Monday, December 22, 2014

Utility Maximization and External Costs

It's the holiday season and it seems like everyone is in a rush.  I have noticed that in the store people push their carts faster and make buying decisions faster.  They are attempting to satisfy as many wants as they can in the shortest amount of time.  This results in a higher utility.

When people don't consider the costs they exert on others, a negative externality exists.  For example, in Walgreens last night, shoppers would stop in the middle of the aisle to look at an item.  They didn't consider that I was right behind them.  So by attempting to maximize their utility, they diminished mine.

This isn't a new observation.  Ronald Coase is credited with this observation and has a theory:

COASE THEOREM: A policy proposition, developed by Ronald Coase, that pollution and other externalities can be efficiently controlled through voluntary negotiations among the affected parties (polluters and those harmed by pollution). A key to the Coase theorem is that many pollution problems involve common-property goods that have no clear-cut ownership or property rights. With clear-cut property rights, "owners" would have the incentive to achieve an efficient level of pollution. This theorem states that it doesn't matter who receives the property rights, so long as someone does. Pollution can be reduced through voluntary negotiation by assigning private property rights to common-property resources. If common-property resources are privately owned, a market in property rights can be established. Owners then have the incentive to protect the quality of their resources.
My thoughts are many and diffused.  The holidays are meant to bring comfort and joy, yet this comfort and joy doesn't come without a cost.

Sunday, December 21, 2014

Law and Economics

Here's an excerpt from direct examination of an expert witness and economist:

Q. Dr. Jones, do you have an opinion as to the profits that the plaintiff's restaurant would have made if they had not been forced out of business?
A.  I do.
Q. What is your opinion?
A.  I believe the restaurant would have earned at least $2.3 million over the next five years if they had been able to stay in business.
Q.  How did you reach that opinion?
A.  I based my calculations on the state's projected population growth combined with the probable demand for fast-food drive ins.

Do you see the economics?  This is what I see.  When population increases this is like saying there's an increase in the number of buyers.  This shifts the demand curve to the right.  What economists call a change in demand. defines a change in demand as:

CHANGE IN DEMAND: A shift of the demand curve caused by a change in one of the demand determinants. In essence, a change in demand is caused by any factor affecting demand EXCEPT price. This concept should be contrasted directly with a change in quantity demanded. You should also review the terms change in quantity supplied and change in supply, too. A change in demand is a change in ALL demand price-quantity demanded pairs, meaning that each price is matched up with a different quantity (which is illustrated as a shift of the demand curve). And this change in demand is caused by a change in any of the demand determinants. In contrast, a change in quantity demanded is a change from one price-quantity pair to the another (which is illustrated as a movement along a given demand curve).

In our example, Dr. Jones would only be able to testify as to future profits if Dr. Jones had been qualified in the area of profits as his expertise.  A geologist would not be qualified.

On cross examination, a deft attorney will challenge the economist's assumption of population growth.  Consider:

Q.  Dr. Jones, you've examined the location of the restaurant in question?
A.  Yes.
Q.  And you found it to be land locked?
A.  Yes.
Q.  Therefore, expansion would not have been possible to serve a burgeoning population?
A.  Expansion would be difficult.

In this line of questioning, the crossing attorney looks at the elasticity of supply and begins a line of questioning to show that the supply of fast food would not have been able to keep up with the demand.

I wrote today's blog for my mock trial team to show how economics is used in law.  

Saturday, December 20, 2014

Sidewalks in Muscatine

The main highway through Muscatine is Cedar Street.  For the past 9 months the street has been under repair.  This street is used by students to enter the high school for the east and west.  The work is outstanding and will provide an easy and scenic route through our town.  Cedar Street is also the street that low-income students use to walk to school.  The school district has a policy that students who live within a half of mile from the school are not bused but have to walk.

The street is under construction to be widened so there's no easy path for these students to take.  The students have to walk through mud or in the middle of a construction zone to walk to school.  Incidentally, the housing addition that is .55 miles way from the high school gets bused.  District policy doesn't allow students living in the low income area to ride the bus with the students who live less than  200 yards away.

