Offseason frenzy drives NBA box office

The article “Offseason frenzy drives NBA box-office” details how offseason ticket sales have increased significantly from last season’s numbers. NBA teams have sold about 40% more full season tickets; additionally 21 teams have sold over 1,000 new full season tickets, compared to just 11 teams achieving this number last season.

According to Chris Granger, senior vice president of team marketing and business operations for the NBA, the increase in ticket sales is explained by “player movement creating a number of story lines and teams adding more sellers…” In other words, he believes that the media coverage of big name trades/controversies, and increase salesman ship has contributed to an increase in demand.

I agree with this to a point, because I do believe that there is more buzz surrounding league transactions, and that in general, casual basketball fans are more interested in the NBA because of this. The addition of more salesmen has also led to an increase in quantity of tickets sold.

Considering there has been no significant change in the supply of tickets (available seating) it is safe to assume that there has been no shift in the supply curve. The logical answer to the increase in the quantity of ticket sold is a shift in the demand curve. I believe that the cause of this shift is a change in consumer taste; with increased publicity, increased salesmen in the market and more intriguing plot lines, basketball fans and casual sports fans in general have shifted their interests towards the NBA, relative to other sports.

The only issue I have with this is that while quantity demanded has increased, the equilibrium price appears to have stayed constant. This market behavior is not consistent with economic theory; if demand shifts outward, and supply remains constant, both price and quantity should increase.

I believe that the current ticket prices may actually be below true market equilibrium prices. I feel that part of the reason is because of such an abysmal economy, but another possible explanation is that the NBA ticket market may actually be emerging, or in the process of become a non-clearing market. One peculiar statistic in this article that I feel supports this notion is that last year, the NBA actually lost $370 million collectively. While this is not typically the intended outcome of a non-clearing market, it may be a sign that the NBA is in the process of developing one.

The advantage to a non-clearing market for the NBA is that there will be a subsequent shortage of tickets, creating more hype, and a spill-over effect in television viewership and basketball popularity. Considering the current economic context, as America emerges from this economic downturn and consumer discretionary income increases in the near future, the NBA could be poised to reap substantial financial benefits. The increased popularity and demand that is being fostered right now can be capitalized upon as consumers will be more willing to pay higher prices in general, because of the outward shift in demand that was not previously reflected in ticket prices. While this scenario I have described is not exactly consistent with a true non-clearing market, I do feel it has many parallels, and the outcome has similar benefits.

China Shifts Away From Low-Cost Factories

This article talks about Chinese companies and their desire to reinvent their businesses. These chinese businesses fear that their low-cost manufacturing ways are becoming obsolete and they need to make adjustments. The author writes that the cause of this need for change is because of manufacturing costs rising and China wanting to create a consumer middle class. But the author doesn't show that he understands the trade-off's between low-cost manufacturing and encouraging technology growth for innovation. Economically this change is needed, yes, but how does this kind of change effect China's overall ability to stay competitive?

"The revamping of this region's industries could help reduce the nation's wide income gap and encourage more balanced and sustainable economic growth." The author fails to give an opinion about this or why these changes could be beneficial. In understanding the allocation of economic resources, the author would have better been able to tell the story of how China could benefit in this economic decision in maximizing their net benefits. Some knowledge of specialization could have strengthened the author's point on how China would benefit from producing better quality items at home to boost their economy, instead of using their resources to produce low-cost items to export to Western countries.

There is some reference to manufacturing costs rising because of previous labor shortages and worker demands for higher wages to counter rising food and property prices. The author doesn't address what China may do to rectify this issue but almost frames the whole issue as a bad idea and gives the option instead of businesses moving to even lower wage countries. Again, some idea of marginal benefit and marginal cost might be beneficial here because if the benefit doesn't weigh heavier than the cost, then why would China even be wanting a change?

This author failed to give any economic explanation for what China is doing or why they are even looking for change. There is just a bunch of summary's or what business owner's said or statistics of what they produce. Some talk about using division of labor, law or demand or changes in supply or even how they will be bringing consumers into the market would have strengthened
this article.

Economics in the news.

One of the biggest issues facing us in this election year is the Obama's proposed tax hike. While Obama has promised to retain the tax cuts for households with an income below $250,000 dollars and individuals making less than $200,000, he has stated that he plans to raise the tax rate from 36% to 39.6%. Is this a good strategy on Obama's part?

The first thing to think about is how this would effect the economy. A greater tax increase would result in more money in the national budget, helping to pay off the deficit and Obama's healthcare reform. Certainly the people who are effected would be able to take it, only 1.7% of households fall under this law under Obama's definition of income. But is this may not be an efficient source of income. While this result in a greater cash flow, those effected would still only pay a small portion compared to the rest of the U.S. Unless we want to become somewhat socialist, there is no way to narrow this gap. Not only that, but most of these households are probably investing their income into their companies, hurting growth and development. With unemployment this high, hurting growth is something that isn't advised.

