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.

Class Summary #37 for 11/30/11

-I found today's class to be extremely interesting. Today, we learned about "The Economics of Price Control" and Prof. Rizzo explained lessons today using the market for rental apartments.

He drew a supply/demand curve depicting a binding price ceiling. Much of today's class centered around price ceilings.

First off, rent as we know it is not rent in economics. In economics, rent refers to income that you get that is completely unearned by you. For example, Rizzo has a student who sends him interesting articles everyday. This would be rent because he is doing nothing to earn this "income" of knowledge. This brings up the question of whether or not he should be taxed.

We learned how we have a price/rent control. Supply curve tells us how we respond to different prices. For example, if the price of an apartment drop, QS drops and Qd increases. How might this happen? Well, for Qs lowering, a supplier could not sell extra spaces in basement he might otherwise have sold. Thus supply elasticity of apartment housing is very flat. The result of all this is that you get a new equilibrium.

-Market Clearing= When there is a surplus. Not market clearing= when there is not a surplus.

-If a price ceiling is binding, you create a shortage of apartments. It is binding because it is set below market price. In this instance, buyers would be frustrated because people who value housing as buyers would not be guaranteed a chance to get it. And the price it is set at ($800 a month) is not high enough whereas you could effectively ration the housing to only those who value it most.

-Non-binding price ceiling wouldn't create shortages because it is above equilibrium and it wouldn't change behavior because those who value it the most would get it and there is a high supply.

Then we learned some very important concepts. Prof. Rizzo taught us about the Outcomes of Binding Price Ceilings:

Outcomes of Binding Price Ceilings

1. Reduced availability and harder to get. There is a shortage created.
2. Lower quality: If you can't raise prices for apartments, there will be a lower quality apartment which can also help to ration people away. Quality decrease= reducing Qd. 
1. If price ceiling is binding, the companies won't have enough money to pay for maintenance so quality will lower.
3. Black markets: apartment broker for example, or extra charges such as a $3,000 key fee. Or also people who rent lease apartment- I own it and rent to someone else. So I make money from the person renting while I pay landlord for rent.
4. Misallocation- those who value the goods most get it (price rationing system). But this doesn't happen with binding price ceilings because anyone willing to pay the ceiling price ($800) has as good a chance to get it as someone who values it much more.
5. Other neighborhoods that are not rent controlled feel the effects of rent control. If Manhattan has rent control, lets say 4,000 people still need apartments since there is a shortage. So, people will search for places in the surrounding areas, which drives up the prices in those other places. This makes it more costly to get apartments where they once were cheaper and one must take into account that those people still will need to commute in to the city for work, and thus, there is a huge cost.
6. Fairness- who is most able to pay for all these other costs? Less apartments available--> hurts the poor. Ok for the rich, but overall this is unfair.
7. Discrimination- Let's say I don't like owners with dogs and I am trying to sell apartments. When there are limited resources and a price ceiling, I can discriminate. If let's say the first person in line to buy is a dog owner and the 2nd is not, I can just sell my apartment to the second person and refuse to sell the first person an apartment. 
1. Now, one might say this is bad. But if you look at it in one aspect, I could claim discrimination does good for society. I may've discriminated against dog owners, but I still did a public service because I made it easier for the dog owner to get a house somewhere else since I did sell the apartment and thus there is one less person in the market looking for an apartment (the non-dog owner).  So, if I don't sell to someone I don't like, I am still doing a social good. 
2. The social good I am doing is done by renting the place out, not necessarily by discriminating. 
3. Interesting fact: we can discriminate as consumers (I won't buy from a dog owner if I don't like dog owners) but we can get in trouble as sellers if we discriminate and can get sued for doing such.
4. In short, rent control/binding price ceilings makes discrimination less costly.
8. Need to go in for office hours for #8, as I missed this one as I went to 11am class and we didn't get there in class.

EWOT Goggles #13

I subscribe to the magazine Sports Business Journal, a weekly publication covering just what the title says it does: sports business!

I usually read through the entire magazine and find countless examples of things that pertain to our learnings in ECON 108. This week's edition fit that bill once again.

For my EWOT, I want to discuss an article written by John Lombardo about the new Philadelphia 76ers (of the National Basketball Association) owner Adam Aron. Aron bought the 76ers, a struggling franchise (both economically and talent-wise), from Comcast Spectacor a few weeks ago.

Comcast was in dire need of selling the team. Comcast was in debt due to its ownership of the 76ers, who failed to earn a profit for the company over the past few years. I can recall watching games on television and at the Wells Fargo Center (where the 76ers play) where more than half of the stadium's seats were empty.

In recent years, fan support for the 76ers has been very poor and very few people have been attending home games. In fact, the article points out that "Last season, the Sixers averaged 14,567 fans per game at 20,328-seat Wells Fargo Center, the seventh-lowest attendance in the 30-team NBA."

The lack of fans last year in 2010 had a lot to do with the loss in profits, as the team was not selling tickets as much as it needed to. And the bottom line is that ticket sales make up the bulk of revenue for professional sports team.

So, the first thing Aron did after buying the team was cut ticket prices on 9,000 of the tickets in the Wells Fargo Center, some by as much as 50%.

This very fact brought me back to class, specifically what we have learned about demand curves.

In 2010, Sixers home-game attendance was very low as fans did not want to go to the games. Some of this may have had to do with the price being too high for tickets for how much fans valued the 76ers. Therefore, on the demand curve, price would be high and quantity demanded would be low (because as the Law of Demand states, when prices are higher, quantity demanded is lower). Now that prices are being lowered by Aron, quantity demanded will most likely increase and more people will want to attend 76ers games since the price to attend (in monetary terms) will be lower.

