December 17, 2010

Price Shopping with Phone

Seems the way we are shopping is starting to change. No longer are shoppers only using brick and mortar stores for their shopping needs. Consumers are now able to access prices on mobile devices such as smartphones, this allows them the ability to comparison shop. Stores are no longer able to just bring in a consumer with the hopes of finding the customer leaving with more than they planned on taking home in the first place. The economic down fall is this is making the market once mildly competitive now highly competitive. Consumers are able to go to a store start up an app such as The Find and comparison shop with other retailers that have the same product almost instantly. What does this spell for the small stores well there is no longer going to be as many small Ma and Pa stores unless they can separate themselves from the others. There are things such as warranties and personally service which can still draw a loyal customer but will it be enough. When those who used the apps available were surveyed, most stated they were used for big ticket items. Will this mean that there will be less employees at the Best Buy when you visit to buy a Blu-ray who knows but it is something to consider. The market is becoming very hard to enter knowing that the prices that are low are from big suppliers such as Amazon who can allow for competitive pricing. Will we be able to see a lowering of the use of apps to shop with; no as technology advances so does how we manage our finances. Penny saved is a penny earned and this will allow those who do comparison shop to feel less guilty, though in the long run they might be aiding in the loss of some employees lively-hood their job.

December 16, 2010

Chinese Iphone Made in America

The economy in China likes to lay claim to many things that are just not there's one such thing is the economic benefits of laying claim to exports. China claims exports that are produced and exported in the final stage of production as part of their GDP. Is the claiming of items only produced and exported as part of their GDP, an honest look at the real GDP of China? No the actual GDP of China should reflect the percentage of the final price of the export added to it. Things will not change though the unseen adjustment to the GDP of China's other contributors to their GDP are left in the dust. For example the Iphone is conceived in the United States 6%, and account for the aforementioned labor and components of the device. Other countries such as Japan, Germany, South Korea and other account for 34% ,17% ,13% and 27% of the production while China accounts for only 3.6% all numbers are rounded and for use of approximation as minute changes are possible in margin of error. With China only accounting for 3.6% of the product how are they able to add it to there GDP, answer, by the current standard of who exports the products is how. If we were to only allow the use of those items who are solely produced to be accounted for this would not be evenly distributed. It should be taken into account the percentage of the product produced in the process and where to be accounted in the country of said work to be included in the correct country for use in GDP determination. China does lay claim though to many products which help its GDP look better than the actual real GDP should be realized. Changing the way it is seen though is a political battle as we are in debt to China seems the United States does not seem it is necessary to act upon these discrepances in real GDP. The debt we owe to China seems to have an adverse affect on our economic outlook but things could always be worse right?

When Will China Overtake the U.S.?

Even though the China's GDP is sitting at 2/5 the size of America's, some economists hypothesize that China will have the largest economy by 2012. It used to be thought by Goldman Sachs, that if China was to overtake us, it would happen no sooner than 2041. Some recent studies done by Goldman Sachs have shown that they could overtake us by 2041. This economic downturn we have experienced in the U.S. has weakened our economy a great deal. This, combined with China's rapidly growing population, and industrailization, has granted them the ability to quickly make up lost ground that we previously held. In fact, China's economy has grown by an annual average of 10.5%, While America has a mere 1.7% average annual growth. This paints a relatively dim picture of our economy in America, and views China as nearly divine, but this fact alone does not provide enough data to make accurate assumptions. It seems obvious, based on past experiences, that the growth rate in China will slow, but with such a large rate of growth, they can afford to slow down a little.
These statistics show that the U.S. has lost much of its economic power, but it does not show why. Inflation rates in China are rising at a rate that is nearly half of their growth rate, which means that the Chinese yuan is not worth nearly as much as the U.S. dollar. The previous statistcs also do not provide the information about the populations of the two countries. The GDP per head in America is four times as large as China's, because China's population is so much larger than ours; the prosperity experienced in America will be far greater than that of China's, because the wealth per person in the United States is fmuch larger than China's.

