Sunday, April 13, 2014

The Super Rich

The Rich Are In A Class All By Themselves

• The super rich or the 1% have come under public scrutiny as debated over income disparity rages on.
• We often hear cries that “the rich keep getting richer and the poor keep getting poorer.”
• The Gatsby’s of the 1920s have lost their wealth but have regained their wealth in 2012.
• Wealth is different from income. Wealth is the accumulation of assets. Income is a flow variable that means earnings over a period of time.
• For the top .01% of families wealth has been handed down.

Per Unit and Lump Sum Subsidies and Taxes

I want to thank Gene Hayward for being a continual inspiration to me.

Friday, March 21, 2014

Minimum Wage

This cartoon infers that raising the minimum wages does not cause unemployment.  The cartoon suggests that the the theory is dead.

This cartoon makes a logical error.  That is what is true for the part doesn't mean it's true for the whole.
Macroeconomics covers so many variables that you cannot aggregate them into a single theory.

Economist Greg Mankiw lists the hundreds of economists who believe the theory and hundreds of economists who don't believe the theory here.  A decade ago Ravi Batra postulated that a change in minimum wage would increase employment.

I was wondering if the debate over a raise in the working wage was really an argument about a static equilibrium.  But when there is a change in a variable, people change behavior and adapt.  So an increase in the minimum wage changes behavior in workers.  For example, one behavior that may happen is that workers drop out of the labor force when they are unable to find work.  This behavior would decrease the unemployment rate (UNRATE = U/LF).

What disturbs me most is how the media can shape public opinion.  When the "cost" of an opinion is easy it is adopted quickly.  A cartoon can easily be assimilated and because it is printed readers don't investigate the truth behind it. I observe this cognition all of the time.  When students say that they want "learning to be fun" they mean that it is easy.  When learning is easy, students mistake content for learning.  This is what I mean.

Suppose that I teach an accounting concept by playing monopoly in class.  Students think accounting is easy and fun but the rigor isn't there.  That's what wrong with the cartoon above.  It lacks the rigor and makes learning fun.  

Monday, March 17, 2014

Income Inequality

Here's a link to NBER data base. If you can find the source of the data that colloberates the assertion in the cartoon, please post in the comments.  I don't doubt that the assertion is true, however, I could not find the study.

The Gini Coefficient measures the extent of income inequality.  It is calculated by dividing the area between the line of perfect equality and the Lorenze curve by .5.  Wikipedia lists the Gini Coefficient as .45. This area would be approximately .225.  I just don't believe that this area is the same as it was in 1920.

Sunday, March 02, 2014

Minimum Wage

The minimum wage has distributional effects and allocative effects that exert costs and benefits on society.  As the cartoon suggests, some workers are enriched, but some are hurt.  The question is do the benefits outweigh the costs?  This cartoon suggests that the benefits are greater than the costs and the minimum wage should be increased.  Most of the workers employed at the minimum wages are teenagers in middle class families who don't rely of the wage for living wage.


In the AP model of long run, the firm's long run ATC is the points tangent to each short run ATC.  The inference is that a firm can choose the lowest total cost when all inputs are variable.

So if a firm wants to make 20 units of a good shown in the graph, the firm can use inputs associated with ATC1, ATC2, or ATC3, but it would choose the long run cost that minimizes total cost.

What bothers me the most is that at 20 units, there is capital that goes unused.  Isn't there an implicit cost of capital.  I now believe that we are supposed to treat the fixed costs as "sunk costs" that should be treated as irrelevant.  I think this is what the model is intended to teach.

Question 1 of the Day

In a perfectly competitive market, the firm is a price taker.  In the micro model that I teach, the market price and quantity is described as the interaction of demand and supply, but the firm's demand curve is perfectly elastic.  I've always taught that this is because of the assumptions underlying the model.  But I was thinking that perhaps the firm's demand curve is perfectly elastic because the market is in equilibrium at the unit elastic point in the market. defines unit elastic as follows:

  • Unit Elastic: The third category is unit elastic, in which the coefficient of elasticity is E = 1. In this case, any change in price is matched by an equal relative change in quantity. The percentage change in quantity is equal to the percentage change in price. Unit elastic is essentially a dividing line or boundary between elastic and inelastic.
Unit Elastic Curve

Firm as a Price Taker
 We know this much about the unit elastic portion of the curve -- Total revenue is maximized.  Looking at the graph "Firm as a Price Taker" one sees that the firm is earning zero economic profit.  Since profits are maximized any change would infinitely effect the firm.  That is, the quantity sold would fall to zero.  I think the intent of this curve is to show that profits are constant (at zero).

When I blog, the intent is for me to reach a deeper level of understanding about the concepts I teach.  I am not sure I reached my goals with this post.

Friday, February 21, 2014

CBO Report on Minimum Wage

Here's a link to the report via Greg Mankiw.

The minimum wage will enrich those teens who live with their parents and not those who dearly need the increase in wage.