Based on what we have learned so far about demand curves, Aron seems to be doing the right thing. Quantity demanded for tickets was low in 2010 and that very much had to do with the expensive monetary price to attend games, as well as the "expensive" price of having to support a bad team. But since the price for tickets has been lowered, people will have more of a reason to attend games because there is less of a monetary cost, and therefore, we should expect to see quantity demanded increase.

I know I am very interested to see how this business decision pans out for Aron and the 76ers. Like I said above, we should see 76ers ticket sales increase, but it will be interesting to see what actually happens come the NBA season, which is slated to open up on Christmas day (the NBA Lockout is finally over!)

Reading Assignment #13- Golf Digest Bethpage Gray (Market)

A.

The beautiful and desirable Bethpage Golf Course in NY.

I found this article to be extremely interesting and it was my favorite reading assignment piece of the semester so far (although I am a bit biased since I am a sports fan and this was an article on sports economics).

I'll point out three things in particular I found interesting in the article.

I found it amazing how Bethpage was so upset that people were making "side deals" to get in to the park. In fact, if Bethpage finds out that a customer used NYGolfShuttle.com (NYGS) to get on their course, the customer will be banned from the course for a year. In my opinion, this is ridiculous, and I explain why I feel this way below.

When the website NYGS makes their "side deals", they are still paying Bethpage the full price of admission. Thus, Bethpage is not losing any money.

In fact, we are all wealthier because of NYGS. NYGS has opened a market that would otherwise not be in existence.

Thus, economic growth is occurring in countless places- the golf course is getting paid as is NYGS and the customer is getting to go to the golf course he/she desires. Thus, we are all much wealthier because of NYGS, which makes me question why Bethpage would be upset.

If Bethpage wants more money, they should charge more. Otherwise, they are actually HELPING our economy by having their golf course at such a low price and causing there to be a huge demand. Now, more people get a good job because of NYGS. So, Bethpage, in my opinion, really has no right to be upset.

A second aspect I found interesting was how NYGS operates. Basically, they take care of ordering the ticket for the customer to get on the golf course. It is fascinating to me because NYGS is operating as a middleman.

I always thought of a middleman as a store selling groceries. I never thought of a scalper, or a website like NYGS, as a middleman, and that is just what NYGS is.

The website is bringing together buyer (the golfer) and seller (Bethpage). The website charges more money than Bethpage does because of the convenience NYGS is offering customers to get in to the golf course (the golfers don't have to wait hours on end outside to get on the course.) Thus, NYGS is reducing transaction costs for both parties as they are making it easier for buyer and seller to come together.

I also found it interesting how in this instance, since the price for admittance is so low, the price rationing system is not that successful since those who value it the most don't have the best chance to get in. But, NYGS makes it so the price rationing system is indeed successful, as those who are willing to pay a heftier monetary price to get in will get the good (a chance to play on Bethpage).


B.
1. If Bethpage State Park is getting its money, why does it care if people are "beating" the system? No one is stealing money from the course as it is receiving its full entry free from NYGS.
2. What would happen if Bethpage State Park raised their prices significantly? Would that have any effect on the business NYgolfshuttle.com? It might since quantity demanded would probably decrease, lines/demand to get in the park might decrease as well, and then the company could go out of business.
3. Does Bethpage even have a right to be upset? Is NYgolfshuttle.com doing anything wrong? Economically, it seems that the website is doing people a favor by rationing the tickets through the price system, so is Bethpage actually the wrong ones in this situation for being upset at what NYgolfshuttle.com is doing?


C.
This article talks about how the demand is very high to play golf at a US Open Golf Course, Bethpage (N.Y.) State Park and this very much affects the allocation of who gets to play on the course (known in the article as "tee-time allocation". The demand to play at Bethpage is arguably higher than any other golf course in the country. The factors that lead to this are:

1. The course is located right outside the most populated area in the country
2. The course had a recent $3 million renovation that made the courser nicer than it already was
3. The cost of admission is modestly priced in comparison to other professional golf courses. Prices are between $60-$120 depending on where you are from.

Bethpage presents golf fans the best chance to play at a US Open golf course at a cheap price, so there are few, if any, substitutes for the course. The effect of this is humongous lines for customers to get a chance to play on the course. The lines are so large that many people are turned away from playing on the course despite the fact that they have waited in line for hours on end- there are only so many hours in a day, and quite often, the golf course will close for the day or reach maximum occupancy while many people are still in line.

As we learned in class during a lecture, people are forced to wait in line to get in to the course. Thus, the rationing of who gets to go in has to do with who is willing to wait the longest in line. But people are wasting time waiting in line (they could be out producing or doing something more productive for society than waiting), so this is an ineffective way to ration.

Because of the difficult to get on the course, a business was born: NYGolfShuttle.com (NYGS). They take care of setting up reservations for people to get on the course and they charge a lot more money than does Bethpage. It costs $850 for one person or $450 per person for a foursome. Because of NYGS, there is now an effective rationing mechanism in place: the price system. Those who value playing on the course the most will pay the most and don't have to waste time waiting in line. 

Simply put, NYGS is a company that "scalps tee times". The way NYGS operates is by getting a customer to give his/her information (credit card, name, address, etc.) to them. NYGS then hires a ton of people to basically wait in line or call in for a reservation on behalf of the customer. Doing this greatly increases the chance for the customer to get a tee time.

This practice is by no means illegal, according to the article. And as I wrote about in Part A, it is actually very good for the economy (although Bethpage employees are against it). In short, this "side deal" helps everyone get what they want and makes us more wealthier because more money is spent, jobs are created, and the customer gets what he/she values without having to waste his/her time waiting in line.