December 15, 2010

Japan Outsourcing to China

Many companies within the mainland China are now starting to see further utilization of their workers by Japan. Originally Japanese companies would hire Chinese workers at a rate not very competitive with what would be paid to workers of the same skill set native to Japan. In the past five year the number of Chinese workers in the business class has doubled. This spells deeper relationships between the two nations which are now beginning to help one another on a scale set to a brisk pace. There are even companies within Japan that are now owned by Chinese investors this would have been troubling previously but now is of little concern. The idea of intermixing the two countries in a way that they are now able to help one another prosper is fresh considering the history of the two nations relations amongst one another. The idea of considering the firm as a whole instead of just individuals is one leading reason they are outsourcing as well as starting to use mainland China as operative fronts for new business ventures. The profitability of the two nations will soar compared to previous decades especially knowing that China is one of the fastest growing countries and will be on the steady course for many years. What is not seen though is the idea that though it will be of benefit for both the effects on Japan considered to be the second leading economy in the world by many is that they are actually helping China more then themselves. The ideas are on the right path though with China becoming more involved with the Japanese economy it seems that the symbiosis relationship is not one that Japan needs to become successful. Outsourcing is good though the dependency of other nations to the point that they are now involved with game changing information could become disastrous. Time being a factor may Japan realize that not always is it better to use cheap labor.

December 1, 2010

Ireland's Minimum Wage

You may or may not have heard that Ireland is in serious financial trouble. With sky high debt and a rising unemployment rate some fear that Ireland is headed for bankruptcy. Recently, both the EU and the Irish government have been taking steps to right these problems. One of these steps is to decrease the minimum wage of Ireland by 1 Euro. In the article “Cowen Defends Minimum Wage” Taoiseach (Prime Minister) Brian Cowen is defending the plan to reduce the minimum wage and Labour leader Eamon Gilmore disagreement with the plan.
Eamon Gilmore argues that this reduction of the minimum wage will result in more borrowing from banks. Brian Cowen says that “the whole idea is to keep as many people in work at a time when the trading environment is very difficult.” So who is right? As we all know a minimum wage results in employers having to pay more than the market equilibrium price for labor. This results in employers must reduce the amount of labor they employ so there becomes a surplus of labor. Ireland has above a 17% unemployment rate. What Eamon Gilmore is concerned about is that this reduction in wages will cause a economic strain on the poor and people earning the minimum wage which will result in these people borrowing more money. This is not the case, the reduction of the minimum wage means that it moves the price of labor closer to the equilibrium. It will reduce the surplus of labor. This means that it will not only help reduce the unemployment rate which reduces the amount of people drawing unemployment benefits from the government, saving the Irish government money which it desperately needs. But it also means that companies can offer more hours to employees. So across the board anyone who is affected by this decrease of minimum wage is better off. They can either find a job or work more and earn more money. So this increase in pay means that they will borrow less money to pay their bills and maybe even begin to pay back the loans they currently have.

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Are Intellectual Property Laws Harmful?

Are Intellectual Property Laws Harmful?

Intellectual property laws have long been the backbone of innovation. Intellectual properties are the so-called ‘creations of the mind;’ that is, inventions, artistic works, trademarks, copyrights etc. In essence, then, intellectual property rights laws serve to grant the owner or creator of the invention/idea/patent etc. exclusive rights for using and benefiting from such intangible goods. But are these laws right? Let us take a look from an economics standpoint.

On one hand, it can be argued that intellectual property laws are a necessity in promoting innovation and creation in the first place. Without intellectual property laws to protect his patents, copyrights and trademarks, a creator could potentially lose his ideas to others who find them appealing. What motivation – save for purely altruistic motive or creative passion - would a designer have to invest his time, his brainpower, and potentially millions if not billions of dollars into something that he may ultimately reap no reward from? Assuming the invention is any good, there would be massive demand for an invention at 0 cost. In this case, though, it would stand to reason that the producer would be unmotivated to produce if he won’t gain any benefit, and ultimately, the good would go unproduced. This extreme case of excess demand thwarts the idea of abolishing intellectual property laws, and the notion surely is that of a socialist mindset that everyone must share equally.

