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.

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.

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.

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.

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

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.

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.

Class Summary #29 for 11/9/11

Today's class was spent mostly on the topic of elasticity.

Elasticity, or M, = % change in Quantity Demanded
                             ____________________________
                            % change in whatever you are interested in (price)

Example: Price elasticity of demand for apples:

P-initial: $1.50/lb   Q-initial: 6 lbs of apples
P-final: $2.00/lb     Q-final: 2 lbs of apples

M apples= (2-6)/6
                 ____________ =     (2/3)/(1/3) = 2
                  (2-1.50)/1.50

Elasticity is 2---> what does this mean? It means that when the price of apples increased, our Q changes a lot, by a factor of 2 compared to the price change. Thus, our consumption behavior changes twice as fast as the price changes.

Important:


Take absolute value for Elasticity.

• If m=1, demand is "unit-elastic".
• If m<1, demand is inelastic and we can say that people are NOT very sensitive to the price change.
• If m>1, demand is elastic and we can say that people ARE very sensitive to price change.

We can define elasticity as a fact of how much consumption changes in relation to the change in price. It is the consumption w/ respect to price/other cost change. 

So, we can say elasticity is the factor by which our consumption changes compared to the price.

So, if elasticity=3.65, we can say that our demand is affected by a factor of 3.65 to the price change, since price is defined at 1.

Law of Demand: When things get more expensive, we do less of it and find alternative ways to fulfill our needs.

What Impacts Elasticity?

1. Time

2. Budget- Price changes in the goods that make up a small portion of our budget (such as salt) won't effect our consumption practices as much as goods that make up a large chunk of our budget or have a high price (such as cars). A very small change in price for a car will affect us much more than a double, triple, etc. in price of salt. I would still probably buy same amount of salt if price increased a lot because a salt costs so little already, but couldn't do this with cars since cars already cost so much. 

• Any time prices change, it has a greater effect on poor than the rich

3. Substitutes- having potential substitutes determines whether or not you can have alternatives when prices change. Usually, we adjust our behavior to price changes. A lot of this, though, depends on the availability of substitutes. This is very important. If there are not enough substitutes readily available, we may have to pay more for items we need when prices increase, which in turn will affect our budgets.

• Salt- there are not really any substitutes for salt, so does not refute the law of demand when prices go up and consumption increases because salt is such a small part of our budget and an increase in price will affect us so little, that we can afford the price increase.

The more horizontal a demand curve is, the most elastic it is. Elasticity depends on some reference point--> How much is a person consuming and how much is the current cost. Then, we can find elasticity.

On the demand curve, elasticity decreases as you move down and increases when you go up.

• Pretzel bakery- a small change in salt for them would affect them mightily (would affect us very little). Since pretzel bakeries consume so much salt, a small price change is actually a huge one for them. So, they are very sensitive to price change in salt and therefore have a large elasticity.

Consider this list:

1. minivan
2. ford minivan
3. red ford minivan

Which of the above demanded items has the highest elasticity?

To answer this question, we need to consider: time, budget and substitutes. Time and budget don't really have anything to do with the list, because they are constant or almost the same for all of those items. But we need to consider substitutes.

1. If minivan prices go up, we can get a cheaper car, bike, etc.
2. If ford minivan price goes up, can still buy a truck or other types of similar minivan. There are substitutes available.
3. Red ford minivan- if the price goes up, many many more substitutes.

The more narrowly and specific an item is, I can come up with more substitutes for the product.

Therefore, the red ford minivan is more elastic because it has the most availability of substitutes.

Then we learned about total receipt/total revenue: price x quantity or units sold = total receipt/total revenue.

Law of Demand: If prices go up, Q goes down. If prices go down, Q goes up.

Businesses always are trying to figure out the cost of raising/lowering prices on the # of consumers they will have.

If customers are sensitive to prices (elastic), a business can make more revenue when they lower prices. If customers are insensitive (inelastic), raising prices will bring more revenue.

Finally, we learned that expenditures are not the same thing as costs. Also, smaller consumption on the demand curve reflects greater elasticity generally. Greater consumption is less elastic.

Class Summary #28 for 11/7/11

Today in class, we went over demand curves. Because I am unsure how to, I will not post all the graphs from class in this blog post, but I will post the information learned in class in this blog post.