Perhaps more interesting is not Obama's proposed income tax hike, but his tax increase on capital gains and dividends going to high earners. Obama is proposing raising the top rate on capital gains from 15% to 20%, and taxing qualified dividends at 20%, effecting these high earners much more. These hikes will hurt the top investors, people who spend plenty in the economy, this is not the best way to raise money.

Obama is already in a precarious situation, the economy is down, the deficit is in the trillions, and Congress isn't cooperating with him. His proposed health care reform was sliced down so much it became potentially harmful, and he needs to find ways to turn it around. Tax hikes are not the way to achieve this. A tax hike can be effective and beneficial for the economy when it is rising, giving the government more money and helping to combat inflation, but in a downward economy it is not the answer, and does more harm than help.

In my opinion, the best thing to do in this situation would be to raise tariffs on various imports. Part of America's problem is that money is being taken out of the U.S. and invested overseas, money doesn't always come back to us when it goes over there. Keeping money in the U.S. would hurt global expansion, but hopefully it would create greater expansion in the U.S. While keeping low tariffs has helped the U.S. in the past, with more companies outsourcing overseas, and our manufacturing coming from other countries, it can be causing harm to our economy. Promoting American products helps boost our infrastructure, and hopefully would create more jobs here.

Whatever the case, Obama should probably lay off for now, and consult more experienced economists. While it is understandable that he wants to do something, he probably doesn't want to sit around with the economy this bad, he is severely limited in what he can do. Any actions he takes now are potentially dangerous, perhaps it is safer to let the economy work itself out. And with congress bickering among itself, strong, decisive action is hard to achieve. But hopefully, Obama will take a little knowledge from Regan, and realize that sometimes, you have to think outside the box to increase tax revenue.

Any comments and criticism would be appreciated.

Decision /making 101

It seems that in our day-to-day life that we use words like always,never, and 100% positive. In actuality we are usually only partially, or not at all, right. We say things as if we know what we are talking about, when in actuality we don't know anything about the subject at hand. If we can take the knowledge that we don't know everything, and apply it to economics, we can acquire a much greater understanding of the economy. When Itzhak Ben-David of Ohio State University, and Sand John R. Graham and Campbell R. Harvey of Duke looked at the decisions of some of the major American Corporations, they found the same situation.

Most CFO's in the U.S. are not very good at forecasting the future of their corporations. This may be because they don't have enough understanding of the economy, they assume to much about the economy and their business, or that they simply do not acknowledge important factors and information in their businesses. When they expressed their 80% confidence limit, they were only right 1/3 of the time. This means that if we were asked what we think the returns were supposed to be on our hypothetical business, we would have either a 10% higher return, or a 10% lower return, than we predicted. To top that off, these predictions were negatively correlated with their stock returns. This means that the lower limit of their prediction made a positive correlation, and vice versa.

It seems obvious that they can't predict correctly, because if they could they would all be billionaires. The troubling factor is that as a whole, they do not realize the lack of forecasting ability that they have. The economists, stated above, said that things feel more uncertain in rough times, but when the worst prediction made was simply a flat market, we are only hoping for the best, when in actuality the market may plunge.

The reason CFO's, and the rest of us, make these wrong decisions, is because we suffer from overconfidence. The trait most of us do not suffer from, but the CFO's do, is narcissism. Although we have confidence in ourselves, we acknowledge that mistakes can be made, and that bad things can happen. When the thought that we can do no wrong is inserted in our minds, we seem to commit more mistakes, and more errors are made. Once we consider that we may not have done the best, most optimal, job, we can accept failure, and even make better decisions to begin with.

Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Colorado Springs Airport, Not Worth It

This article describes the shrinking number of passengers moving through the Colorado Springs Airport. It explains how this is hurting the local economy, and that the airport is trying to get airlines to send more flights through their airport. The Colorado Springs Airport feels that getting airlines (several of whom have stopped service to COS in the past few years) to bring more flights in will fix their problems.

If the Colorado Springs Airport were to look at their situation from an economics point of view they would find that fixing their financial situation is definitely not as easy as sending more planes through.

First, the reason so may airlines have stopped flying to Colorado Springs, or decreased the number of flights, is because marginal cost of stopping in Colorado Springs does not exceed the marginal benefit. DIA is a much bigger airport and even though airlines charge less for people to fly out of Denver, the airlines save money. Airlines save money because they are only stopping at one place in CO, and DIA has many more customers than Colorado Springs. This means an airline operating a flight leaving Denver uses less, larger, and more full planes; compared to the Colorado Springs Airport.

Second customers are also leaving the Colorado Springs Airport. For many customers traveling on a budget, it makes more sense to just drive to Denver and receive cheaper airfare. It is often $50 to $100 cheaper per ticket, to fly out of Denver especially on a last minute flight. If traveling as a group or family this really adds up. So what is happening is the added convenience of not driving to Denver is not worth the extra cost to many people.

In short, the Colorado Springs Airport will not be able to get more flights to move through their airport. Simply based on the marginal cost/benefit for the airlines they have no reason to add more flight to Colorado Springs. Furthermore the marginal cost/benefit of the customer suggests that the Colorado Springs Airport will continue to lose business.