However, not everyone buys this logic. The other side of the argument cries that intellectual property laws dissuade competition, reduce maximum innovation, and lead to monopolies. This is the position the article’s author seems to take. He appeals that, especially in biotechnology and medication industries, that vital information is being purposefully restricted. It is not entering the marketplace at all, so not only can nobody compete, those who could benefit from the goods cannot and people are dying as a result. Furthermore, as information is often hoarded rather than allowed to enter the marketplace, free market competition is not allowed to thrive. In the instances of software rights and other goods being shared (eg. open source software), the industries boon on the free ability of different producers to share ideas and create better products. This not only benefits the consumer, but the producers are selling more, and it stands as a triumph of free market capitalism and is hardly a ‘socialistic mindset.’ Lastly, from intellectual property laws arise monopolies. The government empowering the bearers of intellectual property with unlimited control of their goods – no matter how much or how little of it is used – allows certain businesses to conquer entire industries (eg. Microsoft). Good ideas will flourish whether or not the government is sticking its nose in the business, and everyone would be better off if intellectual property laws were simply abolished.

This issue is certainly a complex one with strong points for both sides. Would abolishing intellectual property rights be a boost to a free market system and be better for everyone as the author and other proponents of this idea suggest? Or is protecting the intellectual property of innovators the only way to encourage production? What do you think?

What the Deep-Sea Drilling Moratorium Really Caused

I found a very interesting article on the New York Times website relating to President Obama’s moratorium on deep-sea oil drilling. The article talks about how Obama will be extending the moratorium another 6 months which cancels exploratory drilling scheduled in Alaska this summer. The White House says they will also be administering harsher regulations to show that they are trying to fix things in response to the BP oil spill. I think this is an overreaction to the problem as oil spills do not happen very often.

The moratorium will cause a decrease in supply as big oil companies will not be able to drill as much as they normally could. Due to the shift to the left of the supply curve, the equilibrium price will go up which will effect consumers all around the world. I believe most people in the world want gas prices as low as possible so why is Obama doing this? The reason Obama introduced the moratorium on deep-sea drilling was so that United States citizens felt like the government was responding to the oil spill adequately. Instead what they are doing is raising prices of gas which is one of the biggest issues that Americans have today.

The moratorium also decreased jobs for Americans as these rigs employed thousands of Americans. So instead of repairing the government’s image like the Obama administration wanted, they put a lot of people on the Gulf Coast out of work and raised gasoline prices.

Even though Obama did lift the moratorium in mid-October the amount of crude oil that the companies could have drilled is permanently reduced. Before the moratorium, oil rigs were already drilling but after they were forced to move to other places around the world to drill. The oil rigs are not going to come back to Alaska, etc. because they already spent millions of dollars to get to other places to drill. I cannot see a decrease in gas prices coming anytime in the near future but we’ll see.

November 30, 2010

Black Friday Externalities

During the first Friday after Thanksgiving, millions of Americans across the nation are out to retail stores, outlets, and shopping malls to grab one time discounted deals. One state on the other hand has garnered attention by using this traditional shopping day craze to make sales of a particularly controversial item...

According to, a leading online state news article, explains how in South Carolina, for a third year in a row, has made hand guns, rifles, and shotguns tax free within the state during Black Friday and the following Saturday. This event is called the 2nd Amendment Sales tax and is the only tax write-off during that holiday that is shockingly designated only for firearms. By having tax free gun purchases, it has considerably raised the demand of firearms during that short weekend, considering the nearly hundreds of dollars saved without a tax upon the purchases and an increase of revenue for the local gun shops in South Carolina. Though shoppers may have felt a rush of savings through the purchase of firearms, there will be externalities that may occur. Even with the costs of obtaining firearms to be much lower than other parts of the year, many would consider this frugal event to be questionable, seeing that there will be an influx of legal but dangerous weaponry in the hands of consumers. With an increase of firearms on the there will be an assumption that crimes and/or deaths may increase within the state but on the other hand may even raise profits for local gun shops in the state of South Carolina and aid the state locally especially in the current economic depression.

