During every fall semester, there are literally thousands upon thousands of high school juniors and seniors across the nation that are eager to turn in their college applications and await their acceptance letters in the months following. One bonding element among all the students who apply to universities in the nation is “the College Board.” The College Board provides the SAT (Scholastic Aptitude Test) which is said to predict a student’s success in college. With only one competitor, there are few choices that determine a student’s success.
According to an online article on Davilleweekly.com, the SAT seems to have a stranglehold among high schoolers to the point where it even surpasses the ACT, the only other standardized test that rivals the SAT. The College Board also seems to be the standard for students wanting to apply for college. Because it is a necessity, it can be costly as students spend their time and money, which can increase even more if the student decides to retake the test or send their scores earlier or in a digitized version as opposed to a tangible letter. For a nonprofit organization such as College Board, it netted a total revenue of $55 million with 9.5% of that being in profit along with $830,083 being earned by the CEO. With the SAT being perhaps the most popular standardized test for high school juniors and seniors, it is to no surprise that the company does have a monopoly over high school students.
Though some may question the College Board’s lucrative revenue from its supposed nonprofit purpose, it does seem have created a niche among high schoolers who regard the test to be even a rite of passage and a mandatory procedure that will predict one’s chance into getting into the school of their choice, along with a reflection of what one has learned.
http://www.danvilleweekly.com/square/index.php?i=3&t=1295
October 31, 2010
Smokin Inelasticity
According to the article, Cigarette Prices on Fire, cigarette prices are increasing. Even with the increase in price, the cigarette firm, Reynolds American, is still able to make a handsome profit. In fact, their profit is even larger than normal years with out the effects of a recession. Mr. Tate, the author of this article cites statistics showing the cigarette company’s increasing profits during recession. However, Tate does not give any reason for this seemingly unlikely increase in profit. In fact, if anything, Mr. Tate seems more astounded at this economic activity than anything else.
It is important to realize that we are discussing the change of revenue within a particular cigarette firm. In this example, demand of cigarettes is not changing but instead the quantity demanded is decreasing. Tate finds it odd that the company can increase their price on cigarettes and still make a sizeable profit. Mr. Tate is unable to tell the reader why this has occurred. Cigarettes are an inelastic good. Therefore people will continue to buy the good at even a greater price. The utility that buyers find in cigarettes is so high that they are willing to pay very high prices. However, it is also important to realize that some people are not willing to pay the higher price; therefore, the good is not perfectly inelastic. If cigarettes were perfectly inelastic, buyers would buy cigarettes to an infinite price.
This tobacco company is acting wisely. They have recognized they can increase their total revenue and maximize profit through increasing the prices. The company may not realize it, but this is all due to the inelasticity of cigarettes. The company has also wittingly decided to develop substitutes such as chewing tobacco. These substitutes are directed towards people unwilling to pay the higher price. These are the people for whom the utility they gain from the cigarettes does not account for how much money they would have to give up to purchase them. In the end, Tate’s statistics show the truth; the firm is doing well. They have correctly taken every avenue to ensure the maximization of their profit.
http://www.internetbits.com/cigarette-prices-rising-tobacco-company-profits-on-fire/54806/
It is important to realize that we are discussing the change of revenue within a particular cigarette firm. In this example, demand of cigarettes is not changing but instead the quantity demanded is decreasing. Tate finds it odd that the company can increase their price on cigarettes and still make a sizeable profit. Mr. Tate is unable to tell the reader why this has occurred. Cigarettes are an inelastic good. Therefore people will continue to buy the good at even a greater price. The utility that buyers find in cigarettes is so high that they are willing to pay very high prices. However, it is also important to realize that some people are not willing to pay the higher price; therefore, the good is not perfectly inelastic. If cigarettes were perfectly inelastic, buyers would buy cigarettes to an infinite price.
This tobacco company is acting wisely. They have recognized they can increase their total revenue and maximize profit through increasing the prices. The company may not realize it, but this is all due to the inelasticity of cigarettes. The company has also wittingly decided to develop substitutes such as chewing tobacco. These substitutes are directed towards people unwilling to pay the higher price. These are the people for whom the utility they gain from the cigarettes does not account for how much money they would have to give up to purchase them. In the end, Tate’s statistics show the truth; the firm is doing well. They have correctly taken every avenue to ensure the maximization of their profit.
http://www.internetbits.com/cigarette-prices-rising-tobacco-company-profits-on-fire/54806/
Soda Tax and How it Could Reduce Obesity
Over the years, America’s love affair of soda has remained strong even with the economic downturn. With the substitution of sugar cane with high fructose corn syrup in sodas decades ago, major companies such as Coca-Cola™ and PepsiCo™ have enjoyed increased supply of their goods with a cheaper sugar substitute along with a overall boosted revenue for that choice.
An online Washington Post article predicts that the effects of a tax increase on soda may suay America's affinity for a timeless beverage. According to a study by the U.S. Department of Agriculuture’s Economic Research Service, a 20 percent increase in the price of soda could result in a decrease consumption of soda, which could lead to the reduction of excess calorie intake of adults and children in the U.S. and possibly obesity. With America’s obesity problem increasing, this could be a possible solution that would solve the current health epidemic, especially with soda rampant in schools, workplaces, and the households of America. Many proposals for this new idea have been turned down but many health officials insisted on carrying it out, despite the possible oppositions from the soda company themselves.