Class Summary #36 for 11/28/11

Today in class we learned more abut equilibrium. To begin, Prof. Rizzo wrote the following on the board:

Some Properties of EQ: Consider a stylized economy with 5 consumers and 5 sellers (not necessarily distinct).

Then Rizzo posted a supply/demand curve of the Guitar Market and he used the graph to teach us about decentralization vs. centralization. Here are some of the notes we learned when going over the graph:

1. Equilibrium= where lines cross
1. At equilibrium, everyone is happy because neither party can "do" any better. 
2. People who value the item the most will get it and those who don't won't.
2. Demand=willingness and ability to pay.
3. Ration by price---> only those who desire an item the most are going to get it= "willingness to pay"

Then, Prof. Rizzo taught us some more lessons from the graph. We learned that if you use prices to determine who gets which good, it is easier for the buyer and seller to make good economic decisions. The reason behind this is because we have an information problem. 

Buyers and sellers don't need to know whether prices are high and low because that information is embedded in the price itself-thus we don't need a lot of knowledge, all the knowledge we need is embedded in the price, which is a reason why the price system is such a good rationing mechanism. This has really attractive characteristics.

What is different between government and market trial and error? In the government, there is little trial and error. They make a policy for all people in all states and it is difficult to alter such a policy. But, in the market, there is an incentive for people to react to save money and get the policy right. There is less experimentation with policies b the government.

In short, markers are much better equipped to adjust to programs/policies that do not get intended results that is the government. Many times, corrupt governments make policies and thus there is more incentives in the market because prices can adjust to make alterations.

The end lesson: the only way to survive in the complex work is to decentralize our decision making as much as possible. This doesn't mean we shouldn't have government, but we need the government to be decentralized.

A final lesson we went over were some problems with rationing by a central planner. On the graph, S4=$25. $25 is the opportunity cost because the supplier could be making $25 doing something else other than making guitars. If S2=$15 and sells a guitar at that price, we are $10 poorer because we could've sold it for $25. This is where side deals come in. If S4 and S2 combine and sell for $25 they can split the $10 profit and now were all better off.

The same can be said for consumers. If D4=$15 buys guitar and gives it to D5=$10, we now have a surplus and we are richer. The whole world is unhurt and we are better off. Thus, we can always be better off.

Even if Q*=3 and market gets that amount of items consumed right, it is still difficult to make sure the correct/most efficient consumer and producers make the deal.

Class Summary #35 on 11/23/11

Today's class was quite interesting. It began with Prof. Rizzo writing a number of graphs/tables on the board.

Because I watched the online version of class as I went home early for break, it was difficult for me to see all the graphs/tables clearly on the board. So in this post, I will describe the concepts went over in class.

The first thing he put on the board was "How Markets Use Knowledge." One of the markets was that of titanium and Rizzo wrote that EQ= P*=$20 with Q*10 billion pounds of titanium bought, which represented last year's amount sold).

Next, he put up a graph of 2 demand curves and one supply curve. One of the demand curves was for previous buyers of titanium, the other was for the demand of the consumer who desires 6 billion pounds of titanium at $20 per pound. Rizzo explained that there was a shortage of titanium so the producers had to raise the price to account for the low supply.

We then learned that you can assume what happens as you move away from an equilibrium point. For example, if the price rises, producers have more of an incentive to dig more titanium up because titanium is thus more valuable. You can also say that people use less of an item as prices increase (law of demand), so depending on how much consumers consume allows producers to know how much they can raise the price.

Some other concepts disclosed in this class are as follows:

1. When more people are added to a market, the demand curve will shift out because there will be more demand. More people almost always means more demand.
1. As a result, current consumers might cut back their own consumption as a result.
2. The next graph basically showed that the elasticity is greater when there is an increase to the price of titanium.
3. The final graph showed that the supply curve was more elastic than before. 
4. Prior consumption patterns don't change that much if we only increase/decrease the price of an item by a little. If there is a little price change, people may get some titanium from the original place and get the rest they need from other sources that are more cost effective.

Reading Assignment #12- Euvoluntary Exchange, Exchange is Immoral

A.
I am extremely happy that I chose this article to read as I found it to be a fascinating and fun article. Even more than that, I thought it very much applied to what we are learning in class about rationing mechanisms (specifically the one about rationing mechanisms and lottery) as well as how over regulation of government can lead to stagnation (which has been an underlying theme of many lessons throughout the semester.)

One aspect of the article I found interesting was how the author "Mungowitz" shows how little options students have with a lottery. We have learned that the lottery rationing mechanism is not really ideal because it:

• Does not provide people with an opportunity to get what they most value
• Makes it difficult to plan for the future

For the students at Duke, and in the article's case, the fraternity Iota Tappa Kegga (ITK), certain students desire certain residential areas for specific reasons. ITK wanted a hall close to campus that is generally noisy. 

But because of the lottery, and the limitations the Duke housing office placed on students, it was impossible for them to get what they wanted if they could not find a willing group with whom to trade. 

This goes back to the barter economy lesson we had- without being able to pay another group for the housing they wanted, ITK would have to waste a lot of time searching for a group with whom to trade. All of that wasted time would come at a huge opportunity cost for EVERYONE in society because of how much time ITK could have used to produce or do something else more productive, even if it was just for their own well-being.

I found it very interesting- and completely mind-boggling- how the Duke housing office would not allow students to exchange money for the housing they wanted. If they allowed this, everyone would be better off. ITK would have gotten what they wanted, the baseball stat group would have gotten what they wanted, everyone would have been happier and better off. It just makes absolutely no sense why Duke administrators would not allow this.

I also found one point made by Mungowitz to be eye-opening. In his article, he writes: "One of the features of a lottery, of course, is that the assignment of a group to a space allocation has zero, zilch, bagel, nada to do with how much that group VALUES that location."