To veteran gun owners and newly gun toting citizens alike, this tax free exception on firearms may seem like a valuable opportunity to obtain a firearm during this current economic downturn but ultimately consequences may arise with externalities (rise of crime and deaths) considering the seemingly never ending debate with firearms.

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Uncle Sam, quit regulating Santa!

“Tests on Toys” by ABC’s Jennifer Kerr, addresses the regulation toy manufactures are currently under. Regulation is enforced by the government to make sure the toy firms produce safe toys. Miss. Kerr seems to be very pro-regulation. Unfortunately, Miss. Kerr fails to explain the economic result of the regulation. While toy regulation has been around for a while it was increased in 2008 and some wish to increase it further. The news article fails to express any economic view points. I wish to point out what the article missed.

While it is true that "toys are safer than ever" this regulation will increase the costs of the firm. Looking at a basic supply demand diagram, from the original equilibrium point an increase in regulation will increase cost for the firm (for things such as hiring new designers and purchasing new manufacturing equipment). The firm’s quantity supplied will decrease. Eventually, because the regulation affects all toy firms, the overall price for holiday consumers will increase. The increase in regulation will make it harder for producers and consumers alike. Due to the increase in price, consumers have a smaller budget line, in effect less money. This regulation is making it harder on both consumers and producers in this recession. It would be a better idea to forgo regulation or at least not add more regulation as they have done in the past. This option would be better for both consumer and producer.

The buyer still needs to deal with safety concerns. Miss. Kerr seems to think that consumers can not make good purchasing decisions without regulation. Consumers wish to maximize their utility, something they are probably not achieving if their child chokes on a toy. Consumers will purchase most merchandise from the firm who maximizes consumer utility best. The firms who are the most carful in producing toys will receive the most business.

At the end of Miss. Kerr’s article, she talks about a company that complied with the government regulation and still had a child choke on a toy. This happened even when the toy meet every single regulation standard. While Miss. Kerr seems to advocate increasing regulation, this is unnecessary. The company in the example recalled all the toys, and quickly fixed the problem. The firm was doing its best to make consumers happy. Accidents will always occur, but the firm that fixes these mistakes and maximizes consumer utility will stand in the end. If the toy market is a perfectly competitive market, other manufactures will be forced to do the same or eventually drop out of the market.

Ethanol: Is it the Right Thing

Lately I have been very interested in how the introduction of ethanol has affected the United States and other countries around the world. This article talks about the negatives of ethanol production and who it is affecting because of it. One of the main issues with ethanol is that we produce it through corn. It is produced through industrial fermentation, chemical processing and distillation of the corn. The issue is that due to ethanol being produced at such a high level currently, a lot of corn is needed. This increase in demand for ethanol leads to a higher equilibrium price as shown in the graph below.

The demand curve shifted to the right due to the increased demand which led to an equilibrium shift from E1 to E2. E2 implicates a higher equilibrium price. In developing countries like Mexico, prices for corn skyrocketed and consumers in these countries are unable to pay a higher price. In 2008, the price of corn increased 110 percent from where it was nine months prior. With demand increasing by so much, a lot more supply is needed and many United States farmers are unable to keep up with the increase. If we want to reduce this threat to developing countries, we need to either use different products to create the ethanol like wheat for example. Doing this will help out these developing countries that have been hurt due to the corn price increase so that these people will not be struggling anymore.

There's no harm in a "living wage", oh really?

There are proposals around the country right now which suggest the need for a "living" or "prevailing" wage. These are not new ideas. However they are being seen more and more in the media lately. The Center for American Progress Action Fund recently released a study which concluded that there is NO negative economic effects for requiring businesses (receiving government subsidies) to pay a living wage and/or prevailing wage. I found this quite negative effects for forcing businesses to raise wages.

The study was done by monitoring 15 cities employment growth and comparing that to control cities. They found that the employment growth of cities who initiated wage standards on government subsidized jobs. They said that this study proved that imposing wage standards across the board would not negatively effect the competitiveness of a city, county, state, etc.