Even though the scientific data of soda and obesity may not correlate into the economic sector, the taxation of soda on the other hand is heavily involved in economics since it touches the behavior of households, their change in demand of soda, and how it could eventually turn into an inferior good to many with the mandated tax.
http://voices.washingtonpost.com/all-we-can-eat/food-politics/usda-says-soda-tax-would-cut-o.html
An online Washington Post article predicts that the effects of a tax increase on soda may suay America's affinity for a timeless beverage. According to a study by the U.S. Department of Agriculuture’s Economic Research Service, a 20 percent increase in the price of soda could result in a decrease consumption of soda, which could lead to the reduction of excess calorie intake of adults and children in the U.S. and possibly obesity. With America’s obesity problem increasing, this could be a possible solution that would solve the current health epidemic, especially with soda rampant in schools, workplaces, and the households of America. Many proposals for this new idea have been turned down but many health officials insisted on carrying it out, despite the possible oppositions from the soda company themselves.
Even though the scientific data of soda and obesity may not correlate into the economic sector, the taxation of soda on the other hand is heavily involved in economics since it touches the behavior of households, their change in demand of soda, and how it could eventually turn into an inferior good to many with the mandated tax.
http://voices.washingtonpost.com/all-we-can-eat/food-politics/usda-says-soda-tax-would-cut-o.html
Verizon Wireless to Offer Cheaper Data Plan
The article I chose to write about is from the Wall Street Journal, October 20, title Verizon’s Cheaper Data Plan. The article discusses how Verizon is introducing a new data plan. Before, the only option for a data plan from Verizon was a $30 unlimited data plan. Now Verizon is introducing a new data plan, for $15 customer get data access limited to 150 megabytes a month. Their competitor AT&T is already offering a plan similar to Verizon’s new plan, the only difference is that AT&T customers get 200 megabytes a month. One issue is that the average Verizon data user consumes 485 megabytes a month. For Verizon customers on the limited data plan who exceeded the 150 megabyte limit, they will be charged a 10 cent fee per megabyte.
Verizon is testing this plan over the holiday season to see how successful it will be. How is Verizon going to define success? It will be a success if the number of data customers increases. If we look at the consumer model where Cell phone services is on the X axis and all other goods is on the Y axis. The decrease in the price of data plan will cause the x intercept to rotate outwards. The implications are that a data plan might become affordable for people who could not originally afford it, and for people who were previous data customers that switch will be able to afford more of the all other goods. Anyone who takes advantage of this cheaper data plan moves to a higher indifference curve as long as the plan meets their needs. So if we take the consumer model and aggregate them together Verizon should see an increase in demand for their data packages.
If they are exceeding the 150 megabyte data limit the overage charges will rotate the budget line back in and cause the consumer to move back towards their original indifference curve. If the overage is bad enough they could even move to an even lower indifference curve.
The article does not explore how this increase in consumer demand of data plans will affect Verizon, is the $15 price enough to cover the marginal cost of the increase in data users. If the increase in users is large enough the $15 price tag will not be enough to cover the costs. This would certainly be considered a failure and Verizon would either drop the data plan or increase its price.
Verizon is testing this plan over the holiday season to see how successful it will be. How is Verizon going to define success? It will be a success if the number of data customers increases. If we look at the consumer model where Cell phone services is on the X axis and all other goods is on the Y axis. The decrease in the price of data plan will cause the x intercept to rotate outwards. The implications are that a data plan might become affordable for people who could not originally afford it, and for people who were previous data customers that switch will be able to afford more of the all other goods. Anyone who takes advantage of this cheaper data plan moves to a higher indifference curve as long as the plan meets their needs. So if we take the consumer model and aggregate them together Verizon should see an increase in demand for their data packages.
If they are exceeding the 150 megabyte data limit the overage charges will rotate the budget line back in and cause the consumer to move back towards their original indifference curve. If the overage is bad enough they could even move to an even lower indifference curve.
The article does not explore how this increase in consumer demand of data plans will affect Verizon, is the $15 price enough to cover the marginal cost of the increase in data users. If the increase in users is large enough the $15 price tag will not be enough to cover the costs. This would certainly be considered a failure and Verizon would either drop the data plan or increase its price.
Bernanke's Credibility
Over the past few years the United States economy has been in turmoil. After the housing market crashed and unemployment rose, America fell into a deep recession that is not similar to any other issue the country has faced in over fifty years. To help solve this issue an economist with an expertise in The Great Depression, Ben Bernanke was hired to head the Federal Reserve. Up to this point people have been highly skeptical on whether some of his tactics have truly helped bring the United States out of the recession.
Bernanke has recently been reelected to serve another four year term at the head of the Reserve, and he soon plans to take new measures at putting a stop to the crisis. Many news organizations and media outlets are considering these up in coming tasks to be crucial to Bernanke’s credibility and legacy. In the article from the Washington Post by Neil Irwin he explains some of Bernanke’s plans and how it could either propel the economy upward, as hoped, or send it spirally back down into a further recession with higher unemployment, less consumer spending, and bad inflation. The economic crisis is primarily seen as a macro issue in the article, but towards the end of the article Irwin explains how consumer spending and individual firms will be an essential part of Bernanke’s plans. Irwin surprises me when he explains that expectations play a big role in the way consumers invest in product or choose to save in fear of a troubled future. He explains that these positive expectations have improved the stock market, and encouraged spending from both individuals and firms.