Pizza, Inferior Goods, and Whoopee Cushions by Veronica Graves

KFOX news reports, Some Industries Doing Very Well Despite Bad Economy, by Derek Shore, is an interesting article when dissected in economic light. According to Shore’s report, the US recession has affected three major industries. Although Shore theorizes, he seems somewhat unsure as to the reason behind the economic growth in cosmetics, video games, and Little Caesar’s pizza. Shore hints that quality may have something to do with this trend.

From an economist’s point of view, the reasoning for the afore mentioned growth is somewhat more plain. During a recession, consumers have less income. Consumers still wish to purchase the normal goods that they were buying before, but now they have less income to do so. During a recession, there is less supply of normal goods at a low enough prices to fit within a consumer’s budget. This deficiency leaves many unhappy consumers. These unhappy consumers still wish to fulfill their wants. They turn to inferior goods. In the consumers mind, an inferior good is second best to the previous option. However, it is important to realize that an inferior good could be a hamburger instead of a hot dog. Inferior does not deal with quality as Mr. Shore insinuated. Instead, inferior deals with the comparison of the average total cost of the item with the individual consumer’s income and amount purchased by the consumer. As income decreases, the amount purchased of the inferior good will increase due to the constraints felt by the individual’s budget line or amount they are able to spend on the good.

In economics, it is assumed that consumers are rational. Therefore, they will seek to maximize their utility. In a recession, consumer’s preferences have not changed, but rather, consumers have less income to satisfy their previous wants or preferences. Inferior market exchanges become more beneficial to some suppliers and many consumers in time of recession.

Again, each consumer knows what his or her normal and inferior goods are. Economists are unable to know that Sally cannot purchase her normal good, funny money, so she instead buys an inferior good, a whoopee cushion. Derek Shore guessed why these three industries were growing. His reasoning for all three came down to a human desire for comfort during hard times; while his idea may be plausible, it would be difficult, if not impossible to prove. Economists cannot say with factual evidence what a normal good will be from one year to the next; much less can we predict inferior goods from person to person.

Gold vaults to new high

On September 29th the front page article of The Wall Street Journal is on how during the last week the price of gold climbed to over $1300 an ounce.

The weakness of currency is cited as the reason for the increased demand in gold. That it “minimizes the opportunity cost of holding hard assets that pay no interest.” This weakening or fear of weakening of the currency has made gold more preferred to other investments. Basically what this is saying is that right now all other investments are substitutes for investing in gold and the weakness of the dollar has made the price of these investments go up. If we look at the supply and demand model, if the price of substitutes increase that would cause a shift right in the demand curve which is what we have seen with gold.

The article does correctly assert that the increase in gold prices are due to the increased demand for gold. Some coin wholesalers are even increasing their prices over the market rate due to the high demand. The article also talks about how the increased demand is causing shortages of physical gold supplies; one example is that the US mint has sold out of the pure gold Buffalo coins. The article does fail to draw a correlation between the increases in the gold price the shortage of gold supplies. Assuming that we hold the current demand of gold where it is. The Supply and demand model shows us that the shortage of gold would shift the supply curve to the left, thus increasing the price of gold. Some of the increase in the price of gold has to be attributed to the lack of supply of physical gold.

The article also talks about how gold warehousing companies are seeing an increased in demand for storage of the gold people are buying. This correlation would suggest that gold warehousing and gold itself are complementary goods.

WSJ link
Gold Vaults to New High

Wealthy Take Bigger Helping of Fast Food

I came across this article and I was shocked at what I read. Consumers are changing the way they eat because of the recession. The behavior of consumers, especially wealthy consumers is changing to meet their needs of a budget constraint during the recession. How? They are eating out at more fast food restaurants. American Express conducted a study and found that “ultra-affluent” consumers (consumers who charge more than $7,000 on their credit cards) increased their fast food purchases by 24% in the second quarter of 2010 compared to the first quarter, and the remaining consumers in the United States increased spending on fast food by 8%. This was shocking to me because I personally do not eat any fast food as a low income college student, and to see these results seemed surreal that wealthy people are increasing their consumption of fast food. The author suggests that, ‘although the economy has shown slow signs of improvement, the wealthy are trying to hold down costs in certain areas.’ Wealthy consumers have a budget constraint in which they are trying to maximize utility. Since the price of fast food is significantly cheaper than fine dining restaurants, the cheap unhealthy food may allow the consumer to eat a higher quantity of food at a lower price; hence more is preferred to less.

Do wealthy consumers think they are actually getting a better value at the drive through with the dollar menu? This is a personal choice by wealthy consumers based on tastes and preferences and from the numbers provided we can assume the answer is yes. Ed Jay, the senior vice president of American Express Business Insights who conducted the study also found that even though wealthy consumers are cutting back in areas such as food, other areas have increased in spending such as air travel, cruises, and other luxury goods. This implies that consumers are faced with a tradeoff and must make a choice on what to spend their income on. For the wealthy, it may be that travel and luxury items are more important than simply eating healthy. Therefore consumers must consider their budget constraint and what purchases they will make in their affordable bundle.