Now that the construction is nearly completed, the contractor is putting in sidewalks.  The contractor could start at the bottom of Cedar Street, east, or the top, west.  The students at the bottom of Cedar Street are the low income students who would benefit the most.  But where does the contractor start?  On the west end.  I was wondering if the construction had more to do with ease than inequality.

Let me explain.  By starting at the west end, more work can be completed because the land is flat and will take little work to make the sidewalk up to grade.  By starting at the bottom, the contract will need more equipment, more labor, better weather conditions, and more time.   So they start where they can get the most done.

But when I look at property values on the east side, they are the lowest and have the worst land to develop.  Land is cheap there so they attract landowners who can afford those kinds of properties.  I believe the land is cheap there because the land is hilly, woody, rocky and hard to develop.  I find it interesting then, that the land prices make it attractive to those who can least afford to develop the land.  And these are the kids that have to walk to school.

I think I'm saying is that social forces, marginal cost of construction, and economic incentives keep an equilibrium where the poor stay poor.  It's not wonder why these students often feel like the system is stacked against them.

End of rant.

Friday, December 19, 2014

Fisher Effect

In this video, Jodie Beggs shows how changes in inflation translate to changes in the nominal interest rate in both the short run and the long run.

Thursday, December 18, 2014

What is Scarcity? describes "scarcity":

A pervasive condition of human existence that results because society has unlimited wants and needs, but limited resources used for their satisfaction. This fundamental condition is the common thread that binds all of the topics studied in economics.
The study of scarcity is what economics is all about.  Students learn that "there's no such thing as a free lunch" meaning that every choice as an opportunity cost.  Since the earth is finite and time is limited, it's impossible to satisfy all wants.  This is the standard reasoning in economics.

I want to offer a different view, in my opinion.

I think scarcity refers to the relative cost of choosing one alternative over another.  Since it's impossible to do two things at once, there's a cost.  In economics, this cost is the opportunity cost.  However, I tender that the cost is relative.  So if I choose to run a mile, I give up studying for my calculus exam.  But since the cost of breathing is so low, I don't give up this function.  Yet, I argue that breathing is scarce, it's just relatively abundant so that it appears not to be scarce.  This is why there's little cost to doing homework and listening to music.

I think scarcity is a relative term.  Scarcity doesn't refer to the abundance of a factor of production, but to the relative cost of consumption of the factor.

As a final example of what I mean, consider that there are 24 hours in a day.  For a teenager the 24 hours is relatively different when compared to a 92-year old woman in the final days of her life. They both have 24 hours in a day but the cost of consumption is different.  So it may be true that both you and Albert Einstein both have 24 hours in the day, it's not true that you consume the 24 hours in the same way.  Your cost may be higher so you can't get as much done.

Private Property

In my Record keeping class last week, a student asked to borrow a pencil.  After I gave the pencil to her, I noticed how differently students use pencils.  One student is a fantastic artists who draws in a sketchbook.  Another student doesn't use her pencil and prefers to play with her digital media.  Some will use the pencil awkwardly in trying to solve problems.  The point is, owning a pencil doesn't mean that students will use it to the maximum.  Owning private property doesn't mean that the factor of production will be used to maximize utility.

For example, I have many tools in my garage that are seldom used.  I have kitchen appliances that are never used.  I have bought books that I have never read.  Over my life, I have accumulated many capital goods that have seldom been used.  But, if I ever needed a crock pot, I have it.  I wouldn't have to run to the store and buy one.  If I ever need to change a tire, I have both the tools and the talent to do it.  In short, accumulated wealth insulates me from emergencies or demands that endogenously occur. For this reason, I believe I have a competitive advantage over those families and individuals who have accumulated less wealth.  That is, I'm able to move my factors of production and use them faster to respond to changes in my needs and demand.

I believe that accumulated wealth is why some schools continually win at athletics.  The wealth that these schools have accumulated allows them to sponsor more educational opportunities, respond to changing dynamics, and allow coaches to concentrate on winning games.

