not the buyers.

So as a result, companies raise gum prices from $3.00 to $3.75 to account for the tax. If you look at the table above, this makes gum 75 cents more costly for buyers and 25 cents more costly for sellers. Thus, the tax has a greater effect on buyers in terms of monetary burden. Thus, sellers are ultimately bearing the cost of tax.

This new price of gum causes a new EQ on the supply and demand curve. If you look at the curve though, we can see that this tax drives a wedge between buyer and seller. The tax prevents other good transactions from taking place.

Important phrase: Excise Tax= the legal liability for the seller to pay the tax. The seller has to write the tax check to the government. He has a legal obligation to do so. This would thus effect the supply curve.

IMPORTANT: When economists say taxes are bad, they mean what is known as dead weight loss, and not the price increase. What they mean is that taxes prevent transactions from taking place. Thus, this results in there being less jobs and wealth. For this reason, the government and society has to be careful with what and when we tax because we want to minimize the aforementioned scenario from happening as much as possible.

Finally, some interesting statistics/info about this topic:

1. $1.2 trillion lost a year by US government because we tax inefficiently and thus prevent transactions that otherwise would have taken place. It is almost counter productive. This amount of money is the entire Australian economy. We can say that in a way, we destroy the equivalent of one Australia every year.
2. Also, remember that it costs resources to collect taxes. Jobs and people have to be paid for collecting taxes. Specifically, the US government spends 41 cents every $100 collected for taxes on paying the IRS, even though the IRS produces nothing of value. They are not PRODUCING anything, just collecting. The IRS might be necessary, but it is of no value if people could just be responsible and send in their tax money, since the IRS employs 115,000 people.
3. This dead weight loss from #2 is separate from tax fraud. Tax fraud is also costly to society because people are wasting their time figuring out how to cheat the rules instead of producing something of value to society (back to #8 from class last week).

Class Summary #38 for 12/2/11

In class today, we learned about a lot of different things.

We went over two graphs: a graph with a price ceiling (which I will refer to as section A.) and a graph with a price floor.

A. When you put a price ceiling, 4,000 people do not have housing. The price needs to therefore be raised to $1200 (not necessarily in terms of money, but there needs to be a cost increase- cost can be anything, not just money) to ration out those 4,000 people away. This could result in housing being lower quality and there being less availability, and those who value the housing the most may not necessarily get it.

As a result, rent control causes sellers to try to keep tenants out to avoid the above problem.

Some other interesting facts: Income increases by a factor of 20 immediately if you take a laborer from Nigeria and put them in a city. That is why the most money is in cities, which explains why housing is most expensive there.

A potential solution: give housing vouchers. This keeps markets in tact, overcomes problem of supply and allows people to pay more than price. But this is the 2nd best solution.

Best solution: Housing voucher gives you money to participate in market, but why should we limit it to housing? We should let them use the vouchers to buy whatever they want. It is not good to restrict people's choices so if we allow them to use vouchers on whatever, maybe they will buy a cheaper house and then spend money elsewhere as well. This is more beneficial for our economy.

B. This was the first time we learned about price floors. When looking at this example, which shows wages, we must ignore benefits and inflation. Just consider the wage itself.

What determines wages in a market? You're ability to produce mixed in with how much your production is valued in the market.

If a worker's wage goes up, generally workers will want to work more. In an effort to pay people more (price floor), you've actually made it more difficult for people to get jobs and for existing workforce to keep their jobs.

For example, you will still get paid minimum wage, but you make equivalent of $4.85 because now the company can't afford the higher wage. So you lose out on getting paid in other ways- less vacation time/benefits, etc. The minimum wage might make a company not be able to afford the wage so they have to adjust the other higher prices.

Is there a better way to help low wage workers? We need to figure out a way to get this problem fixed, by getting rid of surplus lower so it can be at a true EQ. This could happen if we lowered minimum wage so it can reach EQ below the price floor.

Because of all of this, minimum wage creates unemployment.

Important: Most of the people who make minimum wage are not the types of people who minimum wage is supposed to be targeting anyway, so it is a waste. There are not the poor people making minimum wage. Rather, they are married, over 24, etc.

Then class concluded with Rizzo teaching us about important stuff.

An exam question he gave us is what is the difference between scarcity and rarity?

1. Scarcity= more people want a good than it is available
2. Rarity= something can be rare but undesirable, such as Rizzo's wedding ring. Only one of them in the world, but few want tit.

Oil: abundant in supply but very scarce because we want more of it. So not rare, but scarce.

Question: Does a presence of surplus mean we don't have scarcity? No. When goods are in surplus, still need to do a trade to get them. When there is a surplus, it means price is all messed up.

FInally, we learned about the economics of "illegalizing" certain things. To illustrate this lesson, Rizzo drew another supply and demand curve. The graph represented making drugs illegal.

So what are possible results of making drugs such as cocaine and marijuana illegal?

1. It won't abolish the supply and demand process if something is made illegal. The supply curve will get much steeper.
2. When everything is legal and prices go up, we can just plant another drug bush. When it is illegal, we bear more costs to produce illegal drugs because we have to avoid being detected. Therefore, this involves more work and a greater opportunity cost. If we produce less, there is less of a cost. As you choose to make more, we need to do more things to protect ourselves. Cost goes up as we produce more and supply gets more elastic.
3. When the price/cost goes up, there are less drugs sold, especially because of threat of being caught.
4. Also, what you see is that you will sell more powerful stuff because people will not be as willing to risk getting in trouble for less valuable stuff. For example, if someone sells marijuana and cocaine, they are equally as likely to be caught for each. Therefore, if they are looking to make money, they will probably turn to selling the more powerful/dangerous drug of cocaine because it is worth more money and more worth the risk than marijuana. So, more powerful stuff is therefore sold/developed.
5. There will also be a change in composition in who makes/sells the drugs because some people have a comparative advantage in not getting caught for whatever reason, so they would probably be more likely to sell a drug than would someone who does not have a comparative advantage in that sector.