Irwin continues with his analysis of expectations and consumer assumptions, by underlining the idea that if there is a lack of confidence, then people will be weary to invest and spend even with lower interest rates. If this is the case, then Bernanke’s plan $50 trillion worth of bonds would prove to be uneventful and leave consumers scratching their heads and most likely calling for less government inference. Irwin continues on the path as he explains this skittishness of investors, but to me he fails to rope in the economic reasoning behind people’s expectations relies more on common sense compared to true economic analysis.
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/31/AR2010103103818_2.html?sid=ST2010103103824Beer Prices
In explaining the model for the prices of beer. Looking at the value of a good went down, due to poor weather. The poor weather decreased the supply of beer and increased the price of beer. We are focused on the weather change shifting the supply curve to the left due to the higher prices of beer. You would expect for the cooperation the produce the beer to make a higher profit but this is not the case profit dropped. This has also affected the supply of the goods that are needed to produce beer. The weather affected the cost of the goods it takes to produce the beer so this also drove up the price of beer, in this case one would expect that higher prices would lead to higher profits but the reports show in the last quarter profits grew at a slower rate and fell by ten percent. The article identifies two effects that lead to this effect besides bad weather; low consumer confidence lead to a substitution drop in supply due to the bad weather had a sign cant effect on profit that the demand for this Heineken beer must have been very elastic in respect to prices. There is a market for beer resulting monopolistic completion.( The higher amount of substitutes.) Dropping in profit is a frequent symptom of monopolistic completion. Since Heineken competes in Monopolistic Competition. In a perfectly competitive market, there are many buyers and sellers, buyers and sellers are price takers, there are no barriers to entry, free entry and exit, and the product being traded is homogenous across the market. Monopolistic Competition only differs from perfect competition in a few regards. Not like perfect competition, Monopolistic firms are price searchers to a degree. Because of brand loyalty, producers have a certain extent of control over the price they charge. Also, since the product being traded in Monopolistic Markets is nearly homogenous, but differentiated in terms of advertising, brand loyalty is then what allows firms to have some control over the price they charge. Despite these two differences from Perfect Competition, Monopolistic Competition very closely resembles Perfect Competition.
The Effect of Government Regulation on the Economy
I read an article in the Denver Business Journal concerning the recent controversy at Xcel Energy, Inc. which is converting from coal to natural gas created power. Xcel Energy put forth a 1.3 billion dollar plan that involves closing the Valmont’s coal unit in Boulder, converting the Cherokee and Arapahoe plants in Denver from coal to natural gas, and adding emissions control equipment to its plants in Colorado. This plan was designed to by implemented to comply with Colorado’s new Clean Air-Clean Jobs Act by 2017 to meet expected federal regulations on emission levels. This new Act was signed in April by Gov. Bill Ritter on the urging of several state agencies, environmental groups, Xcel, and Colorado’s natural gas industry. This new governmental regulation is expected to bring some economic hardships but it is also shows how economics is used to control pollution.
From an economist point of view by converting from coal to natural gas for energy the demand for coal will drop and will increase for natural gas. According to the article the Colorado Mining Association believes that Xcel Energy and underestimated the costs. Their preliminary estimates are looking at a minimum of 500 jobs being lost and 30,000 to 120,000 jobs when it is fully implemented as well as 11% to 50% increase in electricity rates. These costs seem much worse than they should and it’s possible that since this group is against the conversion they are somewhat biased in their results. In general by keeping those jobs there would be more output, income, and consumption which are all good for the economy. The numbers according to Xcel Energy are not mentioned but it can be assumed that their estimates aren’t as bad as what the Colorado Mining Association put out.
Economists look at pollution as a marginal cost to marginal benefit analysis. Marginal Benefits is negatively sloped because the pollution is getting less and less beneficial as it goes on. The marginal cost is positively sloped because for every additional point of pollution the costs go up. The point that the lines cross each other is the optimal pollution point. This article explains how that point is being controlled by the government by imposing regulations on emission levels. The government could also try to control pollution levels by creating taxes for all the company’s not meeting the required levels.
A more recent article explains how Xcel Energy has submitted a revised plan that will cost 1.1 billion dollars to implement. This particular plan will leave the Cherokee plant open and they will retrofit it with new emission-reduction equipment to help lower emissions and keep more workers on. It will eventually slowly be transformed to natural gas units by the end of 2022. This article gave Xcel Energy’s estimated additional cost of the plan to be a possible 1.7% raise in a typical electric bill. The first proposal would have only been 1.5% more. This case continues to be a hot topic with one side afraid of the economic impacts this will have on Colorado and the other side is more worried about Colorado’s environment.
Sources:
Denver Business Journal October 15-21, 2010 “Fight heats up between natural gas, coal backers”
Denver Business Journal October 22-28, 2010 “Xcel changes Colorado coal-power plan, would keep Cherokee unit open”
Higher Prices & Price Elasticity
I came across an article related to the American Journal of Public Health, which states that the consumption of sodas and sugary soft drinks are the ‘largest contributor to calorie intake in the United States.’ The research from the Journal suggests that this large consumption will increase the possibility of obesity and poor diet. To change the buying behavior of people who consume soda, there was a price increase of 45 cents. Here, I will examine price elasticity of soda, to see if there are any significant changes in the quantity demanded for the commodity in response to the increase in price.