This is so true and explains why a lottery is such a poor rationing mechanism. People have different wants and wishes, and in the case of the housing at Duke, a lottery gives people certain housing in spaces that they may not want at all. A lottery limits the options of people and when "exchanging" has been outlawed, much more people lose out than would have if Duke just allowed people to exchange or ration the housing by a price system- that way, everyone would get the housing at a price each party values.

B. 

1. Why does the Duke University housing office feel the need to control the students and not allow them to exchange? In other words, what makes "trading" acceptable, but "exchanging" not acceptable.
2. Is the regulation that Duke's housing office imposes that types of problems we face with over-regulation in everyday society by governing bodies? If these types of regulating-bodies were not in existence, would we be better off?
3. Would anything actually go wrong if Duke allowed people to exchange housing in the format that the author "Mungowitz" shows? Obviously the Duke housing office is concerned that something bad will happen as a result of money transfers, so would whatever they are worried about come to fruition if students still went ahead and exchanged money as part of the housing trade?

C.

In this article, the author Mungowitz explains a scenario at Duke University in which the housing office prohibited students from exchanging.

It all started when Duke's housing office (DHO) decided to implement a lottery system to ration out residential halls.

As a result of this, many Duke students considered making trades to get the housing the wanted. Except these weren't normal trades, these were exchanges, where groups would exchange houses and in some instances, even money. As Mungowitz points out, this money is often referred to by economists as "side payments."

The example that Mungowitz gives is that the Baseball Stats Study Group (BSSG) gets placed to live in the middle of campus where it is noisy and ITK gets placed off campus. But ITK wants to "be in the middle of things" and BSSG wants a quiet area to study (it is loud in the middle of campus) but also likes the location of the middle of campus because it is close to the academic buildings.

To offset the cost, ITK would be willing to exchange residential areas with BSSG and give BSSG added compensation ($5,000). BSSG valued having $5,000 and the off-campus residence than just having the on campus residence while ITK valued giving up $5,000 and having the on-campus house than living off-campus.

Thus, everyone is happy and everyone is better off because each group gets what they value. 

But then, the DHO found out about the monetary exchanges going on, as these were not the oly two groups exchanging this way. DHO was outraged and sent out a letter to the students, effectively making it illicit to "exchange" where money is involved, but legal to "trade" housing residences as long as no money is involved.

Mungowitz questions the motive behind the DHO doing this (as do I). By enacting this rule, it prevents people from making an exchange that would better countless groups around campus and make people wealthier. 

I wonder if the DHO would be more willing to legalize these "exchanges" if they received a portion of the money being exchanged. 

Based on my experiences dealing with the U of R financial aid office and the like, I have to think that the DHO would indeed be more willing to allow these transactions if they received some of the pot (in short, it is all about money!!! currency!!!- this is especially true in a world where almost everything is rationed through the price system!!!)

EWOT Goggles #12

Today I went to the supermarket with my friend to buy some food.

I was in the mood to buy some chips and salsa, so I went to that aisle to get some.

When I got to the salsa, I looked at the price and it was extremely high for my tastes- $4.00. I couldn't believe it and I had no idea why the price was so high.

I remember going shopping for salsa with my mom during high school, and although I can't remember the exact price of salsa, I know for sure it did not cost anywhere close to $4.00.

I stopped to think for a moment and thought back to our lessons this past week and the week before about rationing through the price system. I came to a couple conclusions about the price change in salsa in economic  terms.

For one, the price of the salsa was such because that is a price at which people value it. As we learned with Prof. Rizzo's hotel room example at the Masters Golf Tournament from class, if there was not another person willing to buy the salsa at that price, it wouldn't be listed at that price because then no one would buy it.

I also thought back to the lessons we learned about rationing goods. It is clear that the price of the salsa reflects rationing through the price system: If the price was as low as it previously was when I was in high school, perhaps the demand would be too high. Thus, the quantity demanded would shoot up. As a result of this, the quantity supply might behave oppositely and go down (supply/demand curve).

Thus, with the suppliers producing less salsa, there is not as much in circulation. Therefore, the price system makes it so those people who value/desire the salsa the most will be able to get it- in the end, I really wanted salsa badly so I bought it. This shows that I valued having the salsa highly, and perhaps the high price of it prevented another person who did not value it as much at that price from buying it before I could get to it.

Although I did end up buying the salsa, I did consider a couple things: were there any good substitutes I could get instead of salsa. My options were as follows:

1. Get a different, cheaper dip.
2. Make my own salsa.

Option 1 was possible but I really wanted to eat salsa, so another type of dip was not a substitute in this instance.

Option 2 was a substitute, but I concluded that I valued my time more than saving a few dollars of money, and thus, it was worth it to me to buy the salsa at $4.00.

Class Summary #34- 11/21/11

Today, we learned about a plethora of topics including supply and demand curves and what exactly the word "equilibrium" entails.

The supply/demand curves Prof. Rizzo gave us had to do with acoustic guitars. On the graph, supply stands for producers marginal opportunity cost to make- if there is lots of profit available and prices are high, supply will also be high so as to maximize profit.

For demanders, however, as prices go up, there is less of a demand. Demand captures the willingness and ability of a person to pay for a good.