One of the main issues in this article is that the author attributes the reason for spending more on fast food is due to the economy. However, there is no empirical evidence or proof that the economy is determining how people change their eating habits. This is most prevalent in the wealthy sector of consumers because affluent consumers are not spending less at all, as the article shows, in fact most are spending the same amount on their credit cards. They are spending less in some areas such as food and spending more in other areas such as luxury items and vacations. This is simply a tradeoff and a choice made by the consumer, and is not directly explained by the economy. If the reason was indeed the economy, then we would most likely see a decrease in the overall spending of affluent consumers, not just an increase or a decrease in the mentioned areas. Although the state of the economy may influence buyer behavior, there are several other possibilities on why wealthy consumers are eating more fast food, such as having minimal time to cook, shorter lunch hours, and tastes and preferences just to name a few. The author was inconsistent in attributing the changes in affluent consumer spending directly to the economy because there are several other variables to consider, which are most likely more prevalent to explaining those changes in consumer behavior.

Who cares if it‘s moral? I get more stuff!

Banks have always been aware of the risks of lending. Interest rate pricing has risk factors built into the models to account for the probability of loan portfolio default. But what about strategic defaults; loans in which the borrower’s can afford to pay their mortgages but choose to voluntarily walk away? Ever since the financial meltdown in 2008 this has become more and more prevalent. What is most alarming is that it is becoming an acceptable option.
When the housing bubble burst many homeowners felt unnerved due to the alarming rate at which home values were decreasing. In some instances values fell almost 50%, leaving homeowners totally underwater (mortgage balance >home value). With multiple lender based and government loan programs failing to offer assistance, many turned to what was an unthinkable option just a couple of years before; walking away from a home they could afford.
Strategic defaults have a profound effect on the market in that they drop the value of comparable properties in the area due to discounted short sale or foreclosure sale prices. While involuntary defaults are unfortunate, some are calling strategic defaults flat out immoral. But are homeowners truly immoral if all they are doing is attempting maximizing their utility? After all, they are honoring their contract by forfeiting the home, right?
Whether we like it or not one of the key reasons that people are walking away from their homes is because they are no longer worth what the paid for them. How could an individual walk away from their home and increase their utility in the process? One way would be to rent or purchase a new home, at a discounted price, that is comparable to the one they walked away from. I understand that there is more to this scenario that just simply moving to a new house, but when you think about it the idea makes sense.
Let’s assume that a person owes $250,000.00 on their home that is now worth $150,000.00. The principal and interest payment on that property would be $1,342.00 per month (at 5% over 30 years). That exact same home, now worth $100,000.00 less, would have a monthly payment of $805.23 (5% over 30 years). That is a difference in discretionary income of $536.77 per month.
In the article, Strategic Mortgage Default: The Irresponsible, Amoral, But Best Strategy?, the author cites an expert that states homeowners should walk away from underwater mortgages because it would be stupid to do otherwise. From an economic standpoint it would make sense that a borrower would walk away. They could potentially rent or purchase (if they qualify) a similar home a discounted price without sacrificing their utility. In fact it would increase their utility in the short run.




If a person walked away and saved $536.77 per month, that would immediately impact their utility due to the increase in discretionary income available. This would allow them to purchase/rent more housing (larger home, better neighborhood, etc.) or apply the additional income to the purchase of all “other” goods. As seen in the graph above, this would rotate the individual’s budget line out and to the right due to the drop in housing price, resulting in the ability to purchase more “other” goods while maintaining the same level of housing that they previously had; increasing their utility in the process.
Not every homeowner in a similar situation could envision following through with a strategic default, and it may be due to the long term residual effects from doing so. First off, many homeowners take pride in the fact they honor their obligations. Whether or not “experts” advise that walking away from an underwater mortgage is the best strategy in a business sense, many people have too much pride to do so. Also many people understand that while in the short term this would provide an increase in utility, the long term effects could be devastating. Letting a mortgage go into foreclosure would have a profoundly negative effect on their credit rating. Most banks will not lend to an individual that has had a foreclosure within the last 7 to 10 years. Not only would it hinder your ability to purchase a new home down the road, it would potentially prevent you from obtaining any credit whatsoever.
While logically it would make sense to walk away from an underwater mortgage, every individual would need to assess the long term effects of the short term gain. A home is a long term investment, and not a source of cash, as made popular by increasingly easy access to a home equity loans over the last few years. Whether or not people feel duped, they need to look at their home and mortgage over the long term to make the best economic decision.

http://money.blogs.time.com/2010/01/11/strategic-mortgage-default-the-irresponsible-amoral-but-best-strategy/

Tampa Bay Rays cause Economic Stir

It is a race to the finish as the MLB baseball season comes to a close. There have been two very interesting races over the month of April; one in the NL west and the other in the AL east. In the east the world famous Yankees have been competing against the young up-incoming Tampa Bay Rays for the top spot in the division. Obviously for any baseball fan and especially fans of either team this is a must watch spectacle. Not so, for the fans of Tampa Bay. Stadium attendance at, the Tropicana Stadium has consistently been low all year, and even during the nail biting end of season battle attendance figures plunge to less than 15,000.

