Changing Elasticity, Substitution & Income Effects

There is a very good article (free content at this writing) in today's issue of The Wall Street Journal. It should have high interest for students, given the subject matter and it is loaded with applications for micro concepts and even for the micro review before teaching macro.

The article is about declining gross sales for concert tours. There was a significant drop this year.  This may not be surprising.  My guess is that students and teachers would both say that concert prices are highly elastic.  Given the times, it would only seem logical that ticket sales would drop.  However, early in the article there is a statement that grosses had increased each of the last eight years. That includes 2008 and 2009. The statement goes on to say that the number of tickets sold held roughly even despite rising ticket prices.  That would indicate characteristics of a good that is highly inelastic. 

We know that elasticity can change.  But we can go into the reasons for the change.  The article gives us room to pursue both income effects and substitution effects. Of particular interest is the idea that older groups tend to be bigger draws than newer groups. Given the possible fan base, this would seem to indicate that it is people with more disposable income that are buying the tickets. That does not mean that only older fans go to see older groups, or that younger acts don't attract older fans, but there may be factors to consider in a discussion.

The article also has some useful graphics, a slideshow, and a video (downloadable) to accompany it.  I suggest you give it a look.

Ronald Coase & Externalities

Yesterday was the 100^th birthday of Ronald Coase who gave us the Coase Theorem.  I missed it (for which I apologize), but EconGirl, Jodi Biggs, did not. She put up a truly superb post explaining Coase’s importance and providing a great example of the Coase Theorem at work. 

I suggest you add this to your arsenal for discussion of externalities. It is clear. It is interesting. And it is real. And it’s hard to find examples that meet all those requirements.

On Friedrich Engels

About 15 months ago, I posted a link to a review of a then new biography of Friedrich Engels, Marx's General by Tristram Hunt. In the interim I received the book as a gift and just finished reading it. It was excellent.

I am not endorsing the book merely as one who studies the history of economics and the lives of economists. I also applaud the book for its historical and personal insights. Engels was a tireless, committed worker in the fields of the socialist movement of the mid-19th century. And he was a paradox.

The son of a wealthy manufacturer, Engels spent time on the barricades in the uprisings in the mid-1840s. But he would return to the world of commerce in order to finance Marx's writing. After Marx's death, Engels continued to move the socialist agenda forward, continuing to support members of Marx's family. All the while, his own life-style seemed to more closely parallel the bourgeoisie than the proletariat.

In fact, a quote from the epilogue may describe his view best:

"Neither a leveler or a statist, this great lover of the good life, passionate advocate of individuality, and enthusiastic believer in literature, culture, art and music as an open forum could never have acceded to the Soviet communism of the twentieth century, all the Stalinist claims of his paternity notwithstanding."

If you are looking for an interesting read to start off the New Year, I would recommend Marx's General. If you're still hesitant, I would suggest you might want to listen to a podcast of a lecture by the author on the London School of Economics (LSE) podcast series in April 2009.

For those of you who want go more deeply, here's Friedrich Engels' Conditions of the Working Class in England. I read it as a graduate student some (mumble mumble) years ago. It provides insights, not only into the impact of the Industrial Revolution in 19th-century Manchester, but provides a framework for The Communist Manifesto, of which Engels was a coauthor.

I welcome comments by anyone else familiar with Hunt’s book.

"Marginal" Thoughts

Today's issue of The Wall Street Journal has a keeper (subscriber content at this writing, but put the headline in your browser and you might find an ungated version). it contains a very good article that can be used when discussing marginal productivity of labor and marginal revenue product. It really is worth the effort to try and find it. The slideshow is "okay" but doesn't have the potential of the article.

The is about how the venerable fast-food chain is adding things to its menu to appeal to changing customer tastes. The problem is some of the investments are hefty and the additional revenue generate may not pay for the investment. In the article, one franchiser talks about how a certain piece of equipment wasn't paying for itself. Another franchiser discusses how an attempt to stay open 24 hours at a certain location didn't cover the labor costs.

At the same time, the article discusses how new ideas can drive productivity - a key aspect for profitability in the fast food business. The most obvious example is the addition of a second drive-thru lane at some restaurants.

As I said, you might want to spend some time trying to find this article. It has real potential to help when discussing those "exciting" cost curves in your micro classes. As always, I look forward to your comments.

For Those Who Celebrate Christmas....

I don't know what yesterday looked like at your house, but around here....

The "Evolution of Markets" in Seventh Grade

Today's Planet Money Blog has a great piece on how markets evolve and trade makes everyone richer.  It involves candy and a seventh grade class.  I won't go farther than that, but it's a great exercise about how trade maximizes surplus. It was also on Morning Edition this morning.

You can even use it to explain why gift-giving can be viewed as inefficient.