The article states that a small increase in price did not significantly affect the consumption of soda. The price elasticity of demand measures the responsiveness in the quantity demanded of a commodity to a change in its price.
If consumers did not change their total expenditures on soda after a small increase in price this would make soda unit elastic, (at the midpoint on the demand curve) where total expenditures ends up be the same at every point on a unit elastic demand curve for the commodity. Elasticity would equal -1, where there is a 1:1 ratio in the percent change in the quantity demanded and percent change in price.
It is also possible that soda was price inelastic, (which is most likely) where elasticity would be between -1 and 0, (below the midpoint on the demand curve) indicating that consumers were unresponsive to the small change in price and consuming a similar amount of soda. Here, there is a greater percent change in price than in the percent change in the quantity demanded. In this case, firms and suppliers of soda are happy because when there is an increase in price and the good is inelastic, total revenue for the firm will increase.
If consumers in fact did change their total expenditures on soda (since the article stated ‘significantly’, there may have been a small change in consumption) after a small increase, this would make soda price elastic, where total expenditures would decrease, showing that total expenditures and price move in opposite directions when the commodity is elastic. Elasticity would be between - ∞ and -1, where the increase in price will affect the quantity of soda demanded. Here, there is a greater percent change in the quantity demanded than in the percent change in the price. In this case, firms and suppliers of soda are not happy because when there is an increase in price and the good is elastic, total revenue for the firm will decrease.
The article states that with a 45 cent increase in price (a 35 percent increase), sales decreased by 26 percent. If we do the math (% ∆ Qd)/(% ∆P) = (-.26/.35) = -0.74, we find that even with a significant increase of 45 cents, soda is still price inelastic (between -1 and 0), where overall consumers are unresponsive to the change in price. Even though sales have decreased, the price increase is not significant enough to change the buying behavior of consumers. The author is confused. The commodity needs to be price elastic (greater than -1) for there to be a significant change in buying habits for consumers.
The author noted that there was an increase in the sales of coffee and diet soft drinks when there was a price increase for soda. This suggests that coffee and diet soda are substitutes for soda, where the price increase in soda results in an increase in the quantity purchased of coffee and diet drinks. One thing that determines the price elasticity of a commodity is whether or not there are a large number of substitutes. The closer and greater the number of substitutes, the elasticity is larger. However, the number calculated above does not show that soda is price elastic at this point. This would mean that the value -0.74 already reflects these substitutes. If there were no substitutes, soda would be even more inelastic or closer to being perfectly inelastic. The buying behaviors of consumers will not change significantly like the author implies they will. If there is a large and significant increase in the price of soda, people would likely respond better to the increase in price and decrease consumption. This would clearly make soda price elastic, where demand is sensitive to changes in price.
The article states that a small increase in price did not significantly affect the consumption of soda. The price elasticity of demand measures the responsiveness in the quantity demanded of a commodity to a change in its price.
If consumers did not change their total expenditures on soda after a small increase in price this would make soda unit elastic, (at the midpoint on the demand curve) where total expenditures ends up be the same at every point on a unit elastic demand curve for the commodity. Elasticity would equal -1, where there is a 1:1 ratio in the percent change in the quantity demanded and percent change in price.
It is also possible that soda was price inelastic, (which is most likely) where elasticity would be between -1 and 0, (below the midpoint on the demand curve) indicating that consumers were unresponsive to the small change in price and consuming a similar amount of soda. Here, there is a greater percent change in price than in the percent change in the quantity demanded. In this case, firms and suppliers of soda are happy because when there is an increase in price and the good is inelastic, total revenue for the firm will increase.
If consumers in fact did change their total expenditures on soda (since the article stated ‘significantly’, there may have been a small change in consumption) after a small increase, this would make soda price elastic, where total expenditures would decrease, showing that total expenditures and price move in opposite directions when the commodity is elastic. Elasticity would be between - ∞ and -1, where the increase in price will affect the quantity of soda demanded. Here, there is a greater percent change in the quantity demanded than in the percent change in the price. In this case, firms and suppliers of soda are not happy because when there is an increase in price and the good is elastic, total revenue for the firm will decrease.
The article states that with a 45 cent increase in price (a 35 percent increase), sales decreased by 26 percent. If we do the math (% ∆ Qd)/(% ∆P) = (-.26/.35) = -0.74, we find that even with a significant increase of 45 cents, soda is still price inelastic (between -1 and 0), where overall consumers are unresponsive to the change in price. Even though sales have decreased, the price increase is not significant enough to change the buying behavior of consumers. The author is confused. The commodity needs to be price elastic (greater than -1) for there to be a significant change in buying habits for consumers.
The author noted that there was an increase in the sales of coffee and diet soft drinks when there was a price increase for soda. This suggests that coffee and diet soda are substitutes for soda, where the price increase in soda results in an increase in the quantity purchased of coffee and diet drinks. One thing that determines the price elasticity of a commodity is whether or not there are a large number of substitutes. The closer and greater the number of substitutes, the elasticity is larger. However, the number calculated above does not show that soda is price elastic at this point. This would mean that the value -0.74 already reflects these substitutes. If there were no substitutes, soda would be even more inelastic or closer to being perfectly inelastic. The buying behaviors of consumers will not change significantly like the author implies they will. If there is a large and significant increase in the price of soda, people would likely respond better to the increase in price and decrease consumption. This would clearly make soda price elastic, where demand is sensitive to changes in price.