This is where the economic issue arises. The Rays have a major star on the team they are young and exciting to watch, yet economically they are unable to attract fans to the stadium. Initially I considered the idea that the market for tickets has not reached equilibrium. Maybe the owner of the Rays wants to make more money from high ticket prices than fans are willing to pay. The author took a different approach as a means of explaining the problem. He considered the lack of an aesthetically pleasing dome as the culprit. This is most definitely not an economic issue, nor would a new stadium remedy the problem.

He continues to explain that the demographic in Tampa Bay will not consistently go to the games, but he fails to give any sort of economic explanation to his assumption. He states that the demographic is primarily elderly and retired people. These assumptions are inaccurate because if these elderly people are fans then what is to stop them from enjoying every game of the season. After all they are retired and are not tied down to work or a daily schedule. Maybe the author should investigate deeper into the economic situation in Tampa Bay; this could possibly give insight into why there is a lack of support to the Rays. One could assume that because football season is now underway focus has shifted, but even the Tampa Bay Buccaneers are under a similar situation. Because they were unable to sell out the stadium quick enough, their game was not locally televised on Sunday. So maybe there is a larger economic issue at hand. People are not attending games because they cannot afford these certain luxuries. Or people are spending time and money doing more important things. Maybe Tampa Bay is just not a good market for sports teams?

The author states that for tonight’s home game finale for the Rays, they are going to give away 20,000 tickets to any fan that arrives at the stadium during the time frame before the game, yet people are unsure whether these tickets will even “sellout”. So does that mean it is not an issue of equilibrium and, it is merely an issue of people’s tastes and preferences? The author seems to be deriving this as his conclusion, but he is unable to provide the necessary foundation and proof to consider his logic relevant.

Article Link: http://www.walletpop.com/blog/2010/09/29/get-your-tampa-bay-rays-tickets-absolutely-free/

Motorists getting lower gas prices

In this article we are addressing gas prices rising in different regions. The fact that the gas prices are rising deals with supply and demand and consumer theory. This also indirectly deals with the theory of the firm but we have not talked about this so I will focus on the consumer theory. In this article the writer is talking about the gas prices falling due to the pipeline shutdown in Illinois. The writer also anticipates that the gas prices would remain high in the west due to the Gulf shutdown. This is an economic explanation, but what the write is leaving out of the article is what the consequences of the shutdown will be. The writer makes not assumptions in this article.

In this article the writer does describe the conditions that influence the gas prices. The article talks about the gas prices and it talks about the pipeline being shut down. In the Midwest the prices are increasing due to the pipeline shutdown. The pipeline shutdown is what is causing the prices in this region to increase.

In the West the consumers are rushing to the pumps. What the article does also discuss is that the consumers are anticipating the prices to go back up so they are rushing to the pump. What the writer does not talk about is that if the demand for gas goes up then the price will also increase.

The author’s logic excluded anything that refers to the consumer theory in both cases. My conclusion is that in the Midwest there will be a shift to the left in the demand curve due to the price increase of gas. Consumers result to the substitution effect will decrease. Income will exceed the substation effect, and this will reduce the amount of driving they do. The consumers will drive but will also be hesitant to substitute other gas or activates for driving. This will make the gas prices inelastic.
Having the consumers rush to the gas pumps will also make the gas prices inelastic due to the need for gas. The only thing that will change is the consumers’ expectations.

Derek Jeter’s Contract: A Microeconomic Analysis

One of the most famous baseball players on the most famous team, Derek Jeter’s image is directly tied not just to be baseball, but as the icon of the New York Yankees. He has been their star player and the face of the franchise for nearly two decades now. This legacy that Jeter has built up, however, is going to pose some unique problems for the Yankees this coming winter. As his current contract expires, how will the Yankees handle contract negotiations? 2010 has been Jeter’s worst season statistically by far, but all signs point towards Jeter receiving a new contract far above what would be perceived as the equilibrium for a player of his caliber and age.

The author of the article, Dan Le Batard, estimates that a comparable player of Jeter’s age and skill would likely receive no more than $10,000,000 for a single year. He then goes on to guess that the Yankees are going to have to pay Jeter five times his market value. Both of these statements from a baseball economic perspective would be agreeable to nearly everyone. From these figures, we can then gain a better insight into the Yankees’ mentality.



The Yankees are overpaying dramatically, at the very extremes of the demand curve for Jeter and certainly far beyond the equilibrium. Why on Earth would an organization pay so much money to someone whose market value is clearly not even in the same realm? The author’s guess: public relations; sentimentality. This variable cannot be considered in the basic supply and demand curve, as the consumer category which would likely be applicable – tastes and preferences – is held constant. When that factor is taken into account, however, we see that the preference that the Yankees have of bringing Jeter back on board as opposed to some other shortstop is worth roughly $50,000,000. Sure, the Yankees have the bottomless wallets that allow them the luxury of overpaying for their aging star’s last hurrah. It is interesting to consider, though, from a microeconomic perspective, how much Jeter’s likely contract stands in defiance of the perceived equilibrium from our model.

http://www.miamiherald.com/2010/09/26/1842889_p2/jeters-career-transcends-the-cruel.html

Gas?.... Or Chocolate?

