Self-interest vs. Social Interest

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Vanity, Thy Name is License Plate

If you look in today's edition of The Wall Street Journal, you will find this amusing "puzzle" to share with your students. The set-up, Marshall and other 19th century economists noted that producer cost was the sole basis of price. Consumer value had to play a part, as well.  Essentially the consumer's willingness to pay had to relate to the utility they received.

What utility is received from a vanity plate?  I was taught that there were three kinds of utility - form, place and time.  I have my idea, but I'd be interested in your thoughts.

Conservation as Conspicuous Consumption

Yesterday, I heard a very interesting interview on Marketplace, the public radio program. The interview was with Stephen Dubner, coauthor of Freakonomics and host of Freakonomics Radio. Dubner talked about the idea of conspicuous conservation. 

Now you probably know about conspicuous consumption. The phrase was coined by Thorstein Veblen who stated that one reason we spend money can be to show off our wealth. Basically what we buy can signal our wealth to others and can, presumably, have an effect on our status or how others view us.

I often ask my students why they buy certain brands of clothes, etc. when other cheaper brands would provide the same function. This leads to a discussion of utility and an understanding that many people place a high value on the perceived ability of certain products to impress other people.

This brings us back to the interview. As I said, Dubner was talking about conspicuous conservation - how certain people will buy certain things to show how "green" they are, and he cites some research by a pair of economists that indicates the payoff for making these choices can be quite high in certain communities.  In essence, the purchasers may be willing to pay a higher price in order to secure higher prestige in a given community.  This offers a great opportunity to discuss value and utility. Because certain choices may not necessarily be the best in terms of actual effect, but may have a higher value as "conspicuous conservation/consumption." Let me know what you think of the interview.

Consumer Surplus

For those of you teaching micro, there are a couple of good posts by David Henderson at Econlog that explain the concept of consumer surplus.

In his first post, he provides what I consider to be a good explanation of consumer surplus. In the second post, he addresses some comments from the first post - making certain aspects clearer. I hope you can use them. I intend to.

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.

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.

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.

Consumer, Producer and Total Surplus

Here's a little lesson in welfare economics that I'm sure most of us can identify with. 

I know many of you are out for the break already; but I will ask anyway. How many went with consumer surplus? How many went with producer surplus?  How many went with a socially optimal outcome?

Happy Thanksgiving and Thanks for Reading MV=PQ.

Consumer Surplus

I don’t know how much time you spend when discussing consumer and producer surplus; or how difficult your students find the concept. My experience is mixed.  Some classes seem to get the idea quickly and can transfer the concept to other topics easily. Others seem to struggle. But here is a short post from Econlog that not only explains consumer surplus quickly and efficiently, it offers a quick and easy way to expand the explanation into a discussion.  What do you think?

Another Example of Conspicuous Consumption

Thorstein Veblen's book The Theory of the Leisure Class introduced the term "conspicuous consumption". People use the purchase of high-priced items to signal their wealth, their "status" and a number of other things. Here is a cartoon you can use when introducing the concept.

Pencils

I know many of you use I, Pencil early in the course to explain interdependence, gains from trade and specialization. But now you can revisit the humble writing instrument when discussing market structure, competition and pricing. Today's edition of The Wall Street Journal has a fascinating story about the competition between the two largest and oldest pencil manufacturers. It opens the door for all kinds of discussion about the firm and even has this engagin video.



I would love to read your reaction.

Utility Maximization in the Face of Scarcity

For those of you who don't start school until after Labor Day....

For those of us who have already started, just rewind a week or two.

A Birthday Observation

Today is the anniversary of the birth of Thorstein Veblen. He is not well-known now, and he wasn't particularly well-known when he was alive.  Nevertheless, his idea of "conspicuous consumption" is something that many of us understand.  Think of it as "signalling". 

You and I often buy products to send information to others about our status, our class, our likes and dislikes. We do this because it adds value (or at least we think it does).  And it's a concept your students understand.  When they make purchases because something is in, hip, cool or whatever the current term is...conspicuous consumption.

Wal-Mart and Small Farmers

As long as I'm referencing NPR, let me talk about another story.  Last week, I put up a post on positive externalities attendant to a new Wal-Mart. Somehow, I missed this story from National Public Radio about Wal-Mart and its effect on local agriculture (HT to Carpe Diem).

My local Wal-Mart has been featuring produce grown in-state recently. And quite frankly, I don't expect it to be able to provide all kinds of local produce all year round - comparative advantage and specialization are operative concepts the last time I checked. But I am happy to see locally grown food at an affordable price in a convenient location.

That's what I call form, place and time utility. And when I can get all three at a good price, I will take advantage of it.

What are your thoughts?

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.

Decisions, Decisions

And the assignment for those of you familiar with the PACED model of decision making is "List some suggested criteria."

A Matter of Time Preference?

I have read or heard a number of stories about hoarding, lately. This issue seems to have caught the attention of the media. I concur it can be a debilitating problem. My family will also accuse me of hoarding on some level, as I get rid of very few books, and I keep a lot of my old papers (it's the undergraduate history major in me, I'm afraid.) I also sense an opportunity to illustrate an economic concept: time preference.

Time preference is about how we view consumption. People with relatively high time preference prefer to consume in the present. People with relatively low time preference will postpone some amount of consumption in exchange for consuming in the future. Thus, the individual's time preference is somehow related to their propensity to save/consume - which sets us up for this cartoon.