October 30, 2010
Subsidies for WA wheat farmers; not a part of the "perfect mix"
This article, form the Spokesman, a Washington State news paper, discusses the prosperous wheat crop this year and the importance of the subsidies for farmers. They explain that farmers have the "perfect mix" this year, composed of good weather, higher prices, and subsidies. The article estimates that $70 million in federal subsidies will be given to Washington wheat farmers. This reminded me of our recent discussion about the pitfalls of setting a price floor. The author describes these as being both necessary and helpful, sating only convoluted reasoning for the subsidies, including the uncertainty of weather patterns and the fact that many Washington wheat farms are small family owned operations. The issues that the author stated are actually not relevant to the subsidies, which can hurt small farms by decreasing their market demand, increasing the number of firms without expanding demand, and decreasing their ability to compete with international markets.
Farm subsidies such as these are the result of the federal government imposing a price floor, which can be demonstrated in the following graph:
In the short run there is one major issue as seen in this graph, a price floor results in a surplus. In order to appease the farmers, who due to the policy, will not be able to sell all of the supply that they normally would, the government “buys back” crops in the way of subsidies. This means that the government is paying farmers to produce crops that they cannot sell instead of letting the market operate at equilibrium and allowing farmers to produce as much as demanded and selling their crops at the market price. In the long run there is another problem. Nothing is being bid up, as new firms enter the market, the. Thus the market for wheat (the market with the price floor) will never return to zero economic profit. This means that the market will not reach a long run equilibrium, and firms will continue to enter the market and increase the burden on consumers and tax revenue. Looking at the graph, if we assume P1 to be the price floor we can see that the market would be prevented from moving back to its equilibrium point.
October 27, 2010
The Failed NHL Salary Cap
In 2005, the NHL joined the NBA and the NFL in instituting a salary cap system into the sport. From an economics standpoint, a salary cap is an enforced price ceiling on total team salary that teams are forbidden from exceeding. The intended purpose of this, like many real world government enforced price ceilings, was to promote parity within the league. To some extent, this has worked. But with all price ceilings, there are unintended consequences that have hurt the league as a whole.
While it’s true that in the age of the salary cap there has been more opportunity for the historically weaker teams to have a shot, over the last few years, as teams have grown familiar with the cap and how to manipulate it, the same few teams have begun to dominate year in and year out. Comparing the division leaders from the 08-09 season with the 09-10 season, many of the same teams continued to dominate. This is because these teams have horded their star players on team friendly contracts, and other teams less fortuitous have found themselves forced to overpay free agents. In the end, this all comes at the expense of young, B-level players. Many teams are frontloaded with star players, and it leaves less opportunity for the middling players. This has caused them to either wallow in the minors, where they do not count against the salary cap, or to seek employment overseas, particularly in Russia. To quote Flyers defenseman Chris Pronger, "Who it affects is the young player who wants to get an opportunity. Maybe a young player could have come up for that game and helped them win and he never got that chance."
Compare this to the housing example given in class. Ultimately, the price ceiling creates an excess demand. Teams are not able to supply the appropriate amount of money to meet the demands of the players, so they are finding work elsewhere. Like the housing example, those who are worst off for this are the poor, in the case of the NHL, the marginal players. These are the non-stars and journeymen type players. Also like the housing example, the teams that are benefiting are those that lucked out into buying the ‘cheap apartment,’ or locking down their star player for cap friendly terms (Detroit’s Henrik Zetterberg for $6 million per, Chicago’s Marian Hossa for $5.2 million per, Vancouver’s Robert Luongo for $5.3 per).
In the end, teams have to all field the same 20 man roster. The cap’s intended purpose, in making the 20 man rosters of all the teams in the league more even, is failing. With teams circumventing the cap with long-term deals and hiding players in the minors, the richer teams still have the advantage and are still winning. All the cap has succeeding in doing is forcing the marginal players out of the league, and this is why the salary cap should be significantly examined during the next CBA discussion.
While it’s true that in the age of the salary cap there has been more opportunity for the historically weaker teams to have a shot, over the last few years, as teams have grown familiar with the cap and how to manipulate it, the same few teams have begun to dominate year in and year out. Comparing the division leaders from the 08-09 season with the 09-10 season, many of the same teams continued to dominate. This is because these teams have horded their star players on team friendly contracts, and other teams less fortuitous have found themselves forced to overpay free agents. In the end, this all comes at the expense of young, B-level players. Many teams are frontloaded with star players, and it leaves less opportunity for the middling players. This has caused them to either wallow in the minors, where they do not count against the salary cap, or to seek employment overseas, particularly in Russia. To quote Flyers defenseman Chris Pronger, "Who it affects is the young player who wants to get an opportunity. Maybe a young player could have come up for that game and helped them win and he never got that chance."