Measuring Trade

This past week, there have been a number of posts and articles that address the continuing fascination with trade imbalances. But the three that follow are particularly helpful if you want your students to really understand the nature of trade.

First I present a pair of links that are related. The first is an article in The Wall Street Journal that connects the iPhone to the trade deficit. If you are a devotee of that particular piece of electronic hardware, examine it. You will notice it says "Assembled in China." What you may not realize is that is equivalent to "Made in China" for purposes of measuring trade. But the article explains that while, for statistical purposes, the last shipping point is what counts. The bulk of the cost of an iPhone is actually due to the U.S.

This is made even clearer if you look at this blog post on Carpe Diem. Mark Perry provides a clear explanation of how the Chinese actually are responsible for the smallest portion of the cost.

Don Boudreaux at Cafe Hayek provides another view of trade. Too often, our students think of trade as a tied to a single event or product. What they need is a clearer understanding of the concept of interdependence. They need to think beyond the initial exchange and examine what the consequences of that exchange. What other exchanges does it make possible?

Information, Prices and Competition: A Bigger Threat to Mom & Pop?

There was a fascinating article in today's edition of The Wall Street Journal. The article (free content at this writing) was about how new apps on smartphones make it easier for people to comparison shop and the pressure that is putting on certain retailers. One anecdote had a shopper seeing a gift for his girlfriend at a big box electronic store. He whipped out his smart phone and found it at an online store for considerably less. He purchased from the online store while standing in the big box.

This article has a lot of potential for use in microeconomics. You can discuss the role of "perfect" or at least improved information in setting prices and making competition. You can discuss consumer and producer surplus, and willingness to buy and sell. You can even go into the idea of value and utility, and make a case that the higher price in the big box was because they offered better time and place utility for the item - delivery and "satisfaction" would have been immediate because of no waiting for delivery.

But I will suggest one more angle. What do these new apps bode for the “mom & pop” stores on Main street? If many of us are upset because various big box stores threaten to put small retailers out of business because of better pricing; how can those same small retailers compete with the lower prices that come with better information? Granted, not everyone has smartphones. But the history of technology suggests that as time goes by, the price of those devices will fall and competitive pricing information will be available to more and more people.

I look forward to your thoughts.

Creative Destruction: From Sci-Fi to the Palm of Your Hand

Today's edition of The Wall Street Journal has an engaging opinion piece by Orson Scott Card. For those of you who do not recognize the name, Card is the author of a very successful science fiction series that started with Ender's Game, a novel of young military genius who helps save the planet from a war with an alien species. The later volumes involve some moral dilemmas that come with "winning."

But Card's commentary is not about the book, but rather about how technology has changed our life in just one generation - call it creative destruction. The economist Joseph Schumpeter wrote about economic growth as creative destruction. He saw new enterprises, new opportunities, and new technologies always replacing older ones. The new created new jobs. The old took old jobs. And as the new jobs demanded new skills that society valued more; the wages improved. The old jobs, because they were connected with goods and services that were no longer valued as highly by society, saw wages languish.

Card talks about how changing technology has impacted how we communicate and how we even do research. But his piece reminded me of another. Mark Perry at Carpe Diem had a post on creative destruction last month. Specifically, he looked at all the devices that were being "replaced" by the smartphone. The list is impressive. And what about all the derived demand for labor that is being lost because we want everything at our fingertips? These might be useful when you next discuss the economic growth process. I welcome your thoughts.

Bowl Game Economics - Scalping Tickets

Last Friday, Mark Perry at Carpe Diem had a post that can be useful to those teaching about prices and markets.  Mark pointed to a rant by a University of Wisconsin student and football fan. The individual was upset because he or she did not get a ticket for the upcoming Rose Bowl game in Pasadena when they went on sale.  The ticket allotment for students through the University of Wisconsin quickly sold out.  So far, so good - we have an example of supply and demand at a price.  We can use it to illustrate consumer and producer surplus in a market with inelastic supply.

What happened shortly after the tickets sold out was the cause of the rant.  Within a few hours, tickets were becoming available on social networking sites (probably even on eBay and other e-commerce sites). And the price was considerably higher than face value.  Some students had purchased the tickets and were now selling them at a considerable premium.

Now we can integrate willingness to pay, inefficient markets, elasticity of supply and demand (remember timeliness can be a factor), budget constraints, and utility/value. Clearly, some people were willing to pay a higher price, but their opportunity cost may have prevented them from going through regular channels.  They may place a different value on being at the game and or have different budget constraints. There are a lot of different directions to go with this, and I welcome additional ideas or suggestions for sharing with the rest of the readers.

As a supplement, I point you to this excellent interview on the EconTalk web site featuring a discussion between host Russ Roberts and Duke University Professor Mike Munger, both big baseball fans, as they discuss the economics of ticket-scalping. I welcome your comments.