One of the key things that they failed to address was the fact that the only businesses they studied were already being manipulated by the government. This analysis has no real information about the effects of increased wage standards on competitive businesses and the competitive markets between states and countries. They suggested that a government funded project like building a stadium creates jobs, and that we should make them "good" jobs by imposing a "living" wage of $10.00 and a "prevailing" wage of $24.00. This only works when the government, who is imposing these wages is footing th bill for the project. Taking an example of an
inefficient situation (government funding projects like stadiums and parks etc.) and adding to that the increased inefficiency of imposed wage standards is in no way a "comprehensive" look at how imposing wage standards across all businesses in a given city, state, or nation effect that area's competitiveness.

A relevant way of looking at how increasing imposed wage standards will effect businesses would be to look at economic, labor models. This model represents the effects of imposing a "living" or "prevailing" wage, which is simply a glorified minimum wage.
When a minimum wage is imposed, a labor surplus will occur. This means that the ever dreaded unemployment will increase. The surplus of labor, or the unemployed will be equal to the area in the upper triangle between the wage equal to 4.20 line (red) and the supply and demand lines. If these people really wanted to add jobs and improve things for people living in these cities they would not increase the minimum wage and thus their unemployment, because unless the government is footing the bill, businesses will decrease their demand for labor at these increased wages.

What IT Resellers Mean to the Economy

Recently I read another article in the Denver Business Journal relating to IT resales and their effect on the current economy. IT Resale Company’s buy used computers, servers, and other business technology, and then prepare them for resale. According to the article many economic professionals see this as an indicator that the economy has a long way to go before it can reach a full recovery. During the hardest part of the recession business’s had to downsize but decided to try keeping their IT equipment because they would need it all when they were able to hire everyone back. Eventually, these companies started to sell their equipment to IT liquidators after three or so years of layoffs and other business failures due to a failing economy. As evidence to this statement the article stated that one company, IT Liquidators, purchased just over 6,200 pieces of IT equipment in 2007 and over 29,900 pieces in 2010. These numbers suggest that companies did not hire back workers and eventually more and more company’s started selling their old IT equipment that they weren’t using. The article also stated that IT equipment drops 3-5% in value per a month so waiting so long was very costly for the selling company’s. The rest of this article will examine how even though IT resellers are greatly increasing their business, it’s not helping to improve the economy.

At the beginning of the semester we learned how demand was the quantity of goods or services that a consumer is willing to purchase at each price. Demand can be viewed from both sides in this situation. First, there is a high demand for old IT equipment from failing businesses by IT resellers because it is a highly successful business right now. In fact the article stated that during the recession IT Liquidators business has quadrupled. Also, there is the higher demand for used IT equipment for businesses that have began to grow again. The article stated that survival for most companies these days starts with being more cost-conscious. This has led to businesses being more receptive to buying used IT equipment. Another fact is that businesses aren’t willing to go out and buy the more expensive upgraded gear unless there will be an immediate return on their investment.

IT equipment resellers are not the only companies in the field who have seen an increase in demand for their commodities. Being more cost-conscious has also led some companies to repair what IT equipment they have currently rather than buy new or used equipment. The article mentioned that Action Computer’s repair business has increased 40% in the past year alone. As I mentioned earlier even though business has drastically improved for IT equipment resellers and IT equipment repairing companies, it’s a bad sign for the overall improvement of the economy. This suggests that the reason so many companies are selling their IT equipment is because they’re downsizing or going out of business which is the exact opposite of what is necessary for the economy to start growing again.


Denver Business Journal November 26- December 2, 2010 “IT resale’s good, but that’s bad for economy”

Left and Right: Down With Ethanol Subsidies

In recent years, the US government has been subsidizing the ethanol industry, giving them tax breaks that have stimulated growth and production of ethanol in the United States. The underlying justification of subsidizing domestic ethanol production is that it strengthens US energy independence. But at what price?

