Self-interest vs. Social Interest

Courtesy of Wondermark.
http://wondermark.com/842/

In the Long-Run

Courtesy of www.xkcd.com

Non-Price Determinants of Demand

I've been meaning to blog on an article for the past couple of weeks but just have not had the time.  I have a few moments while one of my summer classes are taking an exam so I will try to do it now.

The article in question is from The Wall Street Journal. It discusses how buying patterns have changed among the wealthy as a result of the recent recession. It offers a chance for you and your students to discuss some non-price determinants of demand.  How are non-price factors such as tastes, income, availability of substitutes/complements, expectations, and the number of buyers reflected in the article?  You can also use it to discuss the price elasticity of certain goods. What are your thoughts?

Biology and the Invisible Hand?

There is an article in The Boston Globe about the scientific basis of altruism. (HT to Arts & Letters Daily) Evidently there is a controversy brewing in the field of biology about the reasons members of a species will help other members, often at their own expense.  One group argues for something called “kin selection” (helping other members of a genetically-related group) as a method of guaranteeing survival of genes. The other group argues for “group selection” (helping a more diverse group survive).

I am no biologist and I wouldn’t dream of saying there is or isn’t a connection between the biological and economic behaviors. But I see a parallel in the behavior of group selection and if there is a genetic pre-disposition to altruistic behavior in nature, then I would say the “invisible hand” would possibly be a stronger explanation of market behavior than it already is.

I would welcome any comments on this. I’d like to know if you see what I see or if I’m still recovering from fever and pharmaceuticals.

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.

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.

Not Really a Whole Lot More to Say

Institutions and Entrepreneurship

Regular readers of this blog know I find the idea of economic institutions interesting. Institutions have been defined as "the rules of the game." More specifically they are the set of rules and organizations (both formal and informal) that influence our decision-making by setting up incentives to action. They can include written laws, voluntary standards of conduct, even cultural beliefs. The last category is the subject of this post.

An article in today's edition of The Wall Street Journal (free content at this writing), discusses motorcycle taxis in Nigeria. Specifically, the article is about how dangerous the motorcycle taxis are. Evidently, there are so many accidents that one hospital has a ward specifically for people who were in motorcycle taxi accidents.

But attempts to get people to wear helmets have been unsuccessful, largely because of superstition (cultural belief). There is a belief among many that placing the helmet in contact with their head is bad "juju" which can have drastic consequences. People can disappear, lose their brains or their luck. People make choices, often tragic, because the belief presents a perceived cost that exceeds a perceived benefit. Thus, they make a "logical" choice.

Enter one entrepreneur who has developed a cloth liner that can be placed between the helmet and the wearer. It eliminates the contact and, for some at least, overcomes the cultural fear. There are other issues involved, including hygiene, but the fact is the entrepreneur was able to use his understanding of an institutional factor to identify and open a market. I don't know how successful he will be, given there are many inexpensive substitutes like personal handkerchiefs. And there are likely to be more commercial substitutes. But this remains an interesting example of entrepreneurship mixed with institutional economics.

I look forward to your comments.

On Markets, Globalization and the Chilean Miners

Last week, Mark Perry at Carpe Diem put up this post with a video. The point was that globalization, capitalism (and trade) helped save the Chilean miners. I'm not one to say they were doomed without the forces of economics. But economic forces certainly helped. And it was capitalism in the best way - the way that Adam Smith intended when he wrote both The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

But, it was a profit motive that developed the technology. And it was also the idea that we best serve ourselves by serving others that led many firms in many nations to make the technology available. The idea was brought home, yet again over the weekend when this article appeared in my local newspaper, The Richmond Times-Dispatch.

It's just something to think about and discuss with your students. As always, I welcome your comments.

Average Consumer Expenditures

Creditloan.com has an interesting graphic (HT TO Chartporn) on how the average consumer spends their income. It's based on Department of Labor data. I would think it closely resembles the CPI market basket. Nevertheless, it's a good graphic to have around if you're teaching personal finance and could be used as an introduction to budgeting.

Luxury Goods

A short piece from a recent edition of The New York Times, is titled "Is Environmentalism a Luxury Good?"  The piece points to a paper out of the National Bureau of Economic Research that seems to indicate that when times are tough, many of us put issues like the environment behind things like paying the bills.

This really shouldn't be surprising. People make choices on how to use scarce resources. Their immediate short-term wants tend to take time preference over longer-term wants. I've often told students that issues like the environment, arts and culture, and social justice have a better chance of being addressed when the economy is humming along than when we are afraid for our livelihood. Thus to connect to my other post…the sooner the economy gets back on track, the more likely we’ll start worrying about things other than the economy.

I'd welcome your thoughts.