On the graphs, we learned a number of key terms/notes. Here they are:

1. What is surplus?
1. At a particular price then the quantity supplied exceeds the quantity demanded, we say there is a surplus
2. What might sellers do to get out of a surplus?
1. They will cut their prices through special deals, such as 2 for 1s and get a free coffee with the guitar, etc.
1. In this case, what happens when prices are cut?
1. As prices fall, Qs goes down and sellers could potentially drop out of sellers market until the product goes to equilibrium.
2. The two questions one needs to ask anytime there is economic change are:
1. How does each half of the market respond- Buyers and sellers?
2. Whose plans are satisfied? Buyers or sellers?
3. What is a shortage? The opposite of surplus- when at a particular price, the quantity demanded exceeds the quantity supplied.
1. KNOW FOR FINAL EXAM: Difference between a shortage and scarcity.
4. At equilibrium, plans of buyers and sellers are coordinated with one another.
1. A high price signifies the item is relatively scarce.
2. When prices are increasing, it tells us that a shortage is being alleviated and a low price shows that a good is relatively un-scarce.
5. Definition of equilibrium according to Rizzo: when the graph is at a price where buyers nor sellers have an incentive to alter their behavior/price preference. The point at which the graph intersects.
6. In the market, there is two types of equilibrium:
1. "Market Clearing"- Qd=Qs
1. This is GOOD
2. The tendency for markets to clear just happens, it has nothing to do with anybody doing anything to make it happen
2. "Non-market clearing"
1. NOT GOOD

Prof. Rizzo concluded class by giving some examples of what happens when market conditions change:

1. Ex 1. Price of spruce falls. This affects sellers and supply curve shifts out. This happens because it costs less money to produce guitars, lowers price in every aspect of market and thus, with this shift, comes a new equilibrium.
2. Ex 2. Price of electric guitars increases. This affects buyers because demand for acoustic guitars goes up if they are substitutes. So, the demand curve would shift out and once again, there would be a new equilibrium.

Reading Assignment #11- World War II Propaganda Posters

Prompt: please look at the following images and discuss them particularly in the context of what supply and demand suggests how we can think of this issues illustrated:


Poster 4: This poster can be related to our class discussion on Friday. We talked about how when there is a drought, the government mandates that water be preserved. But, as Professor Rizzo points out, that is truly not enough to preserve water. A price needs to be associated with using water in times like that because when prices are higher, people are less likely to use water aimlessly due to the high cost.

So, this poster talks about "Waste Helps the Enemy" and how we should "Conserve Material". In my opinion, this propaganda poster is not enough to preserve the goods. The poster needs to somehow explain HOW waste helps the enemy and how conserving material is less costly than is not conserving material.

In short, this poster is trying to show how we should maintain the supply of a good by not wasting it. But once again, going back to Friday's lecture, without quantifying what the cost is, it may not be successful in conserving the good, as we saw with the water example Prof. Rizzo gave us.

Poster 10: This is a very interesting propaganda poster which shows a man driving a car and an outline of Hitler in the passenger seat. The poster states: "When you ride ALONE you ride with Hitler!" and "Join a car-sharing club TODAY!"

Connecting this to supply and demand, I would say that this advertisement is advertising the idea that we should reduce the demand of cars, which would increase the supply. The advertisement is saying to share cars. If people share cars, people overall would demand them less because instead of lets say every single person in a household having one car, there might be only one per family. And if families consider that to be sufficient, demand for cars would decrease.

As a result, that means that supply of cars would increase. Less of a demand for cars would translate into less cars being bought. With less cars being bought, there would be a much higher supply of cars that were not sold.

Poster 19: This poster is a slave poster which says: "This World Cannot Exist Half Slave and Half Free" and "Sacrifice For Freedom".

This can be connected to Poster 10. What the advertisement is trying to tell us is that we can't live in a world that is half free and half not-free, and that freedom for all is the best way to live. Thus, the poster wants us to "sacrifice" the slaves people owned so everyone can be free.

If people did this, demand of slavery would definitely decrease- if everyone were free, than that would be a result of people not wanting to own slaves anymore. Thus, the demand for slavery would decrease.

Those people who were slaves, however, would no be free. But, if we thought of them still as slaves, the supply of slavery would spike up dramatically. If slave owners decided to get rid of slaves, there would be a lot more available to have because less were being used.

Poster 31: This poster includes a blonde woman with her right hand raised. The poster reads: "I pay no more than top legal prices" and "I accept no rationed goods without giving up ration stamps".

I believe this poster has a little to do with rationing mechanisms and supply and demand.

The first quote on the poster says that we should not pay anymore than top legal prices. Thus, if prices are above legal prices, it appears that demand would decrease and supply would increase as a result, as explained in the posters above. At the same time, if the price for goods were below the legal price, and we were to follow these instructions, demand would increase and supply would as a result decrease.

The second quote is an example of a rationing mechanism, something we have discussed in class this week frequently.

Ration stamps, it appears, are a form of currency like money. Perhaps the poster is also implying that some people receive rationed goods without having to give up ratio stamps, which is not good either.

I'd like to connect this to the discussion we had in class about the swine flu vaccine Prof. Rizzo talked to us about. He told us that the way the flu vaccine dispersion worked was as follows: the vaccine was distributed to different counties, and the county governments were free to pass out the vaccine any way they wished. The way it worked was that whoever "needed" the vaccine, got it. It didn't cost more money for people who needed it more as no price was attached to it. It all had to do with how much each person claimed that he/she did or didn't need it.

As Prof. Rizzo points out, this is not good because some people received it who didn't really need it. That is why the price system is so good- those who need a good are most are willing to pay the highest price, which is why it is a good rationing mechanism.

So, back to the poster. If people were accepting rationed goods without paying, that is not good because then people who truthfully need the goods may not be able to do so since supply would be lower. It is important, in this case, to only accept rationed goods when paying for it because those who need it most are willing to incur the cost of paying for it. If it is given out freely, than demand would shoot up for the goods because people will want to get the goods in case they need it for the future, while supply would decrease as a result which could cause certain people not to be able to get the goods of which they are in dire need.