According to this article, many groups, conservatives and liberals alike, disapprove of the current subsidies of this industry. Conservatives want to cut the subsidy program because they see it as a handout to private interest, and cutting it would reduce federal spending. Environmentalists feel that ethanol has no real effect on greenhouse emissions. Liberals feel the benefits of using corn as fuel are marginal, and they think that the subsidy of ethanol (which is corn-based) is driving up food prices. 1

While this article addresses some very important social issues, it really does not address the economic issues that can result from an industry subsidy such as this. Considering the market for ethanol, when the government has subsidized ethanol production, the supply curve for ethanol surely shifted outward, resulting in a larger quantity being supplied, at a lower cost. The impact of the subsidy is lower prices for consumers with higher prices received by producers; this results in both a surplus for consumers and a surplus for producers. While lower prices for consumers is nice, it is a direct result of the government subsidizing ethanol production, so while consumers may enjoy paying a lower price, they inevitably pay for this through their own taxes.

The total figure by which the ethanol industry is being subsidized by the US government is about $6.5 billion per year. According to a study by the Global Subsidies Initiative, if ethanol subsidies were eliminated, demand for ethanol would fall, resulting in corn commodity prices declining by $.30 per bushel. As the price of corn falls, other farm subsidy programs would go into effect, costing the government about $.57 billion per year. 2 The Renewable Fuels Association believes that eliminating the ethanol subsidy would result in a loss of $3 billion in net revenue of federal taxes.1

So, $6.5 billion per year in subsidies could be saved if the program were eliminated, but there would be an additional burden of $.57 billion on other farm subsidy programs. So eliminating the program would save $5.9 billion per year. I did not include the loss of net tax revenue into this calculation because this tax is not a benefit, but a transfer.

Based on preliminary observation, it appears that liberals, conservatives, and environmentalists may be on to something; whether they know it or not.



Really? A Monopoly?

I found a very interesting article involving Google that I previously was not aware of. Apparently, France declared Google a monopoly in late June this year. Navx markets online databases for GPS navigation devices and complained that Google was implementing anticompetitive practices in the online advertising market. Google informed Navx in writing, on 17 November 2009, that advertising for speed camera databases and warning systems was contrary to its content policy, and thus breached the contract. Google’s practices significantly affected Navx’s income and its potential for growth, so Navx retaliated by complaining about Google. So for this – Google is a monopoly?

“Google holds a dominant position on the advertising market related to online searches,” the French authority concluded. “Its search engine enjoys a wide popularity and currently totals around 90 percent of the Web searches made in France. Moreover, there are strong barriers to entry for this activity.” In class, we asked what explains the presence of a monopoly. We concluded that we must assume there are barriers to entry so that the one supplier remains the only supplier. We also asked where the barriers to entry would come from, and concluded that barriers exist because of some kind of public policy or government. We also said that if we see a monopoly without government backing, the monopoly would not survive over time. I do not see any of this in this particular issue. There may be some barriers to entry with online advertising, and I would like to know exactly what strong barriers the French Authority are referring to. (I tried to look it up on their website, but it did not say). The point is there is currently no public policy or government declaring that Google must be the only supplier of online advertising. The Authority claimed that 90 percent of the web searches in France are through Google. This must mean that 10 percent of web searches are through another source. This indicates that Google is not the only supplier of web searches and online advertising, but that there are others in the industry. Therefore, Google is not the only supplier, and is not a true monopoly. However, they clearly dominate the market at this time in online advertising. Google has been around and dominating the market for some time now. If we do consider Google as a monopoly, and it does not have government backing, then we would expect the monopoly not to persist over time. So how is it that Google still exists?

The author says, “Once a company comes to understand that being too successful may be bad for its future, it is really hard to stay on the cutting edge.” Here, I think the author is mistaken. Just because Google is ahead of its competitors and is successful, does not mean that it will be bad for them in the future. For a true monopoly, I’m not sure if there is such thing as being too successful. After all, we would probably consider that a monopoly is “too successful” in the first place since they are already the only supplier. As they become successful and make a profit, they will remain in the current industry as there are barriers to entry and this does not necessarily mean it will be bad for their future as the author implies. It actually may have more positive signs for the future rather than negative signs.

Not only is the author wrong in evaluating the situation with some of his comments, I think that the French Competition Authority was wrong in the first place in determining whether or not Google is a true monopoly. I think Navx was scared for the future of their company and complained about Google to save their own butts. What do you think?