Class began with us learning about comparative statics, which refers to:

1. How things change in this economy and how we model these out.
2. What things impact how much we buy?
1. Quantity demanded: prices of the good itself
2. All the other costs to people/stuff=changes in demand

Below is a list of things that might change (other than the price of the good) that will affect whether we buy more or less of a product (*note: burritos were used as an example of a good):

1. Income- when you get more, you will consume more. When income increases, so does quantity demanded. This is referred to as the "normal" goods". "Inferior Goods" refer to lower quality goods AKA Raman Noodles.
1. It is important to remember though that no good is universally normal or inferior. The reason why is because preferences are subjective. I might value Raman Noodles as normal while others might value it as inferior.
2. Prices of other things- There are two types of goods in relation to burritos that I might be consuming where prices could change my consumption of burritos;
1. Substitutes (other foods such as tacos, fish fry, etc.) If the prices for substitutes go up, my consumption for burritos go up because those options are less attractive. The opposite can be said if the price of burritos goes up. Remember that price does not have to just refer to money.
1. Substitutes are decided by the graph based on substitute price increases. Can't say that a taco and burrito are substitutes just because.
2. There are no natural pairing of goods. Look at the relationships of goods. If the consumption of one thing goes down when price of another goes up, we treat them in same way as if price is associated with burrito.
2. Complements
3. Expectations (about the price of a good or quality of a good)- perfect example of this is student loans. We expect to have higher income after going to college so we take out loans. We are willing to borrow money and live freely today (eat and enjoy college life) because we think that someday, college will help us make enough money so we can pay off these debts. We wouldn't do this if we didn't expect to get a job after college.
1. When you think future prices of something will go up (your future expectations), you might consume more of that good before the price does go up.
4. Tastes and preferences
5. # of participants

When something other than price changes and this change makes you want to consume more, the whole relationship changes. This is referred to as "Demand Shifts Out".

"Demand Shifts In" refers to when: even though prices didn't change, something occurred to make us consume LESS burritos.

Class was concluded with Prof. Rizzo reviewing what Elasticity is: How sensitive you are to changes in price. It allows us to measure with respect to anything.

So, Elasticity would measure how much our behavior would change if the price of a burrito changed. The way we express elasticity is as follows:

Percent change in Qd (consumption) divided by the percent change in the price.

Next class, we are going to go into more detail about elasticity and everything it represents.

Class Summary #27 for 11/4/11

Today's class was filled with a ton of different lessons all relating to supply and demand curves. I am unsure how to draw graphs on blogspot, so I will just post some of the tables we went over in class and the general rules/lesson Prof. Rizzo taught us today.

Rachel's Demand Schedule for Burritos


P                                Quantity Demanded of Burritos


$0                                12
$0.75                           10
$1.50                           8
$2.25                           6
$3.00                           4
$3.75                           2
$4.50                           0

Here are some notes we learned about the above table:

• The prices in the table are complete subjective
• Prices show how much we value 1 burrito at
• In the case of the burrito that "costs" $0, there is still a cost for consuming a burrito that needs to be considered. This explains why the quantity demanded of burritos when it costs $0 is not infinity.
• The prices are signals: when prices are low, the price says you can use burritos for everything. When the price is $0, you might get as many burritos as possible to use as gifts, food for the day, use as a tool, feed pets with it. 
• You have to ask yourself- is the pleasure I get from using a burrito in that way greater than the cost- when price is $0, yes. We are always making these types of tradeoffs in our head.

What Can Be Obtained From This Simple Chart?

1. Marginal values- the graph and chart shows the marginal values to a person of a burrito. It shows the price of burrito plus how much we value the next one at.
2. Total Expenditures- one can calculate this by multiplying: PXQ
3. Total Values- sum of pleasure you get by consuming each burrito. This is the area under the demand curve. To get this, you can take integral or use simple geometry to find total value or add up values from the chart.
4. "Buyers' New Gains"- AKA Consumer Surplus= Total value - total expenditure . This is showing the gain I get from being able to participate in this market.

Why Do We Behave This Way? (i.e. why do demand curves skype down?)

1. Wealth Effects-
1. When prices go up, you are poorer. When you are poorer, on average, you tend to consume less.
2. Substitution Availability-When prices are low for burritos, you are not giving up a lot to get it. So alternative items are not as valuable. When prices increase, it makes other items, or "substitutes", more attractive so as to save wealth on alternative forms of food/items.
3. Diminishing Marginal "Utility"- This is the most important. It refers to each unit you purchase of a good gives you less satisfaction than the previous one.
1. i.e.- the 2nd pizza slice you eat is less satisfying than the first, and so on. Thus, you wouldn't be willing to pay as much for the 2nd pizza as you would the first pizza, and so on.