So, I think the 2nd quote on this poster is a very legitimate piece of advice. If everyone follows the price system (in this case, rationing stamps) we are all better off.

Class Summary #33 for 11/18/11

Today in class, we learned more about rationing mechanisms.

When you use pay rationing mechanisms, it gives people incentives to produce more stuff. This wouldn't be the case if we rationed by other systems.

For example, if we were going to provide healthcare to everyone, it would be a duty of ours to become doctors. It would be a moral obligation of ours to become doctors to make sure everyone received health care. But this is not economically good.

The main reason why we need to use the price system over other mechanisms: you expand people's freedoms to make decisions about what they want.

Not having moral persuasion causes people to economize and act morally. Cheating on an exam even though it says not to on syllabus and exams is an example of how giving directions to do something does not necessarily mean someone will act morally because as we have seen in class, people still cheat.

Here are some more important facts we learned about the price system:

1. If water cost a penny, we would overuse water uncaringly 
1. If water is expensive, we will start to economize. We would be free to shower as long as we want but we'd think otherwise about doing so. We'd start ranking our values and not use water for things we don't value as much. Thus, the price system is what would preserve our water, not our government banning use of it during drought seasons.
2. This is a perfect example of how the price system forces us to consider the values that people put on water and other goods. This is the most ethical part of the price system. 
1. Lets say price for a gallon of water is $30. This shows that someone out there really wants water, so if I don't but it because I don't need it as much, I'm leaving the water for someone else who is willing to pay that price because they value and need it much more than I do.
2. Let's say there is no need for water here. Well, we can bring water to where it is needed because they value it more there than us. This is an opportunity for us to gain from a transaction.
3. Bottom line: not using the price system is immoral.
4. Money reduces transaction costs because there is no time being wasted looking for someone with whom to barter (barter economy).
5. The price system gives companies incentives to produce water and thus, it is a preservation mechanism because having this incentive could incentivize people to make new mechanisms to develop water. This wouldn't happen without the price system because there would be no incentive.
1. Thus, we can say that without the price system, water might potentially be all gone by now
6. If you don't allow sales of certain things such as a kidney, the marginal value of kidneys is much, much higher because they aren't readily available.

Prof. Rizzo ended class with explaining the economic importance of having money:

A world with no money is not good. Let's say I am a guitar maker. I would need supplies to make it. Without money, I'd have to barter to get these supplies. But money changes how the transaction takes place. If you need a tooth bush, I'd need to barter so I'd be spending significant time looking for a tooth brush provider who wants a guitar.

 

Also, there is the issue of an unfair trade occuring. I can't split up certain products like guitars. So, this would make it that much more difficult to get a fair trade when trading a guitar. This is also why bartering makes us poorer- because by bartering, we're wasting time that could be used producing and/or on leisure time by looking for someone who has what we want and wants what we have.

This is why money improves the situation and the price system is the best rationing mechanism.

Class Summary #32 for 11/16/11

In today's class, we learned about rationing goods- a very interesting lecture.

Class began with Prof. Rizzo explaining to us "The Challenge".

Simply put, "The Challenge" has to do with scarcity and not having enough stuff to go around. This is the fundamental economic problem.

This brings up the question: How do we figure out who gets those scarce goods?

To show us this, Prof. Rizzo explained to us examples of rationing mechanisms. The list of these rationing mechanisms are all below, with a description of each:

1. Need
1. Refers to the neediest person shall get the good
2. Problem with this is that there is no measurable metric for neediness and it is very hard to determine who is the most needy. 
3. The way we, as a society, convey our needs for something to a producer is by a needs index. People who want/need fish the most won't get it if we allocate fish by wants/needs. 
2. Queues
1. This refers to a line- the first people up in line get the good.
2. For example, lets say Dave Matthews comes to UR and there are only 150 seats. We also say that we won't let him overcharge us. So, how do we determine who gets tickets:
1. Those who want to go the most camp out. As the line lengthens for tickets, some people will say that it's not worth the wait. This ends up being a cost relative to money- by waiting in line, there is a huge opportunity cost because you are waiting in line for so long that you are giving up a chance to be productive in other sectors. Thus, this is very costly and we generally don't do this.
3. Lottery
1. We all have an equal chance to get the good. People who need/value the good the most might not get it, which is an economic issue in many ways.
4. Equal Shares
1. Everyone gets an equal piece of the pie, which is the meaning of pure communism. 
2. The problem with this: some goods, such as a car, can't be split efficiently or even at all.
3. Sometimes cutting up a good so much, such as a fish, would make the good useless. If we split up 1 fish with everyone in the country, we'd all go starving.
5. 'Kickin' Ass
1. Whoever wins a fight gets the good.
2. This is unfair to certain people who are weak.
3. There is a big cost because people will be wasting their time trying to get strong to win the fight, thus wasting time where they could be productive doing something else for society
4. It is impossible to plan in this world, because you will never truly know if you will win the fight
6. Merit
1. Refers to, for example, those people who are most beautiful or smart will get the good.
2. Impossible to define who is the most meritorious at something.
3. If we ration on merit, we'd end up like the 100 mile suit- very little production because we're not rewarding those who produce effectively.
4. In result, we'd be much poorer.

Important: Producer costs--> must consider that producer costs also consider prices people would BE WILLING t pay. If I'm willing to pay $300 for hotel room and they charge me $60, it is a huge disservice to themselves because of the giant opportunity cost to them. The hotel wouldn't charge $300 if no one else was willing to pay that price because then they'd get no business. They can charge at a high price like that because I don't buy it, someone else likely will. If a business doesn't capitalize on these high prices, then the business might not exist anymore.