As an example, take the hypothetical case where two wrestlers from different schools have a flat tire.  One wrestler who comes from a household where there's accumulated wealth will simply take another car to school.  But the other wrestler will have to change the tire.  The second wrestler who had to change his tire incurred a higher cost of participation.   Although, the second wrestlers cost was relatively minor, the accumulation of these costs significantly reduce the athlete's ability to concentrate and perform at a higher level.

This is only an anecdotal opinion why some schools perform better and it is not comprehensive.  I can see where wealthier schools attract more talent, are safer, have a climate of success, and a higher tax base.  But I think that accumulated wealth is one component of a successful school system.

Sunday, December 14, 2014

Change in Demand -- Clothes Teens Wear

A change in demand happens when one of the determinants of demand change such as income or tastes and preferences. The demand curve can shift to the right or to the left. An article in the Muscatine Journal caught my attention about how tastes and preferences have changed the way teenagers dress.
NEW YORK — Being a teen can be tough, but catering to one is even more difficult. Teen retailers are learning that lesson the hard way this holiday season. The longtime CEO of Abercrombie & Fitch on Tuesday abruptly retired just a week after the retailer posted an 11.5 percent quarterly sales drop and slashed its annual profit forecast. And American Eagle and Aeropostale gave dismal forecasts for the quarter that includes the holiday shopping season after each posted weak sales for the fall. Teen retailers are facing ho-hum results at a time when overall U.S. retail sales are up 5.1 percent over the past 12 months, the Commerce Department said Thursday. It's a major shift for teen retailers. They became popular in the last decade for their logo tees and trendy jeans, which became a high school uniform of sorts. But since the recession, these stores have been losing favor with their core demographic. One reason is technology. Teens are more interested in playing on smartphones than hanging out at the mall where these stores are. They're also more likely to spend on tech gadgets than on clothes. And when they do buy clothes, they do so differently. Today's teens shun the idea of wearing the same outfit as the girl or guy sitting next to them in chemistry class. Case in point: Olivia Nash, a 16-year-old junior from Washington, D.C. Nash used to shop at American Eagle and Abercrombie, but now she pulls together pieces at a variety of other retailers. "When I was younger, everyone wanted what everyone else had," she says. But now, Nash says "everyone is putting their own individual spin" on their look.
Retail sales to teen outfitters like the Gap and Abercombie & Fitch have dropped because of the recession. Teens will substitute less pricier designer and name tag jeans for less pricier. Still, teens like to play with technology more than hanging out at the game. Teens are substituting new smart phones for clothes that homogenize their appearance to look like their peers. As demand for clothing changes, retailers will have to change marketing strategy. In my opinion, the retail industry shows how prices will reduce to their marginal cost and competitors will exit the industry. For example, let's look at some of the brands that are now out of business. Merry-Go-Round, Ruehl's, Demo, and Bugle boy. I can think of more, but the point is that the industry is monopolistically competitive.

Sunday, December 07, 2014


In Welfare economics, the KALDOR-HICKS IMPROVEMENT refers to a change in social conditions that enrich some members of society at the expense of others. For efficiency to improve to the socially optimal level, the "winners" compensate the losers. I would reckon this to sharing the wealth after a favorable tax credit. defines the condition as:
KALDOR-HICKS EFFICIENCY: A type of efficiency that results if the monetary value of society's resources are maximized. This is achieved if the marginal willingness to pay by those who benefit from an action is equal to the marginal willingness to accept of those harmed. If this condition is not achieved, then a Kaldor-Hicks improvement is possible. Kaldor-Hicks efficiency, named after Nicholas Kaldor and John Hicks, is the theoretical basis of benefit-cost analysis, a technique commonly used to evaluate the desirability of producing public goods (such as parks, highways, or reservoirs). This is one of two noted efficiency criteria used in economics. The other is Pareto efficiency.
How would citizens in Ferguson, Missouri, be compensated for the damages that occurred after Officer Wilson was exonerated by the grand jury? How about the family of Eric Garner? You might argue that these two cases are not relevant, but costs have been exerted on people who were not involved in the arrests.

Monetary Policy, Money Creation, and Bank Deposits

This is a complete presentation for AP Macroeconomics prepared by Dr. Clark Ross of Davidson college.