Prof. Rizzo also briefly touched on the following topics:

• Condition changes alter prices- i.e. when there was a snow storm on East coast last week, food prices went up.
• The Law of Demand does not just include money prices, but also non-money prices. It considers economic prices as well.
• Is making jack-o-lanterns and not finishing all your dinner really taking food away from poor peoples' mouths? We will learn about this later on.
• As burrito prices go up, you will cease to use burritos in ways that are costly to use- in many ways, these are wasteful ways.
• It is vita to prioritize your wants/values- if burrito prices go up, might use something "cheaper" with which to play baseball.

Class Summary #26 for 11/2/11

Today we learned about supply/demand and market systems.

The biggest economic challenge is getting people together so they can buy and sell.

A transactions costs= anything that prevents beneficial exchanges from taking place.

Then we learned about middlemen. Below are the notes we learned about them:

• Middlemen generally have a bad reputation
• Example of middlemen: ticket master, stubhub
• They bring sellers and buyers together and take a fee for giving us the convenience of being able to buy an item in a convenient location
• middlemen have a comparative advantage in lower transactions costs for customers and producers. They have the ability to bring buyers and sellers together
• Wegmans is the ultimate middleman- reduces transactions costs between farmer and customer
• For example: Apple at wegmans: $1.69, apple from a farm: $0.31. Is Wegmans ripping us off? No, they are just reducing transactions costs for us in terms of making it more convenient for us to get the item we desire, considering the farm is far away in an inconvenient location. So Wegmans is actually making it cheaper for us and producers/farmers to make a transaction.
• For the farms, it reduces the search cost as well because non-locals from Rochester would never know where to get/buy an apple from (no idea what farm to go to)
• Reason why middlemen work: because we live in a society where people can exchange property rights

Then we learned about exchange. Exchange can occur in small groups. But we live in a world of 7 billion people. There are two problems with large groups trying to come together to exchange:

• Information problem- hard to understand outside a small group what people want and know the best way to deliver an item to them
• Barrier- such as distant/trust barriers

Then we learned about prices/demand. 

A price is simply information. They are signals to buys and sellers about what is scarce and how scarce something is. It is a signal to sellers about what we as a society value.

Markets mean more than just exchanging. It is a whole process.

Markets: prices are determined in a market proces. A market is any group of potential buyers and sellers.

• Could be a physical market- stock market/farmers market
• virtual market- ebay, craig's list
• prediction marker- sports betting

A market is also any decentralized, unorganized interaction between buyers and sellers.

When you have a market, one of two things will emerge:

1. Productions of money prices and/or non money prices.
1. This happens because the goal is to produce order (things are organized as expected)
2. Money prices= reflected in type of business. If there are long lines at a business, then prices tend to be too low and if there is a lot of stuff not being sold, prices are too high
3. Non money prices= good example of this can be seen with free healthcare in some countries. Collective planning authority decides who gets the health-care. In this case, it isn't prices deciding order but somebody. There is no cost to the person and someone will pay for the healthcare in those countries but the cost is that there is no  guarantee you will get the healthcare you need as there is not enough to go around. Therefore, the healthcare does get rationed and it is not completely free even though there is no price associated with it.
1. Another example: we are rationed by quality (SAT tests, ACT, grades, extracurriculars, etc.) to get into UR. That too is a market.

There are two different names for participants in a market:

Buyers:

1. "Demanders"
1. In a goods market, households make up the market.
2. In a factor market, firms make up the market.

Sellers:

1. "Suppliers"

1. Goods market, firms.
2. Factor markets- households.

Then we learned some important notes to conclude class:

• When two people transact, their transaction has little to no effect on anyone else's transactions/behaviors.
• Demand is a relation between the amount you wish to obtain and the sacrifices you must make to get it. I.e.: to get an A in Econ, need to study 10 hours a week and to get a B, need to study one hour. Thus, you are considering costs while keeping in mind other things you want to spend time on/give up so you can get your grade.
• Quantity Demanded: a plan, a number- amount of a good that buyers are WILLING and ABLE to consume at a particular price.
• i.e. us as students to buy Maserati- 0 quantity demanded because we don't have enough money to buy one at current price
• Law of Demand= other things equal, the quantity demanded of an item falls when the price of the item rises

Class Summary #25 for 10/31/11

Today, we learned about trade as we have been learning about in the past few weeks.