Evaluation of Rationing Mechanism

1. What is native of competition: destructive or constructive?
1. Whether a certain rule will channel our behaviors into something that is positive/productive or negative/destructive.
2. Price system leads up to constructive behavior. 
2. How does mechanism impact supply (Q)?
1. Need to give incentives to people to make more tomorrow: prices do this.
3. Other considerations

EWOT Goggles #11- Postal Service Logs Loss in Billions

My EWOT for this week is about an article I read a couple days ago by the Wall Street Journal. The article talks about how the US Postal Service just ended its fiscal year with a $5.1 billion loss and that as a result, the US Postal Service "could regain its financial footing by cutting annual costs by $20 billion by the end of 2015."

Clearly, this means that the US Postal Service will be forced to reduce jobs in their industry, which is one of the only ways the independent government agency can cut annual costs and save money.

This led me to think about some of the stuff we have learned in Economics this semester, namely the effect the influx of technology has on an industry.

To begin, it is clear that one of the reasons why the US Postal Service is struggling is because less people have a need to send paper letters. The reason behind this? Because of the influx of new technologies such as better telephones, more efficient/secure E-mail, etc.

Thus, less people are buying stamps/paying fees to to send letters so the means of income for the postal service is reduced.

The cutting of annual costs will undoubtedly cause jobs to be lost. I am just waiting for people to come out and say something such as "this is horrible! Look what is happening in our economy due to these new technologies! So many jobs are being lost! This is a result of our struggling economy! Now we are poorer!"

This is a common rationale for jobs being lost due to technology, as we have learned in economics this semester.

But, this couldn't be farther from the truth. While the influx of new technologies has indeed costed people their jobs, we are richer because of it. Jobs aren't lost- rather the composition of jobs has changed.

Sure, there may be less jobs in the postal service, but think about how many new jobs will be created to produce cell phones, increase email technologies, etc.

Not to mention, think how much wealthier we are now. Email, for example, is ultimately free from monetary cost- all you need to do is have internet access and a computer, which many people have in our country for other reasons than just sending emails. Thus, people nowadays don't have to spend money on sending letters because they can get what they want by sending an email, which is free.

Now, people don't need to spend money on stamps and thus we as a society have more money in our pockets to spend in other industries on things we value.

Also, those who lost the jobs as a postal service worker can now go work in other sectors to be more productive where they can be of more use. This also makes us wealthier because new, innovative things may be created as a result of transferring these jobs into other industries.

All of the above explains how these job losses in the postal service are actually a good thing: they might be bad for those who lose their jobs initially, but for us as a whole society, we are much better off.

The article can be seen here: http://online.wsj.com/article/SB10001424052970204190504577040350312660374.html?mod=e2tw

Class Summary #31 for 11/14/11

Today we began learning about supply curves and quantity supplied.

Prof. Rizz posted some graphical depictions of supply on the board. He also included some tables. Here is one of the tables:

Supple Schedule


Price $              Quantity Supplied
0                        0
.50                     0
1                        1
1.50                   2
2.00                    3
2.50                    4
3.00                     5

This tables shows that if the price is $2, I will produce 3 burritos.

Embedded in the supply curve graph is opportunity costs. Supply means marginal opportunity cost. Each point on the curve refers to marginal opportunity cost of producing each unit at that price, and thus equals the cost of producing that particular unit.

Things to consider on Supply Curves:

1. Marginal Cost
2. Total Cost (of all units for producing--> marginal cost of all units added up
3. Total revenues- PxQ This is what you really care about if you are a producer. 
4. Producer surplus= Total revenue-total cost = how much money you make

Below are some more notes from class about supply curves:

1. As the price increases, you'd be willing to increase your production. Supply curve slopes up. As price goes up, quantity supplied goes up. This is because it costs more to make more.
2. As market price increases, you have more money to invest and create more unit.
3. Supply refers to the relationships. Qs refers to one particular point on the curve.
4. The Law of Supply does not always hold true, but it means that when price goes up, producers have an incentive to produce more.
5. Supply=marginal opportunity costs, costs more to make more.
6. Why does the supply curve slope up?
1. Diminishing returns on production.
7. If prices change for burritos, there is a change in Qs- I move along the supply curve
1. If other stuff changes, the whole supply curve shifts and supply changes. An increase in supply means it shifts out, and a decrease means the supply curve shifts in.
8. What impacts supply changes?
1. Anything other than the price that changes behavior
2. Any change in input prices (things that are involved/costs of production)- cost of production falls, lower/higher wages, etc.
3. Expectations for future costs- if you expect prices to fall, then today you will increase your supply an vice versa
4. Technology- any improvement in technology will increase supply because it is less costly to make
5. Changes in other markets- (if pizza price starts going up, it would decrease burrito supply to focus some on pizza to make profit in that sector
6. Elasticity can be applied to supply
9. Price elasticity of supply: how much more will I produce when price goes up?
1. M= percent change quantity supplied/percent change price of this good.
2. Relatively elastic>1, relatively inelastic<1
10. Price system: we ration  good in economy by prices, since there are more people/demand in world than stuff we have, so we need to allocate those goods by prices
11. When thinking about what price to sell something at, must consider the marginal cost (how much it costs to make next burrito including cheese, beans, etc, not including machines because those are sunk costs). Do not consider average cost for this, must use marginal cost when deciding what price to sell item at.

Reading Assignment #10-The Theory of the Leisure Class

A.
Overall, I did not find this article to be interesting, but one or two points did peak my interest.

I found it interesting how the author points out that productive labor is the lower classes means of acquiring goods. It is pretty interesting in my opinion how lower class and leisure class differ on what types of jobs are successful- the leisure or upper class wants to have ownership jobs while the lower class is more than fine having production type jobs underneath an owner.

