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.

EWOT Goggles #10

Last week in class, we learned about middlemen- or people, businesses or organizations that bring buyers and sellers together to make a transaction more convenient. To do this, middlemen also charge an additional price for offering such convenience to buyers and sellers.

The other day, I was talking to one of my friends (Joe) and he gave me a perfect example of a middleman.

Joe was telling me how this year, his friend Shawn does not have a car on campus but he (Joe) does.

Shawn wanted some beer to enjoy his night on a recent weekend, and Joe agreed to go buy him some booze, since he had a car with which to drive to the store. But, Joe only agreed to do this on one condition: if Shawn paid him all the money for the beer plus an additional fee of $10.

I asked Joe what the additional fee was for. He told me: "Taking the time to go buy alcohol for Shawn came at a cost to me. I had no interest in drinking alcohol or buying beer, I was simply doing him a favor. I could've spent my time doing other things I valued, such as my school-work. So to incentivize me to buy him alcohol, I requested that he pay me a fee in response to the cost [of losing my time] that was placed upon me to go out of my way to get him beer."

And then it hit me: Joe was acting as a middleman, just as we learned in economics. Even though the store Joe was buying beer from was also a middleman, Joe was serving as an additional middleman- bringing a buyer and seller together. Joe was making the transaction convenient- and possible- for both parties, which is all part of being a middleman. And after putting two and two together, I realized that Joe very much deserved compensation for getting beer for Shawn, not only because it cost Joe his valuable time, but also because he was making a transaction much more convenient for both parties.

If it wasn't for Joe acting as a middleman, the transaction could never have occurred. Shawn would not have gotten the beer he wanted because he had no car to get him to the store. This shows how middlemen are indeed good for the economy- they stimulate economic growth through making transactions possible that would not have been possible without middlemen.

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.

Reading Assignment #9- The Economic Organisation of a P.O.W Camp

A.
Overall, I found this reading assignment to be very interesting. It opened my eyes to how a market develops spontaneously.

I'd have to say the most interesting thing I gleaned from the article was just that: the development of the market.

Truthfully, before I read this article, I never stopped to think about why or how a market comes into existence. It was amazing to me how the market developed spontaneously simply because people had desires and wants, which led to people exchanging, which in turn led to a market being developed.

I also found it fascinating how cigarettes became the currency used in the market because outside of the camp, cigarettes would not have had nearly the same value- it is interesting how one man's gold is worthless to others, as a cigarette for a normal citizen who was free at that time could not buy much in the free world.

One other thing I found interesting was how much the market thrived with little regulation- when the store and restaurant owners began regulating the prices and market, sales started dwindling. This exemplifies how little regulation (a-la laissez-faire) can help a society economically.

I also found it fascinating how when the Red Cross failed to deliver a certain number of cigarettes, prices dwindled and deflation/inflation occurred depending on the number of cigarettes in circulation. This perfectly compares to the currency we use in our society- money. When there is too much in circulation, inflation occurs, while deflation occurs when there is a small amount in circulation.

In essence, I thought this article was a very worthwhile read as it encompasses a number of different themes and topics we have learned/discussed thus far in ECON 108.


B.

1. What is it that leads to a market being created?
2. Is the market that was created in the POW camp an accurate representation of how markets in countries and around the world were created?
3. How does a market decide what the currency will be backed by? In the POW camp, currency was cigarettes. Does it just have to do with what, collectively, the most valued item is?

C.
The 11-page excerpt from a book, written by R.A. Radford, basically explained the development of a market in a Prisoner of War Camp (POW=Prisoners of War) during WWII in 1944. The market thrived for much of the story and was free from regulation until the end of the story, when regulation started taking place. And of course, the market was created spontaneously, which is a theme we have learned about through economics this semester.

The market described in the POW camps were all based on trade and exchange between food, attire/desirable items, and cigarettes, which turned out to be the most valuable currency (more to come on that later).

The article begins by explaining the development of the market. For the purpose of getting the point across, I am just going to explain what went on in the German camp, as several different camps were discussed in the excerpts but the German camp is where the majority of the action takes place.

Initially, when the writer arrived at the camp, prices and values started to develop for different foods and items. You see, the Red Cross would deliver rations of different necessities to the POW, so the rations can be referred to as the source of "income" for the POWs.

Trade values started to come into existence after these rations were delivered- certain foods/items were worth certain values, and thus, these foods/items were traded for other things. Diced carrots, for example, were worthless and a cigarette was worth several chocolates.