To begin, Prof. Rizzo explained to us how if you borrow money to increase productivity, it is not a problem even if the borrowing puts you into debt. Also, trade is always perfectly even.

We also learned about how when the US government spends more money than it takes in taxes, US needs to pay off its debt. A lot of countries such as China may buy off some of US debt because they will eventually get paid plus a 3-4% return rate per year. Doing this also keeps interest levels lower in the us.

Trade statistics are really not meaningful entities as well. Consider the trade deficit and surplus between NC, SC and the rest of the US. If NC and SC succeeded from the union, nothing would happen to them, which is proof of the aforementioned postulate.

Prof. Rizzo went on to show us a fascinating example of how inefficient "buying local" is. A group of college students at a Philadelphia-based college made a suit only with materials from towns/companies that were within a 100 mile radius of the school. It took 500 hours to produce the suit that really wasn't great quality and cost the equivalent of $10,000 to make. It would have cost a lot more on the open marker to sell.

Another example Prof. Rizzo shared was that of the Whirlpool Call Center. Let's say there are 1,000 people who work as call receivers at Whirlpool. But, we decide to send those jobs over to India. Each job loss will crush the employees because the job loss is worth about $100,000 per worker (when you take into account all the benefits that were associated with the job, plus any additional costs the worker incurs due to the loss of his/her job). This equates to about $100 million in savings for the company/loss for the workers who were laid off.

The only reason why Whirlpool would do such a thing is because it would reduce prices for consumers. Prof Rizzo says that by outsourcing these workers, whirlpool prices would reduced by $2 per unit. But when you consider how many products are sold, this would be worth the cutting of jobs to send over to India.

Then we learned about trade's impact on the environment. Nations with the highest environmental standards tend to attract the greatest investments.

Trade does two good things for the environment:
-It leads to more environmental consciousness
-Specialization through trade reduces congestion on land- we don't need to fill everywhere with farms. Instead, we can get certain things from different places, which reduces land congestion.

An important thing to consider: Trade gives us more money to spend on other things.


Class concluded with some final notes. They are below:

Adam Smithian notions of trade: When you specialize, there is much less time spent at job doing other things. You have more time to spend on perfecting a specific craft, which leads to more production. Also, specialization allows us to develop knowledge and capital where you otherwise wouldn't be able to. For example, Prof. Rizzo has an incentive to increase his knowledge of economics because that is what he specializes in. He doesn't have to waste his time on chemistry and other subjects. Finally, specialization allows you to expand in market and lowers costs.

Ricardian notion of trade: All has to do with comparative advantage.  Trade lowers costs when you take into account which person/group does a task with the lowest opportunity cost and does the tasks that you are most efficient at. By doing this, other people can do the same thing and then everyone in general is more efficient/better off.

-In economics, people valuing stuff at different values is important for trade to happen/for a marker to exist.

At the very end of class, Prof. Rizzo began to talk about supply/demand:

Transaction costs- the cost of negotiating contracts and agreements. Simply put, it is the cost of arranging for a trade to happen. There are three of them that an economy has to help buyers and sellers overcome:
1. Physical- the physical distance among potential traders
2. Ignorance of opportunities - in marker economies, we don't need to know all information before making a trade
3. Interference

Class Summary #24 for 10/28/11

Today in class, we learned about a variety of different economics topic.

To start, Prof. Rizzo began class touching on a topic he went over frequently last class: If you are concerned with trade costing jobs, then you must be concerned with everything else that costs jobs as well. This includes technology. But as Prof. Rizzo points out, he doesn't see anyone doing that so why do people do that with trade?

What is it that decides whether a job gets shipped over season? Two notions:

• Absolute advantage
• Comparative advantage

Then we learned a formula: How much more stuff I can produce with one more hour of work. Thus, the following formula allows us to calculate an opportunity cost of how much I am giving up by not doing an extra hour of work:

Wages

______________________ = (this is an example)---> 

Marginal product of labor

China:

$8 hr

_____________ = $2/unit

4 units per hr 

US:

$30 hr

______________ = $1.50/unit

20 units per hour

Thus, US is more efficient because one's productivity is what matters. It is not just how much a wage is. It is also about what is a person's ability to produce  with a certain wage. One needs to know the wage amount and productivity among all sectors to determine who is more productive.