Americans Cut Back ... The Power of Price

Today's edition of The Wall Street Journal has an article (free content at this writing) that deserves your attention. Amid all of the discussion about health care, one aspect seems to be lost. What incentives are put in place for the consumer (patient) when a third-party payment system (whether private or public) stands between the consumer and the provider? To the extent that the "cost" of service is disguised, either by elimination or drastic reduction, what is the effect on the demand for service? If a more "realistic" price is available, do consumers change their demand for the service? If so, how? If not, why not?

It is possible that the recession is providing some answers. According to the article, Americans have begun cutting back on spending for healthcare. As a greater share of the cost is being transferred to consumers in a way that is immediately apparent, the demand curve may be shifting.

I would suggest you take a look at the article and see if there's anything you can use in your classes. I would be surprised if there isn't.

Debt Issues...Micro and Macro

I've been busy with my online courses and I hope to get busier. 

Nevertheless, here is a comic that, in my opinion, offers all kinds of possibilities as a discussion starter.


The first and third panels carry the weight. 

The first panel can be related to expectations, the business cycle, and employment. (For those of you unfamiliar with the strip, Gene is the soon-to-graduate college age son of the couple you see.)

The third panel can be used to illustrate credit, debt & deficits, normative statements, business cycle, animal spirits, expectations, and behavioral economics.  And those just hit me in the first minute.  Do you see other possibilities?  If so, please share.

Frederic Bastiat and the Simpsons

Yesterday, there were numerous salutes in the blogosphere to the memory of Frederic Bastiat on the anniversary of his birth. Many (like mine) referred to his Petition of the Candlemakers. But EconGirl over at EconomistsDoItWithModels came up with a modern version, courtesy of The Simpsons.

Birthday of Franco Modigliani

Modigliani may not be someone you're familiar with. But he won the 1985 Nobel Prize for Economics, along with Merton Miller. He was a co developer of what would come to be called the Modigliani-Miller theorem of corporate finance which states that under some circumstances, the debt-to-equity ratio of a firm (the amount of borrowed money vs. owner equity used to finance the firm) does not really matter.

While that may not be high on your list, this next item for which he was recognized is. If you teach personal finance or economics, you undoubtedly have heard of the life-cycle hypothesis. This states that because most people want their consumption level to be relatively smooth, they tend to save in high income years and to spend (dissave) in low income years (like retirement). That's something you probably use.  And if you don't you might want to consider using it.

If you're interested in learning more about Modigliani, I would suggest here and here.

Follow Up to Haitian Rice Farmers

A few days ago, I posted on the unintended consequences of aid to Haiti and the impact it was having on that nation's rice farmers.  Here's a follow-up from National Public Radio's Planet Money.

Economics of the World Cup

While I know most of you are out of school, you may still be looking for interesting graphics to use during the forthcoming school year.

If you have soccer players, coach soccer, or like soccer, here is a very good graphic courtesy of The Mint. It shows some of the economics of the World Cup. This could be especially useful when discussing the economics of big events or sports facilities.  One could even dig further by researching the economics of previous World Cups or Olympics.  (One of my students said he had heard a story that the Athens Olympics was one reason Greece was in the condition it is in. We had a good, short discussion on whether or not that might be true.) 

***UPDATE***
Here is a link (free access at this writing) to a story in today's (6/17/10) edition of The Wall Street Journal that seems to confirm my student's comment.

Unintended Consequences (of Subsidies and Aid)

There is a very interesting and deceptively intricate story on NPR’s Planet Money about the impact of foreign aid on Haiti’s rice farmers. It seems that well-intentioned aid for those caught in the devastating earthquakes in Haiti, is having a negative effect on the rice farmers of that country who live far outside the damage zone.  Free rice for the victims is depressing the price of Haitian rice.

When we choose to help others, those actions have effects far beyond the immediate. This is because, in any society or economy, actions impact those initially involved. But this changes conditions and changes the resource mix and other choices that have to be made. These are secondary effects. They are costs imposed on others outside the initial action. By my way of thinking, you might want to use this story to illustrate a number of concepts: unintended consequences, secondary effects, externalities, interdependence.

I also found myself wandering down a different mental road. Would the rice farmers be in the same situation if U.S. rice production wasn't subsidized? Wouldn't it be preferable if various aid agencies in the U.S. and elsewhere, bought local rice first to help the quake victims? Wouldn't that minimize the effect on the local market?  Why should subsidized U.S. rice be used if it is negatively impacting the Haitian producers? Evidently, the practice is prompting questions elsewhere.

Entertainment Spending

It’s a bit late in the year for this, but you could think of it as an early start on next year.

Those who teach a personal finance unit usually do a lesson that has the student put together a budget. As we know, teenagers (and even adults) generally include some things as necessaries that are really luxuries – entertainment for example. That’s not to say all entertainment should be banned. All work and no play makes….you know the rest. But what is a proper amount to budget for entertainment?

Well, it may or may not be an indicator of the “proper” amount, but it will give you regional averages from around the U.S. Thanks to the folks at Visualeconomics for this one.