One final thing I found interesting was the reading pointed out that it has been traditional belief of the leisure class that women should prepare the luxury foods for leisure class men to enjoy, while lower class citizens do not think this way.

I found this interesting because in today's day and age, that really is not a pragmatic way to think of things- more and more, women are working prominent roles in businesses and to an extent, there seems to be somewhat of a role reversal, as more and more than ever there are stay-at-home men.

That part of the article piqued my interest because it made me think how much our traditional beliefs are changing. I really do feel like people, especially leisure class people, are less and less attributing these types of descriptions to women.

B.

1. Why do we attribute certain behaviors to certain classes? Why is it typical according to traditional practice that women produce the food and men consume it, as is show to be prevalent in the article surrounding the leisure or upper class?
2. Why is it that working classes interests lie mostly within the industrial employments? Why do they accept the industrial employments while the leisure class rarely does so?
3. How did the two categories in modern economic institutions come about- the pecuniary and the industrial employments?

C.
This article described traditional beliefs and practices of the leisure class versus the working, or in many cases, the lower class.

The first few pages we had to read talked about how productive labor is the lower class's ordinary means of acquiring goods and this is especially true when a community is at an agricultural stage of industry.

These lower classes also tend to not be lazy and do no avoid labor in any way because labor is their accepted way of life and they take pride in efficiently working since doing so is all they truly know.

Then the author discusses the superior class's ideals, which includes not accepting the thought of being inferior. The superior class does not like having to report to a master and doing traditional labor is a debasing practice to many in the superior class. Also, for these types of individuals to be satisfied, it is not sufficient to just have wealth and power--> they must be able to buy material stuff so as others can witness their wealth.

On the second group of pages, the author writes about the ideal of the superior class that men should consume what women produce. This is a traditional belief (a belief that I believe is changing), especially when it comes to preparing luxury food for the luxury working men to consume. Thus, a signal of being in the upper class for many is being able to consume luxury foods at the hands of women.

On the final set of pages, the authors explains how there are two categories in the modern economic employment world: the pecuniary and the industrial. The pecuniary refer to ownership positions and industrial refers to production-type work.

The leisure class employment interests lie almost solely within the pecuniary employments. The working class can indeed fit into the pecuniary employments, but the majority of the time, they strive for the working/industrial class of employments.

A key note the author shared was that the way to enter into the leisure class is by being having a pecuniary employment. This reason behind this is because as the author writes, the pecuniary employments are the "captains of industry."

Class Summary #30 for 11/11/11

Class began today with Prof. Rizzo asking: is it possible for a demand curve to be vertical, and thus, perfectly inelastic? What this means is that regardless of the price of something, we would buy it.

No, it is not possible if there is a price with which you wouldn't buy product because it is just not possible to be able to afford a product at every price (if this was the case, people would charge infinity for products).

The other thing to consider: At some point, there is a substitute for everything.


The example Prof. Rizzo gave us for this was insulin. Is the demand for insulin for diabetics perfectly inelastic- in other words, would they buy insulin at any price.

No, there are substitutes such as having a better diet and exercising more, or even praying to hope that you get better. This might not be a perfect or desirable substitute, but the bottom line is that the substitute does still exist.

This all relates to the demand curve, which states that you want something AND have the ability to get it. At some prices you just can't afford it.

Also think about the health care example: a woman called in the radio show and said that people will pay for health care at all costs. Why is this person's comments wrong? She said we'd do anything for health care. We disprove this when we drive and do other tasks/activities that pose a risk to our lives. If we cared about out health at ALL costs, we all would start doing things that reduce all threats to kills us- like eat healthy, exercise, etc. We all don't do this, so she is wrong.

Then we learned about income elasticity of demand:

% change in qd/% change in Income = Income elasticity of demand

This tells us how much consumption changes when income changes.

Important to note:  Income and consumption is different than prices and consumption.

If Income increases and consumption increases, then the product being consumed must be a normal good. If the product being consumed decreases when income increases, must be an inferior good.

If Income decreases and demand for a product decreases, product must be normal good while if vice versa happens, must be a inferior good.

Then we learned another concept: Suppose initial income= 50,000 dollars and initial expenditure on environment= 500 dollars. Let's say Mi = 2 and income increases by 20%. What does that imply for spending on environment? If income goes up 20%, spending on environment increases by 40%

Also, US spends more on health care than other countries--> most of other countries are poorer than us so in comparison, it is the same expenditure on health care because we have more money.

-Cross price elasticity refers to substitutes and complements. When the price of pizza goes up, demand for burritos goes up.

When cross price elasticity is positive, tells us items are substitutes. When it is negative, it tells us they are complements.

Opportunity cost- why are poor people more likely to ride bus than place? It's because it's cheaper for them in terms of opportunity costs. Forget about the monetary price- think about opportunity cost. A wealthier person time might be more valuable so dont want to waste time taking bus.

More people apply to grad school now because of recession- less jobs so giving up less to go to grade school- a 20,000 dollar job as opposed to a 60,000 dollar job.

For something to be a cost, it has to be tied to an action and someone who is bearing the cost.

The costs that matter for producers are opportunity costs.

Why does it cost more to make a bike than a picnic table?

• The price of all the stuff going in to the mountain bike costs more than that of a picnic table
• also, the skills necessary to make a bike are more scarce and therefore those workers are more desirable at a higher price.

Skilled workers are paid more than unskilled workers only if there are more opportunities from other people to have his skills employed than unskilled person.

Quantity supplied= the amount of a good that firms are willing and able to produce at a particular price. 

Law of supply= holding all else constant, when price of a good rises, firms will produce of that product.