Sunday, September 07, 2014

Trickle Up Economics

This cartoon was posted on a social network with some confusion from readers.  Some of the comments are:

Basically, we subsidize the wealthy on the off chance they'll create jobs. If they have any money left after feeding their polo ponies.

The Government has been "giving" to "the poor" since the 1960's and what do we have? The same amount of poor people! IF the Government wasn't robbing business and US with their unbelievable amount of rules and regulations it would be a much different game. The wealthy create jobs because they know that's the key to MORE WEALTH!

 I thought I'd throw some facts in here. Since LBJ started the War on Poverty the US has spent over $20 Trillion on support payments and we have fewer people that are self-sufficient than when the "War" started. It has been a colossal failure BUT it makes people "feel good". The money would have been much better invested in polo ponies who create jobs for stable hands, etc. I'm not an Economist, but follow economics daily for my career, and the things that go on "behind the scenes" are very scary......

Oh, I get it! The more money the government diverts from helping the poor and "gives" to business, the better chance business will hire the poor. Yea!

Wikipedia defines "Trickle Down Economics" as:

Proponents of the trickle-down effect believe that a free market, which is uninhibited by heavy taxation and other forms of government controls, will cause an increase in wealth for society as a whole, part of which will "trickle down" from the affluent to the less wealthy, making the latter group better off. In this model, relative poverty may increase, but proponents state that this is a moot point because absolute poverty decreases. Opponents to this theory may point out that a large gap in the distribution of wealth can lead to a similarly large gap in power and influence, thus making this economic model undesirable. The trickle-down effect is usually used to describe a process by which benefits to the wealthy "trickle down" to benefits for the poor. The trickle-up effect, in a corollary to this, states that benefiting the poor directly (for example through micro loans) will boost the productivity of society as a whole and thus those benefits will, in effect, "trickle up" to benefits for the wealthy.

I think the cartoon is saying that the poor people aren't doing enough to stimulate the economy.  I think the cartoon is also making a point about income equality.  This cartoon was printed in the spring of 2014 right after Thomas Piketty published his book "Capital".  I think the cartoonist was motivated by that publication to make the same point but in few words.  In the traditional viewpoint, it's possible to fight poverty and promote GDP growth.  I believe the cartoonist is saying that that idea doesn't work.  I might be wrong, but I think The Economist was the first to use the term.  

Monday, September 01, 2014

Burger King

What purpose do cartoons serve?

In this cartoon, maybe the artist wanted us to drop our defensive guards and see that our governmental polices of taxation are garbage.

I believe that cartoons help us form an opinion about complex issues.

Cartoons even motivate behavior.  In this case to change corporate tax laws.

I think cartoons such as this one help to make connections between contradictory issues.  For example, the government needs taxes to fund public projects, but a tax rate this is viewed as unjust motivates corporations to outsource work.

The work of a political cartoonist is to help people come to some reasonable conclusions about the the complexity of a social issue.  This cartoonist made the issue of corporate tax avoidance easy to swallow.

Tuesday, August 12, 2014

Are You A Racist?

This excerpt is from Capital Ideas, by Alice G. Walton:

A poorly worded Twitter message landed the US Republican National Committee in trouble in December 2013. “Today we remember Rosa Parks’ bold stand and her role in ending racism,” the RNC tweeted. The predictable backlash was rapid and furious, noting that racism was, in fact, far from over. Hours later came a correction: “Previous tweet should have read, ‘Today we remember Rosa Parks’ bold stand and her role in fighting to end racism,’” the official handle noted.
The rest of the article is here.

In a study that has been repeated enough times to give validity to the claim, job seeking candidates with black sounding names were called to an interview less than those with white sounding names.  Judges give longer sentences, political candidates were thought to be black when their viewpoints contrasted with polling respondents, and white referees seemed to be biased against black until the bias was pointed out.

I know that the more interaction I have with people from different races, culture, and religion, the more my stereotypes disappear.

Wednesday, August 06, 2014

Time Warner Merger is a Monopoly

How many traits of a monopoly can you interpret from this cartoon in the recent issue of MAD?

1.  Less competition.  2.  Higher prices.  3.  Inefficiency.  These are a few I can easily pick out.

As an aside, for those interested in how people make choices under severe conditions of scarcity, check out, Orange is the New Black, and the 100 Foot Journey.  

Saturday, July 12, 2014

Sunday, July 06, 2014

Excel Problem -- Budget Equation and Indifference Curve

Wan allocates $20 to spend on Nuts and Berries.  Nuts cost $1 a package and berries cost $2 a clump.  Wan’s utility function for both goods is: U(n,b) = nb. 

1.        Use Excel to graph Wan’s budget line and indifference curve.  On the Y-axis, put Nuts.

2.       How many bags of nuts does Wan consume?


2.  Wan will consume 10 bags of nuts.

Income Effect?

Hi's family used more utilities than they expected during a rough winter.  This effectively made the family poor.  The higher bills acted as if there was a reduction in Hi's income.

As a result, Hi decides that they cannot take a vacation.  In economics, when a person's income falls and they consume less of a good, that good is a "normal good."

Of course, Hi's income really didn't fall. But he's going to consume less vacation.  Part of his reduction in vacation time is due to the income effect.

Simple Demand Project Using Excel

Wan is a utility maximizing consumer.  Wan has $20 to spend on nuts and berries.  Nuts cost $1 and berries cost $2.  Wan’s utility function is U(N,B) = NB. 

1.        Let’s find the quantity of nuts and berries that maximizes Wan’s utility.  If Wan spends all of his money on nuts, Wan can buy 20 packages of nuts.  If Wan spends all of his money on berries, he can buy 10 bunches of berries.  Wan has to make choices that have opportunity cost of forgone opportunities.  Complete the table below to see the combination of nuts and berries that will maximize Wan’s utility.  What amount of nuts and berries gives Wan the highest amount of utility?
Income = $20












2.        Suppose that Wan’s demand for nuts is given by: Nuts = $20/2Pn where P is the price of nuts.  Complete the demand schedule below.






3.       Using Excel graph the demand function.
4.       Using your demand schedule above, calculate total revenue at each price and quantity.
5.       Using the midpoint formula, calculate elasticity of demand in the price range $10 and $5, $5 and $2, and $2 and $1.  Describe the elasticity.
6.       Suppose the price of nuts increases from $1 to $2.  How many nuts will Wan buy now? 
7.       Given your answer in step 6, is this change in consumption a change in demand or a change in quantity demanded?
8.       Suppose Wan’s income doubles and the price of nuts is a $1.  How many nuts will wan buy now?
9.       Given your answer in step 8, is this a change in demand or a change in quantity demanded?
10.   Given your answer in step 8, are nuts a normal or inferior good for Wan?

The answers are here.  Scroll to page 2.  Page 1 is a reproducible worksheet.

An Excel template is here.  

What is learning?  I have written before that "Learning is a dependable change in behavior that isn't the result of maturation."  Yet, in the course of writing this lesson I learned things as a result of making mistakes and as the result of insight.  For example, the demand curve generated from the Cobb-Douglas Utility Function happens to be unit elastic.  This was an insight for me, but I should have known that the curve was unit elastic from the function.  In my definition, the insight that the demand curve is unit elastic is "learning" if it's a permanent change in my thinking.  Let's hope so.