As everyone will agree we need gas but we want chocolate, especially after reading this article.

Every year we watch the gas prices fluctuate between seasons, but did anyone ever stop to see the price changes in chocolate? According to this article, chocolate companies in San Diego, CA haven’t seen too much of a deviation in sales, maybe a few dips here and there between months as a result of the economic downturn, but other than that business is good!

“The U.S. market for premium chocolate has enjoyed 20 percent annual growth for the last seven years and is projected to hit $1.7 billion in sales next year. Promising to put the box away “after just one more piece,” we later regret eating almost 13 pounds a year each — the equivalent of 100 Hershey bars!” Most companies can only dream of a 20% annual growth in seven consecutive years. What does that say for gas as a necessity, despite the BP incident?

A big thing that this article leaves out is what are the projections for quantities demanded over the last seven years, with 2010 being the specific year in question? Now I know as a chocolate supplier they can only see supply side of things but how can you say that there is a 20% growth when all you see is the supply side of things and be giving an accurate account for sales and the quantities purchased by customers in these hard times?

The company owners interviewed for this article said “There will always be room for chocolate in a moment of crisis; it’s a small indulgence that delivers a very important pleasurable and emotional release.” But that doesn’t explain if this year the industry saw nearly a 20% growth this year. Sure maybe it grew a little bit, I know I’m guilty of picking a packet of chocolates over a gallon of gas or healthy food on some occasions, but not often with things so tight. Sure the utility anyone gains from consuming chocolate is great, but fleeting at best. It wouldn’t win over putting car in my gas to get to work tomorrow. As amazing as these owners claim their chocolate to be, I think anyone who can stand to go without for awhile will when it comes to necessities over frivolous things especially if it means paying the bills or is a complimentary solution to getting the bills paid like having a running car.

Katie Compher

Maybe America Doesn't Need All That Stuff

Maybe we don't need all that stuff - maybe our economy would be better off without some of it...Well, maybe we DO. The basis of this article is faulty in regards to the economic principles of consumer theory. According to what we have learned in class, consumer theory is one of the most important tools in the economists toolbox. How does the consumer decide what to buy? We assume they are making choices to maximize their utility subject to their budget constraints. This is based on the idea that MORE is always preferential to LESS. According to our models, if people aren't spending all income, they aren't maximizing their utility. Buying less because we don't need all we have, as the author suggests, is a violation of these basic economic principles.

This author makes a false comparison between the US economy and other nations by stating that as consumption accounts for 70% of our economy and comparing us to Greece, and lesser percentages in other countries, that we are somehow a greedy nation that doesn't need what it consumes and we would be better off consuming less. I believe this is a faulty and biased argument. What is this author terming consumption? Is it only Nikes and Prada purses? No, consumption includes a much greater range of items than this author gives credence too. Every transaction we make as individuals is a form of consumption. Buying a service is consumption. Getting an oil change is consumption. Going to the Doctor is consumption. Should be reduce these activities in order to align our economy with other nations? No, I think not.

As Prof. Eubanks spoke about in class, this author is viewing our economy as though this is how they WANT the world to be, not whats real or feasible.

Tax Cuts and the Deficit

This article deals with two major issues in the American economy: the national deficit and the tax cuts imposed by former President Bush. The writer of this article focuses mainly on the relationship between the tax cuts and the deficit. The author points out that if the tax cuts remain then the deficit will continue to grow and the nation's economy will be put in a more uncertain position. What the author forgets to include is the benefits that the tax cuts could have in helping the economy recover.

Ever since Obama has been in office he has been tasked with helping curb the deep economic recession that the US currently is in. His first attempts at turning around the economy can be seen in the stimulus packages that he passed in an attempt to "spark" the economy. Bush's efforts to help the economy was seen in his tax cuts that he passed in 2001 and 2003. This is a classic example of conservative economic views against a more liberal economic stance that includes more government involvement.

As we have studied in class, government involvement in the market place often leads to excess demand (NY housing/price ceilings) or excess supply (wheat overproduction/price floors). What Before I continue, i want to point out that this is not a sermon against Obama and his policies, because he was under immense pressure to do something about the economy and to do it now, which is why many people chose to vote for him. What I am trying to say is that under many circumstances government involvement in the market, as we have studied in class, leads to many situation other than the maximum output in the market.