In short, productivity reduces manufacturing and jobs (in technology, it takes over jobs because technology is more productive than the person working).

Here are other important notes from class:

• Trade surplus does not necessarily create job
• Today, we are capable of growing triple the amount of food we did in the past on a smaller scale of land. This is a reason why agricultural employment has been reducing
• Trade deficits also don't create and/or destroy jobs
• You pay for imports with exports
• When you specialize, you get richer. This is known as the "income effect". 
• Because of specialization, trade will allow us to consume more more in turn creates more jobs
• A good example of trade deficit can be seen by Rizzo's relationship with Wegmans. Rizzo buys food from them, so he is getting food, yet he is not exporting to them. Therefore, there is an infinite trade surplus for Rizzo. Also a trade surplus for Rizzo with UR, because they pay him but he buys no merchandise from them.
• There is also a relationship between all of this: He exports knowledge to us, we pay him, and with that money he goes to buy food.
• Rizzo firmly supports trade- raw data shows trade creates jobs

Rizzo concluded class with a very important concept:

What happens when I buy $10 of toys from China? According to Rizzo, this is not a problem at all because the money has to come back to me in one form or another. If it doesn't come back to me, however, that is even better.

So lets say I buy $10 of toys from China, which is a merchandize trade deficit for me. With this $10, lets say a Chinese student pays $5 for education in America. Well than the other $5 could do three things that show it will come back to us:

1. Buy more American goods
2. Buy an American asset (mutual funds, etc.)
3. Buy a product from another country and that country uses the money on American asset at one point or another.

Prof. Rizzo also pointed out that if we rip up money, we are making every American richer because the US loses money in circulation, so the rest of the money in circulation is worth more and raises the value of American currency by however much we rip up.

Class Summary #23 for 10/26/11

Class began today with Prof. Rizzo reiterating the message to us that as long as we specialize in what we are good at and we aren't giving up a significant amount of other things (low cost), we all get much richer.

Then we went on to learn about unemployment and trade. Here are some of the key notes we learned:

1. In the US, the jobs we see going away are the ones that are easily mechanized.
2. People losing jobs is not necessarily a bad thing. It may even make us richer. Consider this:
1. If people at the UR registrar lose jobs, we are richer because there is more money in our pocket, as machines will be doing their jobs. Then, they will be forced to acquire new skills to get new jobs, which will benefit us because they could then go on to create new things.
3. The most important concept of class is that self-sufficiency is the road to poverty
4. Peoples' wages are higher when their jobs are close to being outsourced. Rizzo's wage is high because he could easily be replaced by another person/machine.
5. Trade doesn't cost jobs, it just changes the jobs in an economy
6. Technology is the greatest job destroyer in history.
1. Interesting question posed by Rizzo: If we are concerned about job loss, why is it that we worry our selves with the impact trade has on job loss and not technology. Technology takes our jobs away as new machines are made, yet we as a society welcome new technologies all the time but say trading with other countries is bad.

Trade Deficit= the amount more we buy from another country than we export (the difference)

Trade Surplus= the opposite of above

Since 1976, we have bought more abroad than other countries have bought from us. 10 trillion more goods have been bought by us since 1976 than they have bought from us. Yet, US total employment since the beginning of trade deficits since 1939 employment has increased overall.

People claim that unemployment today can be attributed to trade deficit, but this is not true. Trade simply creates/affects the types of jobs we are present in an economy, it doesn't cause unemployment.

Today, because of influx of machinery, manufacturing jobs have been decreasing since 2000. Just 9.1% of American workers today are manufacturers.

Despite this, we are manufacturing more than ever which is much due to machinery- we are manufacturing by 5.1% more than in 1931 and we have increased production despite having less workers (more machinery).

IMPORTANT: When jobs are lost by machinery/technology, it gives people incentives to go back to school/learn/develop new skills and help our society in another way. Having this new technology saves us money and helps us grow wealthier because new jobs are being created that give us new tools. Technology has saved us a load of money because less people need to be paid for work, which has helped our economy because we have more money to spend on other things. Thus, all of this makes more jobs and gives us more wealth as a society.