Compare this to the housing example given in class. Ultimately, the price ceiling creates an excess demand. Teams are not able to supply the appropriate amount of money to meet the demands of the players, so they are finding work elsewhere. Like the housing example, those who are worst off for this are the poor, in the case of the NHL, the marginal players. These are the non-stars and journeymen type players. Also like the housing example, the teams that are benefiting are those that lucked out into buying the ‘cheap apartment,’ or locking down their star player for cap friendly terms (Detroit’s Henrik Zetterberg for $6 million per, Chicago’s Marian Hossa for $5.2 million per, Vancouver’s Robert Luongo for $5.3 per).
In the end, teams have to all field the same 20 man roster. The cap’s intended purpose, in making the 20 man rosters of all the teams in the league more even, is failing. With teams circumventing the cap with long-term deals and hiding players in the minors, the richer teams still have the advantage and are still winning. All the cap has succeeding in doing is forcing the marginal players out of the league, and this is why the salary cap should be significantly examined during the next CBA discussion.
October 25, 2010
No COLA for you!
The government recently announced that there would be no monthly cost of living increase (COLA) for social security recipients for the second straight year. What an outrage, right?
Social Security benefits (SSI) are a major political hot topic, especially during election season. Just today I heard a radio campaign ad stating that so-in-so republican said Social Security is a broken system that needs to be eliminated. Of course you could not tell what the candidate’s actual belief was based on the 5 second sound byte that, by the way, never actually mentions Social Security. The major issue with SSI is that too many Americans rely on it as their major or even sole source of retirement income. It has become a much too relied on crutch, when it should only be a supplemental source of an individual’s income after they leave the labor force.
The outrage stemming from the governments recent announcement is not as bad as the story would lead you to believe. Yes, there will be no COLA increase for the 2nd straight year, but what about the $250.00 one-time bonus paid to SSI recipients in 2010? When you consider that the average SSI benefit is $1,072.00 per month, that $250.00 bonus equates to an increase of 2% from the previous year. Also, since the COLA is based on the CPI W (consumer price index for urban wage earners and clerical workers), the lack of an increase in 2009 was really a non-issue due to the fact that, according to the CPI W, we did not experience any inflation. In fact, there was deflation. The CPI W in 2009 was 205.70. In 2008 it was 206.744 (www.ssa.gov/OACT/STATS/cpiw.html). According to this data the inflation rate is calculated as 205.70-206.744/205.70x100, which equates to a -0.50% decrease in prices from 2008 to 2009. The rate of deflation, coupled with the $250.00 increase in annual income, would have increased overall purchasing power of consumers receiving SSI benefits by 2.5%. According to consumer theory this 2.5% increase in income/purchasing power would shift the consumer’s budget line out from BL1 to BL2, increasing the consumers affordable set in the process (x1, e1, y1 to x2, e2, y2; assuming normal goods). This move would shift the consumers indifference curve from u1 to u2 making them better off during this time period.
In 2010 the CPI W rose from 205.70 in 2009 to 212.568 which equated to a rate of inflation of approximately 3.4% (212.568-205.70/205.70x100). When taking into consideration the one-time bonus of 2.5%, and the 0.50% deflation in 2009 the total inflationary increase for SSI recipients who received the bonus was less than 1% (0.90%). That is not too bad considering the CPI tends to overstate the level of inflation. Since the CPI is calculated based on a fixed basket of goods, it does not take into consideration the consumers ability to substitute toward goods whose prices have fallen or the introduction of new goods that could potentially increase the real value of the dollar.
In an effort to ease SSI recipient’s fears, the Obama administration is considering a proposal to issue a 2nd $250.00 bonus in 2011. If this is done, assuming the average SSI benefit is $1,092.83 per month (2010 average plus $250.00 annual bonus in 2010) the actual level of increase in the average SSI benefit would be roughly 1.9%, or $1113.66 per month total new benefit. With that 1.9% increase, coupled with the 2.50% increase from 2009, SSI recipients would actually be ahead of inflation by 1.5% (212.568-206.744/206.744=2.9% increase in prices from 2008-2010), on top of the fact that the CPI tends to overstate the level of inflation.
An argument could be made that individuals receiving SSI benefits rely on the annual increases received to maintain a comfortable standard of living. But before people panic about a halt on their annual COLA, wouldn’t it be best to ease their fears by helping them understand why they are not receiving one? Wouldn’t it be beneficial to use situations like this to spark resurgence in personal savings, so people could wean themselves off of their reliance on a government run retirement program? Based on the government’s track record with spending and budget management, especially by the last two administrations, wouldn’t you be wise to plan for your retirement future? If we did, at least we would have to worry about whether or not we were going to get our annual increase in SSI. Prices on the other hand, would be a whole different story.
http://news.yahoo.com/s/ap/20101010/ap_on_bi_ge/us_social_security_no_cola
Social Security benefits (SSI) are a major political hot topic, especially during election season. Just today I heard a radio campaign ad stating that so-in-so republican said Social Security is a broken system that needs to be eliminated. Of course you could not tell what the candidate’s actual belief was based on the 5 second sound byte that, by the way, never actually mentions Social Security. The major issue with SSI is that too many Americans rely on it as their major or even sole source of retirement income. It has become a much too relied on crutch, when it should only be a supplemental source of an individual’s income after they leave the labor force.