Looking at the demand function (f(d)=(P,Ps,Pc,I,Nc)) we can see that income is a variable in this function. By keeping the tax cuts that Bush instituted this would allow consumers to keep a higher percentage of their earnings. If the tax cuts were abolished and higher taxes on the wealthy were put in place the government would be able to decrease the deficit but consumer income would decrease. If the demand function is used as explanation to what would happen in theory, the demand for normal goods would increase if consumer income increases. Increased demand would lead to greater sales of products and an overall improvement for our nation's industry. If Obama is trying to help "stimulate" our nation's industry it would seem wise to keep the tax cuts in place and allow our economy to recover.

To assume that consumer spending and demand would increase we have to make several other assumptions to keep this true. We have to assume that people would take the extra income they are receiving and actually spend it instead of save it. If people took their increased income and saved a higher percentage of it instead of spending it in fear of higher taxes in the future, then this theory would not keep true. To explain this in today's world, a consumer fearing higher taxes might decide to put away an extra $10,000 in savings for their kids education instead of going out and buying a new car. So in order for my theory of increased income and demand to stay true, I have to assume that consumers would be willing to spend the extra income they would receive.

The author of this article is very concerned about the nation's deficit, but that is not the issue that I am trying to tackle here. The author chooses to completely focus on the relationship between the deficit and tax cuts and completely ignores the benefits that cutting taxes could have on the economy. Looking at this issue from a micro-economic perspective and how taxes affect the individual consumer can offer deeper insight than the author gives here. Instead of using big news channel buzz words like "deficit" and "tax cuts", a look into microeconomic theory shows that a turnaround of the economy may not best come from government spending, but from the people.

Silly AP

JERRY O'DRISCOLL:

The AP writer was apparently perplexed by this because he has made an elementary mistake. He confused demand and the quantity demanded.

You probably want to read the entire post because I think this is a very good example of your Economics In The News assignments.

Manitou Springs & Natural Monopolies: Give Me a Break

"The streets of Manitou Springs are twisty, narrow and steep, so why, city officials ask, should trucks from three waste haulers rumble down them every week, running the same routes with the wear-and-tear equivalent of 1,500 cars?"

It's a fair question. Trash hauling is one of those things that looks kind of like a public utility but is usually not. So to me, it is not clear as to whether it renders a greater benefit to society as a free-market, laissez-faire sort of good or as a natural-monopoly-type good. (I assume that natural monopolies exist and are mostly legitimate and best dealt with by the government; I believe this as an axiom that is as obvious and as logical as any Austrian-school tenet that we have learned about this semester)

So, let's analyze it: it's a homogenous good. It's a network-orientated good. And, since there's no real way to differentiate service in any meaningful way, and the good is mostly homogenous, it is subject to the phenomenon of confusopoly, which I have cited before as being an "group of companies with similar products who intentionally confuse customers instead of competing on price."

However, I will stop short of claiming that trash hauling is on par with other public utility-type goods, which, in addition to the characteristics above, is where the up-front costs of building and maintaining and growing infrastructure are so high that they render infeasible multiple, private providers.

So, I will call trash-hauling a "semi-natural monopoly" sort of good. Which means that I would subject it to a burden of proof for operating as private, laissez-faire that is higher than for goods such as iPods, but lower than for goods such as water or electricity.

So, how does this apply to Manitou Springs, and to any given city in general? Well, it means that I would probably favor trash hauling in its current status-quo form as a private, free-market good except under special circumstances where the costs to society and to the public are obviously far greater than the benefit of having private competition.

And does Manitou fit the bill of those special circumstances? Well, let's see.

Its roads are such that the typical private trash hauler cannot operate their usual fleet of trucks on them; it must have custom, smaller trucks. Also, the costs for maintaining the road infrastructure in Manitou are higher than they are in a typical city, and the road-to-person ratio is very low. And Manitou has less money to pay for its roads than the typical city, which is usually either much larger in size or which resides in a county that has a tax revenue that isn't a complete and total pittance (the property tax in El Paso County is 4 mills, one of the lowest in the nation by far).

So any given trash hauler operating there will probably not be operating very efficiently, since catering to Manitou necessitates special services and trucks to provide those services. And the more haulers that operate there, the more damage they will exert on the roads--the public infrastructure--by an order of magnitude more than each additional hauler would probably exert on a typical road system in a typical city. And also, each additional hauler of necessity decreases efficiencies across the spectrum, since with each one comes more back-tracking and redundancy of routes for multiple private companies doing the exact same thing: providing a completely (as close as you can get) homogenous good.

And due to confusopoly dynamics, the more fractured the market gets, the more costs will go up per customer in addition to the cost increases due to inefficiency in this micro-market. And finally, no private company will be especially suited to adapt to the special dynamics of Manitou unless they operate specifically and only in that market alone; something that does not apply to any of the three haulers currently operating there.

So, as far as I can tell, it easily meets the criteria for those special circumstances that would tell me that the net cost to society (and to individual customers) of having multiple haulers operate under the "free market" in Manitou is far greater than the cost of losing an artificial and meaningless "choice" of whichever hauler you choose as a customer.

Yet ignorant dolts are up in arms about it.

According to the article:

“I feel like I live in the United States and I have the freedom of choice and I won’t be told what to do,” said 78-year-old Anna Damm, a Springs Waste Systems customer.