(Here is some important info from the article, so you don’t have to read it all - “Having determined Google has a monopoly, the agency ordered the company to resume offering its services to a French company called Navx, which sells a database to let drivers know where the French police are likely to have radar traps in operation. Google found Navx’s business distasteful — it is arguable that Navx’s customers use the product to help them act illegally with impunity — so last November, Google stopped doing business with Navx. As a result, those using search terms like “radar trap” in French could no longer learn of the company’s product and, a few clicks later, buy it. Navx complained to the French government, saying its sales had plunged and that as a result it was facing problems raising capital. On Wednesday, the authority ordered Google to resume selling ads to Navx and to produce clear policies on when advertisers would be turned down.”) hmmmmm.....

Perfect Competition

Perfect competition in the short run capital is constant. In the long run price and capital vary, due to low varies to entry for numerous firms. Entering the market and exiting the market due to the amount of people in the market is perfect competition is set into play. Prices are lowered due to the high amount of competition prices are also lower due to lots of competition. But for a firm the lowest they are able to drop the prices is where they are functioning at marginal cost. If a firm drops its prices lower then there marginal cost then the firm will be forced to exit the market due to negative profits. (MR=MC) is where a firm should be functioning. One possibility is that these businesses are experiencing some kind of monopoly power, or control over price in long run. This would make perfect sense if the farmers were part of a union, sharecropping community, protected by government regulation or maybe a local farmer’s market. Does this imply brand loyalty? Does this imply that the farmers are a Monopolistic Market (Monopolistic Competition)? We can characterize them as in monopolistic competition especially if they are a farmer’s market because in that case, advertising creates brand loyalty. In the article these firms are monopolistic competition. These firms are able to be a monopolistic competition because they have brand loyalty. On order for prices to be higher than marginal cost we expect for brand loyalty to h9old price higher. If they are high the marginal revenue will also be high. In order for a firm to invest in more capital than profits will have to be positive and high. A firm will definitely invest in capital because profits will be guaranteed to the firm in the long run. One possibility is that these businesses are experiencing some kind of monopoly power, or control over price in long run. This would make perfect sense if the farmers were part of a union, sharecropping community, protected by government regulation or maybe a local farmer’s market. Does this imply brand loyalty? Does this imply that the farmers are a Monopolistic Market (Monopolistic Competition)?
We can characterize them as in monopolistic competition especially if they are a farmer’s market because in that case, advertising creates brand loyalty. A firm would invest in more capital because the profits will be guaranteed in the long run for the firm. Because profit is zero in the long run, and we know these businesses are in the long run, how can it possibly make sense that they are experiencing higher profits?

November 27, 2010

Minimum Wage

Our class discussion last week on min. wage really peaked my interest. Based on our models, it is easy to see why a min. wage would lead to unemployment ( excess supply of labor ) but I wanted to know WHY this would impact teens and black members of the work force more than others. So...I started reading...and reading...and reading...and there is A LOT of research out there on this subject, some of it good, and some of it....well let's just say the arguments I found FOR a min. wage seemed to me to be ideological and NOT economically sound.

I began by looking at the actual unemployment rates and teens and blacks are significantly higher than other categories. According to the BLS, teen unemployment stands at 27.1% and black unemployment at 15.7%...MUCH higher than the national average.

The arguments to explain this were most clearly articulated by Thomas Sowell, an economist at Stanford University. His arguments state that:
According to Sowell, when we legislate min. wage, we fail to account for the movement of real wages in the economy between levels of worker. By standardizing wage increases, policy makers and politicians stop looking at the evidence and escalate the wages of the lowest level of worker on a schedule without accounting for the wages of the experienced worker, which creates a disequilibrium in the wage structure.

The result of this situation and a min wage is that unskilled workers, statistically teens and blacks, are legislated to a wage that is relatively the same wage as a skilled worker. Thus, when firms choose to hire labor, they are faced with a labor market providing two levels of skill at the same cost. Facing that choice, firms will of course choose to hire an experienced worker over an inexperienced worker given the costs the firm incurs to train a new worker, clearly an inexperienced worker is a larger investment than an experienced one.

