Non-Price Determinants of Demand

This is not appropriate for use in high schools. However, those of you who teach at the college or university level may find this helpful.  Econgirl at EconomistsDoItWithModels has a great illustration of non-price determinants of demand with the help of "the most interesting man in the world."

Sometimes the Simplest Answers Are the Best

If you discuss the Chevy Volt with your students, you might want to use this. (HT to Carpe Diem.)

The Invisible Hand and Thanksgiving

I suspect many of you are busy today.  Our family had our dinner yesterday because one of my sons is working on Thanksgiving Day. But when you get a chance, you might want to review this column by Jeff Jacoby of The Boston Globe. (HT to Carpe Diem for the reminder.)

The market works wonders. And if you're thinking "but turkey was relatively expensive this year"; the market explains that, as well.  Here's an item from Bloomberg.

Happy Thanksgiving.

Markets

Russ Roberts at Cafe Hayek has generously made an essay available.  It is a visual explanation of how markets use knowledge. For those of you teaching AP Micro or Principles courses, this will be very handy. For those of you teaching more traditional courses or who feel it might be beyond student reading ability, it might be good background for you to integrate into your lesson. Either way, it is worth your time.

Markets

I know we tell students that the market exists where supply meets demand.  But we also have consider what each of those mean.  Demand is a willingness to buy. Supply is willingness to sell. If you don't have both, you don't have a market.

Supply, Demand, Interdependence, Inflation

Last week, we were discussing inflation. Later, outside of class, one of my students brought this article in Slate to my attention. It talks about rising food prices and some underlying factors. It gets into basics of supply and demand and provides opportunities to review whether you shift the curve or move along curve.

It also talks about the impact of government price policies and the interdependence that comes with a global marketplace. I think you’ll find it a useful addition to the discussion with your students on a number of levels. Let me know if you agree.

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.

"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....

A Seasonal Example of Complementary Goods?

Or maybe it's not seasonal, maybe it's just interesting. 


There might be a cross-elasticity problem in here somewhere.

Economists Do It with Models

EconGirl (Jodi Beggs) has some great new videos on Economists Do It With Models. They deal with taxes and, in my humble opinion, they are very good. There are two explaining the tax wedge and two explaining general rules about taxes.

I really enjoyed the first two. They provide clear explanation without shifting the supply and demand curves around. I found that makes it much easier for students to understand. I strongly recommend these to you if you need to brush up, or even to give to your AP students if they were absent the day of your stimulating presentation.

EconGirl has a whole series of videos. Check them out.

Immigration Effects on the U.S. Economy

I just received a very interesting issue of the FRBSF Economic Letter. The topic is The Effect of Immigrants on U.S. Employment and Productivity. I will state up front, it does nothing to provide a sound economic argument for those looking to restrict immigraion on the grounds of protecting American jobs.  And quite frankly, I didn't think it would. If anything, it provides further support for an view put forth several years ago in this issue of the Federal Reserve Bank of St. Louis's The Regional Economist.

I would recommend either or both of these articles for use with your students provided they are reading at grade level. I would think they would make a good discussion starter for labor markets, factors of production, and production function and GDP, just to suggest a few.  If you wouldn't mind, read them over and share your suggestions or thoughts.

Pricing Mysteries (with video)

Today's edition of The Wall Street Journal has an article (free content at this writing) that just begs to be used in economics class. It's about airline ticket prices. And it includes a very good video.

Airline ticket pricing has long been a mystery. Two people sitting in the same row in the same relative position (both in aisle seats or window seats) can pay significantly different prices. As we know, some of that is how soon before the flight did you buy the ticket, how long are you staying at the destination, etc.

But what about the basic cost and pricing structure of the flight. Why does it sometimes cost more to fly short distances than longer ones. Or why do two trips, of the same distance seem to have different price structures? Shouldn't marginal cost and marginal revenue fit in somewhere? This article tackles some of that. And if you're about to launch into pricing this could be helpful.

As we know, cost can be a determining factor. But it's not the whole story. Friedrich von Weiser provided some insights. His idea of alternative cost (later opportunity cost) gave more power to the consumer based on how they value the good or service, as opposed to the cost basis.

So the popularity of the destination will be a factor, as will the income of the consumer. But even those factors don't provide the whole answer. The number and type of competitors also play in. I recommend this article. Give it a read and see what you can do with it. I'd also welcome additional thoughts on its use to share with the readers.

P&G & Competition

For those of you getting ready to teach micro, there is a good article in yesterday's edition of The Wall Street Journal. The piece outlines how Proctor and Gamble (P&G) is competing with its rivals in a period of consumer reluctance. In the past, P&G depended heavily on marketing in selling its products to the upper end of the market. But times have changed. P&G is looking to increase market share and that means cutting prices to compete with other products. And lower prices mean smaller profits.

There are all kinds of things you can do with this article, from manipulating price to show changes in supply and demand to examining consumer and producer surplus. I'm trying to consider exactly where to use this article because it fits into so many places so well. What would you do with the article? Please share your thoughts.

Basic Markets: Supply and Demand

Here's a story and a chart from The Economist (HT Chartporn) that should give you a starting point for the new semester.

If you’re not following the story, you’re missing a great resource. Just in the past few days alone there have been two stories in The Wall Street Journal on wheat prices and their impact. "Decision Time Looms for Wheat Farmers" (Subscriber content at this writing but put the headline in your browser. You might find it as free content.) and "Russian Export Ban Raises Global Food Fears" (Free content at this writing).

And remember - it's the most important meal of the day.

What Do You Think?

Would Jean-Baptiste Say recognize this cartoon as an example of supply creating its own demand?

I’d be interested in your thoughts.

Birthday Wishes

First, we take a moment to wish a happy birthday to George Akerlof. Akerlof won the Nobel Prize for Economics in 2001. Whether you know it or not, you use his work when you talk about information asymmetries in markets - or as it is more commonly called the market for lemons. In this case a lemon refers to used cars.

The basic idea is that the seller has superior knowledge of the car, and is therefore in a better bargaining position. The buyer, having inferior knowledge, is in a poorer position. Thus a correct market price, which depends in part on "perfect information", is unlikely.

If you want to read Akerlof's Nobel biography, go here. If you would like to read his Nobel acceptance speech, go here.

Either way, celebrate with a glass of lemonade.

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.

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.

Can Markets Fail?

Thanks to one of my regular readers in Indy for this tip.