The outrage stemming from the governments recent announcement is not as bad as the story would lead you to believe. Yes, there will be no COLA increase for the 2nd straight year, but what about the $250.00 one-time bonus paid to SSI recipients in 2010? When you consider that the average SSI benefit is $1,072.00 per month, that $250.00 bonus equates to an increase of 2% from the previous year. Also, since the COLA is based on the CPI W (consumer price index for urban wage earners and clerical workers), the lack of an increase in 2009 was really a non-issue due to the fact that, according to the CPI W, we did not experience any inflation. In fact, there was deflation. The CPI W in 2009 was 205.70. In 2008 it was 206.744 (www.ssa.gov/OACT/STATS/cpiw.html). According to this data the inflation rate is calculated as 205.70-206.744/205.70x100, which equates to a -0.50% decrease in prices from 2008 to 2009. The rate of deflation, coupled with the $250.00 increase in annual income, would have increased overall purchasing power of consumers receiving SSI benefits by 2.5%. According to consumer theory this 2.5% increase in income/purchasing power would shift the consumer’s budget line out from BL1 to BL2, increasing the consumers affordable set in the process (x1, e1, y1 to x2, e2, y2; assuming normal goods). This move would shift the consumers indifference curve from u1 to u2 making them better off during this time period.
In 2010 the CPI W rose from 205.70 in 2009 to 212.568 which equated to a rate of inflation of approximately 3.4% (212.568-205.70/205.70x100). When taking into consideration the one-time bonus of 2.5%, and the 0.50% deflation in 2009 the total inflationary increase for SSI recipients who received the bonus was less than 1% (0.90%). That is not too bad considering the CPI tends to overstate the level of inflation. Since the CPI is calculated based on a fixed basket of goods, it does not take into consideration the consumers ability to substitute toward goods whose prices have fallen or the introduction of new goods that could potentially increase the real value of the dollar.
In an effort to ease SSI recipient’s fears, the Obama administration is considering a proposal to issue a 2nd $250.00 bonus in 2011. If this is done, assuming the average SSI benefit is $1,092.83 per month (2010 average plus $250.00 annual bonus in 2010) the actual level of increase in the average SSI benefit would be roughly 1.9%, or $1113.66 per month total new benefit. With that 1.9% increase, coupled with the 2.50% increase from 2009, SSI recipients would actually be ahead of inflation by 1.5% (212.568-206.744/206.744=2.9% increase in prices from 2008-2010), on top of the fact that the CPI tends to overstate the level of inflation.
An argument could be made that individuals receiving SSI benefits rely on the annual increases received to maintain a comfortable standard of living. But before people panic about a halt on their annual COLA, wouldn’t it be best to ease their fears by helping them understand why they are not receiving one? Wouldn’t it be beneficial to use situations like this to spark resurgence in personal savings, so people could wean themselves off of their reliance on a government run retirement program? Based on the government’s track record with spending and budget management, especially by the last two administrations, wouldn’t you be wise to plan for your retirement future? If we did, at least we would have to worry about whether or not we were going to get our annual increase in SSI. Prices on the other hand, would be a whole different story.
http://news.yahoo.com/s/ap/20101010/ap_on_bi_ge/us_social_security_no_cola
The Job Market and Demand
As President Bush’s term in 2007 neared its end there was little warning to what the year 2008 would bring about with President Obama’s inauguration. Then in 2008 things started falling apart at the seams. The supply of jobs plummeted and unemployment skyrocketed from its normal average of 5% to 10% and supposedly reaching its peak at 10.6% (lowest since the depression). Small, often first time business owners were hit hard and like 1 in 4 newer small businesses they were out of business. Around this time at the start of the fall of the economy it was 2 or 3 out of 4 new small businesses. In small towns where small make for most of the jobs with some larger businesses in the mix, small towns feel the crunch of unemployment; like in this town of Elkhart, Indiana. These townspeople have understood hardships, especially when the unemployment reached 22.2% in this small town. According to Moore, a Democrat in a primarily Republican state claims that 40 million dollars from the Presidents stimulus has gone to the town to help fix roads and rebuild some of the town’s buildings and therefore providing some jobs to the town’s people. But Moore also admits that his party could do more to help the people with unemployment. The demand for jobs is there but the supply is certainly still short. The money that went towards building roads may have provided some jobs for the short run but because it is a temporary process building roads it is not a long term solution. As you can see the fixed amount about 40 million dollars of capital for the short run was not a good solution for the people of these small towns like Elkhart. The current unemployment in the town is 15.6% which although better does not mean that the rate could still go down. The people of the town agree that times are harder now than even before. So how to fix the supply of jobs for these people who so relentlessly demand them, is another stimulus package an option? Or is that all we can do until a new President with a new and better solution is elected?
Supply Side Sense for Marijuana Dispensaries
This article from the Colorado Springs Gazette provides several possible explainations for why medical marijuana dispensaries in Colorado Springs and the unincorporated county areas are having trouble staying in business. The article addresses the start ups needing capital, a solid business plan, and good customer service. The models for perfect competition tell us a lot about this story that the article did not address. The dispensaries going out of business is not a result of bad customer service or poor business plan per se, it is a basic result of perfect competition. When this market opened, all the suppliers were at an initial positive economic profit postion. Although the suppliers cannot see the increase in demand, they did see the increase in price the rise in demand caused and they responded by opening more and more dispensaries. More suppliers entered the market seeing the positive profits being obtained by the suppliers, perhaps shifting their resources from previous business ventures because according to the definition of economic profit, every other market was in a less favorable position than the dispensaries. As more and more dispensaries opened, this shifted the short run supply curve out, causing prices to fall, and the suppliers profit to decline until, now, they are in a negative economic profit position. As the model shows us, suppliers must now leave the market as they reach the shut down point on their cost curves.