If there was no floor in place, inexperienced workers could bargain for a lower wage and obtain employment from firms who are, of course, seeking to maximize profits. These firms would be willing to hire more labor at a lower price and invest in their long term productivity by providing training. In addition, this would free up resources on the firms end for them to then invest in capital, thus in the long run, enabling them to provide even more jobs.

It seems to me there is a cyclical impact here in the unemployment cycle that min. wage negatively reinforces. It also occurs to me that the min. wage policies hurt those that they were intended to help, and I can't help but wonder why they are still a matter of public policy. Based on my readings in Prof. Eubanks other class, I can't help but think there must be either A) a special interest at work with something to gain from a min. wage or B) a political football for the politicians to use against the rationally ignorant public who is unaware of the negative economic impact of the policy.

Mo' Money, Mo' Money? How about No Mo' Money.

The Federal Reserve’s (Fed) policy of a dual mandate, which requires the balancing of both employment and inflation concerns, is currently failing according to Rep. Mike Pence (R-Ind). His assertion is that due to the record high unemployment rate we have seen for the past 18 months; 9.4%, the Fed needs to change its policy from the dual mandate and focus solely on price stability, and not the announced quantitative easing 2 (QE2) which he believes will trigger inflation.
The essence of the QE2 policy was to increase the money supply by purchasing longer –term securities (government debt, mortgages, commercial loans) rather that targeting short-term interest rates. By doing this the Fed would “inject” money into the banking system, increasing the amount of reserves held by commercial banks. In theory this would give the banks increased liquidity and the ability to lend more, thereby stimulating growth in the economy.

In theory, since banks receive little interest from holding reserves, the money injected by QE2 would incentivize the banks to lend out more money to households and businesses in order to earn a higher rate of return. This increase in the supply of money would shift the aggregate demand curve out to AD’. The new money shifts the AD curve because it is assumed that household borrowing and consumption will increase due to the increase in funds the banks are holding in reserve. Since prices are “sticky” in the short-run this increase in consumer lending and consumption will move the economy toward full employment as shown the graph above.
The issue with this policy is that an increase in aggregate demand, due to the increase in supply of money, will begin to start pushing up prices due to the increase in overall demand. As prices rise, output gradually returns to its original rate, and the economy moves from point B to point C as illustrated on the graph below.

At point C output is back at the original level of GDPe but now at price level P2. At this new level consumers are worse off than before the increase in the money supply because they are now paying more for a basket of goods than they were before .In the short-run the economy would grow but would eventually return to its original level in the long-run resulting in inflation.
Prior to QE2 the Fed has been driving down long term interest rates in order to stimulate growth. Rep. Pence’s issue with this policy is that for the first 18 months this mandate (lowering of had not worked; which led to QE2. With QE2 the Fed will purchase $600 billion in Treasury’s over the next eight months. With that, it has been hypothesized that the influx of money, coupled with the lower rates should help the U.S. economy grow modestly.
Rep. Pence disagrees with the notion that QE2 will prevent inflation. He wants to change the legislation which requires the Fed to balance both employment and inflation and focus strictly on price stability. His concerns center on the fact that the Fed increasing the money supply will lead to inflation, not economic growth in the long run, which would lead to financial instability.

Pence’s argument asserts that if the Fed does not increase the money supply to stimulate growth in the economy prices will naturally fall back to a toward the level they once were at GDPfull. If the Fed were to leave the money supply at its current level, or even reduce the amount in circulation along with raising interest rates, this path could potentially lower the rate at which prices are rising. Even though price stabilization may not bring prices down to their former levels, he contends that it would reduce the rate at which they rise to a more sustainable level, curbing inflation in the process. By not increasing the money supply and/or increasing the interest rates consumer demand would drop toward a level near P1. As demand decreases prices will begin to fall. As they fall, the quantity demanded at each lower price level will begin to increase. This increase in quantity demanded will shift the SRAS curve to SRAS’; increasing U.S. economic output toward the level of full employment to point D at P3, all without increasing the money supply and placing undue inflationary pressure on the economy.