Competition, Rent-Seeking and the Role of Government

This has to be a quick post.  In today's edition of The Wall Street Journal (free content at this writing), there is a great story on food trucks in Chicago. The owners are trying to compete in slow economy. Existing restaurant owners are bringing pressure to bear on local government. And the city council is trying to decide whether and how to change the existing laws to allow trucks to prepare food in the vehicle. Current law says food must be prepackaged and not altered in any way. 

This is a great little piece to bring together a trio of topics for your class.

Rich and Lost: Learning about the Economy

I just finished reading an interesting piece of economic fiction.Rich and Lost in Prosperia by Doramas Jorge-Caleron is a fanciful exploration of basic economics set in the mythical tropical island of Prosperia. The two main characters have different views of the role of business. One of them seeks guidance from a renowned economics professor who, during the course of the book, teaches him the fundamentals.

The setting and character names are just fanciful enough to be corny. But this is part of the charm of the book. Those of us who teach and have taught high school know that corny often works with students - especially if the corn intellectually nutritious.

And this book has that merit. The economics lessons provide the brain food in an appetizing way. Through a series of meetings, one of the characters is given a crash course in economics. But the lessons are not boring, dry discussions of theory. Rather they are set in "real life" examples that illustrate the points - each morsel is something to mentally chew on. And the menu is diverse. There are discussions of prices, scarcity and value. But they also cover economic systems, globalization and even the environment.

I see this book as a useful ancillary to a basic economics course at the high school level. You should read it and consider it as such. I don't think it can be the "stand alone" text - I don't think it's meant to be. You can read it and decide for yourself. It's one dish for the meal that is your course.

Possible Rent-Seeking? Captain Renault Is Shocked

USA Today provides this story.  This is a good time to discuss coincidence, correlation and causation.  Regardless, Captain Renault is shocked...shocked.

On the Grinch, Pigouvian Taxes, Externalities and the Coase Theorem

Forbes magazine has this wonderfully entertaining take on a classic by Dr. Seuss. (Big HT to Greg Mankiw for this one.)

I'm going to share it with students. I hope you do, as well.

Choices and Opportunity Cost

Can information be too perfect? Can you have too much information when making a decision?  At what point does making the decision become an opportunity cost?


And this one is clearly about choice, but it's a groaner.

Measures of Growth

This can be filed under "old news" for some of you, but for others it may be helpful information. Hans Rosling, who developed Gapminder, has a new presentation linking economic growth to health over 200 years. (HT to Mark Perry because his blog is where I ran into it first. Since then I've seen it many times, many blogs.) When you talk about measures of progress in the early part of your macro classes, you might want to offer this as a way of explaining how economic progress affects in social progress. It also offers an entre for discussion of coincidence, correlation and causation. Regardless of how or even if you use this presentation, imagine a not too distant future when you can do something like this in your classroom.

This May Not Help...Much

There was a useful article in Monday's edition of The Wall Street Journal (free content at this writing) that discussed a pending deal in Congress. It would trade a temporary extension of the Bush era tax cuts temporarily for an extension of unemployment benefits. On the surface, this would seem to be a great example of classical Keynesian economic policy.

However, there are a number of additional directions you can go with this. One can use the fact that the extension of tax rates is temporary and that people know this. Essentially, they are being told that taxes will go up in the not too distant future. Consequently, what is the likelihood that people will spend the extra money vs. saving it to offset future tax increases? Does it make a difference that we are in a recession? Does the incentive to save differ for those who are still struggling - perhaps with part-time work because they can't find a full-time job? If you're still unsure about your job going forward, how will that impact your decision to spend vs. save?

As for the extension of unemployment benefits, there has been research that indicates the length of time the benefits are available has a connection to duration of unemployment - the longer the benefits period, the longer the duration of unemployment. Other economists believe that people who are unemployed try to seek employment quickly - even at lower wages or positions that would previously have been unattractive.

For either tool, a case can be made that passage will help the economy. And a counterargument can be made that it won't. At the moment, the discussion is basically academic because nothing has been passed. But that makes it a perfect intellectual exercise – lots of room to play. And as neither side is planning on cutting other programs to pay for what being proposed, it will add to the deficit. You can even begin discussion of "crowding out." What do you think?

PNC 12 Days of Christmas Price Index

If you have followed this blog for more than a year, you probably know about the PNC Wealth Management 12 Days of Christmas Price Index.  The index is based on the old Christmas carol wherein a true love showers the target of his or her affections with an assortment of presents – each corresponding to the 12 days of Christmas. I highlight it every year during the holiday season. I think it's a fun and interesting way to introduce economics and economic measurement.

As usual the folks at PNC have done a great job, providing explanations and teacher resources. My only concern this year is that those of you with slower systems or who lack certain computer capabilities in your classroom won't be able to enjoy it.

Nevertheless, I hope you enjoy it as much as I did.  I suspect you will be surprised by many aspects of the index this year. I know I was.