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.

Website Link:

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.

Is Ireland an Example of What Could Happen to U.S.?

According to this article Ireland is looking at an €85 Billion bailout ($112.5 Billion U.S.) and its coming too late. The middle and lower classes are paying dearly for it. Though some in these classes have homes and mortgages, and jobs everything they have goes toward trying to keep their homes that they stop spending money on food and instead go to soup kitchens that are supplied by churches. Their government has made €15 Billion in budget cuts ($19.8 Billion U.S.) and still making more in other areas such as private sector jobs which pay has been decreased by nearly 13% over the last three years and 25,000 of those jobs have been completely cut since then. Starting to sound a bit like the situation we’re in? Just think of the implications of what has happened there, which has yet to still have effect on other things such as food markets, being driven down because few in Ireland have the money to pay for food therefore seeking what they can get for charity, driving demand down, supply up and ultimately prices down hurting the food market. There would also be the housing market, which in this article and in other situations we see the market for that has burst. People in Ireland who are now forced to sell homes they can no longer afford for nearly half of the buying price. Job demand is only rising along with unemployment rates. Just to think there is over €10 Billion ($13.2 Billion) in cuts and €5 Billion ( $6.6 Billion) in taxes being implemented, I’m literally seeing a negative affect here. A source in the article states that those who are higher income earners will pay the most in taxes, which I could see how that works when you have all of these people who were once making enough to actually be able to pay taxes are now no longer able to. Will that soon be a large portion of the U.S. population in the same sticky, depressing situation? Any food trade that we have going with Ireland will all but come to a screeching halt with the demand going down. But who knows if that is what will happen? At this point we have yet to feel those exact effects. Here is hoping that it won’t go that far and something will restore the consumer confidence back in to the markets and it won’t sink much farther.

Katie Compher

November 19, 2010

Minimum wage 2010 v. 1968

Here's an interesting article that talks about the value of the minimum wage, just thought it was interesting cause we talked about it in class today.

Unemployment in Ohio

To sum up this article, the unemployment rate is falling in Ohio and has been for the past several months. That is because jobs are being "created" right!?!? Well, not so fast. Here is the breakdown of jobs "created" :

The state added more than 8,000 jobs, with the largest gains in government jobs (4,300); professional and business services (2,700); leisure and hospitality (2,600); and educational and health services (2,100).

So out of these 8,000 jobs "created" this month 4,300 of them are government jobs and 2,100 are educational and health services jobs. I have a slight problem with this. As we learned in class today, people will be hired if their marginal revenue product(MRP) is greater than their marginal expense(ME). That is, if they bring more to the company for every addition good they produce than they cost for every additional unit of the good they produce, they get hired. My big problem with this article is that I do not think that alot of these jobs "created" are hiring employees where their MRP>ME. These government jobs may be something else that I am not thinking of, and I am not counting out the possibility that they might, but in reality I think these jobs are ones that government is "creating" for the sake of numbers, or some other reason that in general go against what we know about efficiency.

These government jobs may be representing a false demand for labor, and a false number for the unemployment. Although keeping people busy with work may have other effects such as lowering crime, these jobs are most likely temporary and will not be there long term. The jobs that I am excited to see being created are the 2,700 professional and business services and 2,600 in leisure and hospitality. What this tells me, is not that jobs are necessarily being "created"(I officially don't like using that term here), but that there is an increase in the demand for labor in these fields. Leisure and hospitality implies hotels, spas, gyms, that sort of thing, at least to me. And if people are using hotels and spas and chiropractors more, this must mean that they are choosing to spend money and consume. These are the jobs that are going to help our economy recover and help people in the long run, not the jobs that government "creates."

November 4, 2010

Pharmaceuticals: Oligop-utopia!

In the world of perfect competition, in which everyone is a price taker, perfect information is realized and there is (according to the market model tool) an infinite supply of both buyers and sellers: individuals and business' enjoy free entry and exit into an industry. In other words, barriers to entry are nonexistent and any entity can enter or exit an industry with zero cost.

In the pharmaceutical industry, with global revenues of approximately $640 billion, and an infinite demand, obtaining a piece of this market share would be highly profitable. But just how easy is it to enter this industry? To realize almost unheard of gains in sales of 72% in the first half of 2010, as did the biosimilar company, Sandoz, it doesn’t take much intuition for one to realize the amount of money to be made in a rapid-growing multibillion dollar industry.

There exists an endless demand for cheaper prescription drugs. One must be careful to distinguish between an increase in demand and an increase in quantity demanded. In this case however, a technological advancement will increase actual demand. When demand shifts to the right, the firm will enjoy a profit. Furthermore, the firms in this industry are experiencing a highly positive economic profit.

The pharmaceutical industry obviously reflects oligopolistic competition, which has two important implications. The first implication is that, because the industry is experiencing a positive economic profit, it creates a high incentive for other firms to enter the industry. The second is that firms already in the industry will, according to the article, “fight very hard to protect their patch.”

Take Home Midterm 2

Here is the link to Midterm 2.

The due date has been changed to 11p Tuesday November 9.

November 1, 2010

Obamacare: The Right Choice?

The article I analyzed is about government intervention into the healthcare system. This article is obviously referring to the more recent healthcare bill that Obama imposed, referred to as Obamacare. People for Obamacare argue that the previous healthcare system led to very high costs for families, leading them to going bankrupt as well as pre-existing conditions not allowing people that need medical help to get it. The problem with Obamacare is it is not necessarily fixing these problems. There are several reasons relating to microeconomics that show how Obamacare does not fix problems associated with the previous healthcare system.

Due to healthcare services being a market with many sellers and buyers, it is considered a competitive market which can be described by our supply and demand model in class. In the supply and demand model there was an equilibrium point where quantity demanded is equal to quantity supplied. Obviously the equilibrium point was not satisfying all people before Obamacare, but the way Obamacare tries to shift this is wrong. Obamacare extended healthcare to another 32 million American people. This caused a significant change in the market demand curve. The demand curve shifted to the right by 32 million which obviously creates a need for many more physicians to treat these new patients. Obamacare also limited physician reimbursements for Medicare which will cause physicians to opt out of Medicare. Due to this, the supply curve is going to shift to the left when it needs to shift to the right due to the demand curve shift. Thus, the equilibrium price becomes even higher than before Obamacare. In turn, there will be a disincentive for suppliers to supply healthcare and eventually they will drop out of the market and consumers will have nowhere to turn.

Supporters of Obamacare understand this and know that to combat the threat of a shortage of doctors we need to obviously increase our supply of doctors, nurses, etc. Instead of the bill calling for an increase in doctors it calls for an increase of 16,000 IRS agents which will be responsible for making sure Americans are buying American approved health insurance. Just a little microeconomic analysis on Obamacare shows certain flaws of this new system and that is very valuable.