Eventually, everything was traded not in terms of other foods but in terms of cigarettes. Cigarettes, which were highly valued by the POWs, became the new currency of the POW Camp.

Additionally, an "Exchange and Mart Notice Board" was put up in the camp to list offers from different people, so people could be aware of what was up for sale. This, in a way, was a type of middleman, as it allowed for buyers and sellers to come together and see what means needed to be met to make a deal.

A lot of commercial organization developed in the German POW Camp, as a shop with public utility that was controlled by officers on a non-profit basis came into effect. With the new currency in cigarettes, bartering was now at a minimum and everything was bought like a real retail store with currency in the form of cigarettes.

Thus, a market came into existence without labor or production. It was all based on spontaneous operation, with prices being fixed by supply and demand (sometimes cigarette amounts were not as great for whatever reason which led to deflation and vice-versa).

There was some labor in the form of offering services for cigarettes, as well as the shop and eventually the restaurant, but ultimately this was a market based on no regulation that developed from the Red Cross dropping off rations at the POW Camp.

As I stated above, economic instability occurred when cigarette amounts dwindled. Weather conditions and rumors affected prices for items as well. Simply put, just like our economy, changes in conditions affected the price level and structure.

Later on, paper money began to get issued that was backed 100% by food. This paper money was called the Bully Mark (BMk).

Eventually, when the POW Camp was bombed, BMk began to fall because of the shortage of food. If BMk could've been tied to cigarettes, it would have been like a real money currency that we have today. Once the BMk came into existence, however, regulation in the market really took off.

Towards the end of the camp, the shop and restaurant that was created on the camp took over the "Exchange and Mart Notice Board" and started regulating the market. Prices increased as the "middleman" had to be compensated for his work.

Eventually, public opinion went against these middlemen and the idea of regulation fell and everything returned to as it had been before (at least somewhat to what it had been like before), with cigarettes being the main currency in society.

At the very end of the story, the 30th US Infantry Division arrived with elements. Radford used this occurrence to show how having infinite products causes economic organization and activity to be unnecessary since every "want" people had could be met without any effort or work.

EWOT Goggles #9

I subscribe to a magazine called the Sports Business Journal. The content of the magazine includes exactly what the title says- business from the sporting world.

I enjoy reading the magazine because it allows me to apply a lot of my economic learnings from class to sports, which is my biggest passion in life.

San Francisco Giants Pillow Pet

Yesterday, I read an article about a new fad in the sports merchandise world called "Pillow Pets" (see picture to the right). Basically, they are stuffed animals that can be "un-velcrowed" from the stomach to transformed from a cute and cuddly friend into a pillow.

Apparently, Pillow Pets have been making record sales since they came into creation. Their sale has boomed even more since the company who initially produced Pillow Pets recently licensed the product to another company, Fabrique, to begin putting sports logos on the pets.

Take a look at Pillow Pets revenue generation since its inception in 2007 (Pillow Pets sell anywhere between $15-$30 apiece):

• 2007- $300,000
• 2008- $3 million
• 2009- $7 million
• 2010- more than $300 million

I was absolutely astonished at these figures. When I read how much money these pillows were generating, I thought to myself how ridiculous it was. I initially thought to myself- "who needs such a pillow? They are so useless! I can buy a more than sufficient pillow for much cheaper than $15 to $30. What a waste of money!"

But I continued reading the article and this is what Brian Jennings, NHL executive VP of marketing, had to say about the item's success: "They hit a great combination of the right emotional chord and the correct price point."

Bryan Swallow, VP of marketing and sales at FootballFanatics.com, said that "Adults like them because they're a connection to their favorite team. Kids need pillows for car rides, nap time or whatever, so they won't be dropped in the toy chest and forgotten."

These quotes brought me back to what we learned leading up to the first midterm. Although they may seem to be, these pillows are not at all useless and are well worth the money because people VALUE them. As we learned with the Jibbitz fad Prof. Rizzo loves to refer to: no matter how useless an item might seem, it cannot actually be referred to as useless if there are a significant amount of people who value it and are willing to pay for it.

This led me to reconsider my initial thoughts. I now realize that the Pillow Pet fad is not a useless fad but rather a useful fad. For one, it allows parents and children to connect with each other through a parent's favorite team being the pillow for a child. Thus the child gets to become a fan of the same team the parent likes by being exposed to a stuffed animal/pillow with a sports team logo on it.

Perhaps some day I will buy a Pillow Pet for my own children. After all, I do want my own children to get sufficient rest- and be a Philadelphia Phillies fan just like me!

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