Combine the cyclical effect of the perfect competition model with the recent changes in regulations and laws for dispensaries, and the market should regain its equilibirium profit postion, and potentially, with the influence of government, a positive economic postion.
With the passage of the moritorium on dispensaries within city limits, the number of suppliers will soon decrease even more as potentially ( this is still under discussion) only dispensaries in the unincorporated areas of town will retain their tax and business licenses. However, no new businesses within the city limits with be granted licensture. We know that changes in regulations and laws shift the supply curve, and in this case, to the left, thus prices will rise as the number of suppliers decreases, and those lucky few in the county jurisdiction may make a success of their businesses yet. If they can cover their fixed costs in the short run, or even a portion of their variable costs as well, and hold out long enough for the competition and the city based suppliers to go out of business, they may not reach the shut down point and be able to stay in business. Well...that is until the federal government decides to take over the medical marijuana business altogether in order to obtain a new revenue stream...but that's another discussion.
Combine the cyclical effect of the perfect competition model with the recent changes in regulations and laws for dispensaries, and the market should regain its equilibirium profit postion, and potentially, with the influence of government, a positive economic postion.
With the passage of the moritorium on dispensaries within city limits, the number of suppliers will soon decrease even more as potentially ( this is still under discussion) only dispensaries in the unincorporated areas of town will retain their tax and business licenses. However, no new businesses within the city limits with be granted licensture. We know that changes in regulations and laws shift the supply curve, and in this case, to the left, thus prices will rise as the number of suppliers decreases, and those lucky few in the county jurisdiction may make a success of their businesses yet. If they can cover their fixed costs in the short run, or even a portion of their variable costs as well, and hold out long enough for the competition and the city based suppliers to go out of business, they may not reach the shut down point and be able to stay in business. Well...that is until the federal government decides to take over the medical marijuana business altogether in order to obtain a new revenue stream...but that's another discussion.
October 13, 2010
5 Ways to Make a Bad Economy Better
To sum up this article, foxnews went and compiled the top recommendations from economists in Washington DC on how they would make the economy better. Here are the recommendations:
1) cut the corporate tax rate
2) renew unemployment benefits
3) extend the Bush tax cuts
4) more stimulus money
5) cut spending
Cutting the corporate tax rate would allow big business to increase profit which would allow them to either reinvest that money or their workers would be better off. More profitable big businesses can only be a good thing for an economy, so I believe that this solution has some validity. The more profit a company has the more of their product they are willing to supply and the quality of the good is likely to increase. An increase in supply of a good would lead to lower prices for the consumer. Lower prices for consumers, higher wages for big business workers which would then be put back into the economy (hopefully), and higher productivity in big business would all be things that could help put this economy on track.
Renewing jobless benefits is only a short term fix to a long term problem. People who are poor need help getting on their feet, but by renewing jobless benefits every time it comes to Congress does not give the jobless a reason to want to get a job. The people that receive the job benefits do end up spending that money which puts money into the economy but in the long term them staying unemployed and receiving a government check is not the answer. Decreasing the amount of jobless benefits over time would be a way to not completely take away support to the poor but at the same time giving them incentive to find a job because the time will come when the check won't show up.
Extending the Bush tax cuts is a hot topic right now, and one that President Obama is seemingly going back and forth about. In the demand function Qd= f(Price, Price of substitutes, price of compliments, Consumer Income, Number of Consumers), we can see that Income would be part of the function effected by a tax cut. Continuing the tax cuts would keep current demand the same all other things constant, but hiking taxes, even if only those making $250,000 or up are taxed, market demand will decrease for a number of goods. The reduced purchasing power of the wealthy limits the productivity of business by not allowing wealthy people to put money into the market and contributing to business revenue. Extending the Bush tax cuts is a valid way to help the economy recover.
An interesting solution to our recession brought up by these Washington DC economists was to "pump in more stimulus." As we have discussed, giving people or companies more income can increase their budget line and increase their possible maximum utility, but this stimulus gives us a false sense of security. By printing and giving out money the government consumers or businesses are given a spike in their purchasing power. If income spikes then, as our demand function shows us in the above paragraph, that demand will increase. An increase in demand will lead to higher prices. The end result of this fiscal policy of stimulus and bailouts will lead to rapid inflation, so this is probably not a very good solution to solve our economic problems.
The last idea that the economists in Washington DC brought up was to cut spending. Wait, do WHAT? Hold on, is it even possible for government to cut spending? Let me answer that question, YES! I couldn't believe that this was the last of the five that the economists suggested because this to me seems to be one of the easiest solutions. The federal government is broke and the first step to fixing something that is broken is to cut it, well not really, but cutting back on spending is a great first step in establishing some fiscal discretion. As we have seen, government putting money in the market has lead to outcomes other than the efficient allocation of resources, so cutting back on gov't spending would help curb this.
Overall, I think that three of these "fixes" would really benefit the country. Although they may seem prototypical conservative viewpoints, from what we have learned in class, cutting the corporate tax rate, extending the Bush tax cuts, and cutting spending would help this country's economy in the long term.
October 1, 2010
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