She and others urged town officials to let a public referendum decide the single-hauler proposal.

Rick Johnson, also a Springs Waste customer, said, “It’s an issue of government kind of sticking it’s nose where it doesn’t belong and legislating intelligence.”

Yet with the new single-hauler system proposed, customers who currently use any hauler other than Bestway, the bidder for the single-hauler system, will save money and gain recycling. The city will get a $48, 000 lump sum payment every year to help with repairing the roads, which will experience far less wear than they did before. And residents won't have to deal with the constant roar of trucks coming throughout the week to do the exact same thing under the veil of "competition."

Yet still people complain because this is just another example of that pesky Manitou Council trying to "impose its socialist agenda" on the helpless citizenry.

Give me a break. The single-hauler system in Manitou makes so much sense.

Spillover Effect

As millions of gallons of oil choke the waters, wildlife and livelihoods of Louisiana, Mississippi, Alabama and Florida, armchair economists wade through the muck of deceit that parties involved share with the news media, in order to gauge the "true" costs of this ecological nightmare. As Austrian economists, we immediately wonder who pays which costs.

Environmental catastrophes, such as the exploratory oil rig spill in the Gulf of Mexico, present an opportunity for neoclassical economists to discuss the "negative externalities" inherent to fossil fuel consumption. Generally speaking, externalities represent the costs to those who were not contracting parties to an exchange - the costs to society which are not reflected in the price of the good or service consumed. In the case of Transocean's Deepwater Horizon exploratory rig, the negative externalities of oily water and air pollution associated with the spill and cleanup result in closed shipping lanes, lost tourism and grounded commercial fishing fleets to name just a few costs. There are those who look to our Uncle Sam to stem the flow of crude from reaching America's fragile coastline, and with good reason. Thanks to public mandate and finances, the U.S. Coast Guard is the most capable emergency responder in this instance. So who pays?

In order to "internalize" the externality - to create a neoclassically efficient outcome - a price must be put on the extraction of crude oil to offset the harmful consequences that such spills can cause. Yet government regulations, created by women and men in tidy offices in a faraway city who entertain the advocates of the petroleum industry, never solve the "problem," that is, unwanted spillover of oil into ocean water, without creating a new unintended consequence - most likely in the form of mandated controls and redundant safety equipment which consumers will fund through their gasoline purchases.

Perhaps a less forceful, more sensible approach to the remedy for this disaster has already begun. As a primary party to the accident, British Petroleum will spend over $100 million for the resultant cleanup. The degree to which BP and Transocean are at fault for causing damage to fishing, tourism and commercial shipping should be determined by courts of law. Parties hurt by the spill can seek damages in a well-functioning civil court system. The question of who pays and how much revolves around the issue of who has the property right to what, an issue most effectively settled by the judicial system. Ship owners, shrimpers, even beach combers all have a potential claim against the offending parties. As a result, the oil rig owner and the petroleum refiner may incur enormous costs to satisfy the plaintiffs. As it should be. Only limited liability and government protection stand in the way of justice being served.

One possible extension of the application of property rights to help determine how cleanup costs shall be determined is government claiming domain over the coastal waters, if citizens mandate that government regulate what may not be put into coastal waters. Regardless of whether The Force or individual parties have rights to unspoiled ocean water, I hope that the bill for damages presented to BP and Transocean is thorough and memorable.

Economic Models Ill Prepared for Foreign Innovation

Economic models have long been based on the assumption that there is an optimal level of efficiency in the production processes of goods and services. Businesses make inventory as well as research and development decisions based on these models. As is often discussed in class, these models do not take entrepreneurship (i.e., innovation) into account. As a result, we are seeing the companies who have built their businesses on these models being left behind and some of the deficiencies of the models are brought to light.
A recent article in the economist points out that emerging, developing companies that were once simply a source of cheap labor, are now becoming a leading source of innovation. Much of this innovation is due to the fact that these countries are not allowing themselves to be bound by the parameters of the model and are testing new methods of production, delivery and inventory. One example cited in the article is about how Japan surpassed American auto makers in the early 1980s. This was accomplished by a new system of making things that the Japanese invented called "lean manufacturing." The importance of this process is a conceptual one. The Japanese did not continue to try and find ways to increase efficiency within the model, as that would only allow for a certain (optimal) level of efficiency to be attained. According to the model, once that level or equilibrium is reached, there is no reason to search for a better way to do things because you have reached the point that marginal output will begin to decrease. Therefore, the Japanese disregarded the model in a sense and the results of willingness to try something new was increased market share and greater profits.
In emerging markets worldwide, they are experminenting with new business models. This trial and error approach is allowing these countries to not limit themselves to predetermined outputs and in some cases, they are now producing more than the classic model predicted they could produce. This level of innovation is also challenging in terms of who can enter into different markets and produce a quality product. Innovation not only spurs competition in the sense that better, cheaper products appear in the marketplace, but also in the sense that barriers of entry can be lowered or in some cases, sidestepped altogether. This can happen when there are barriers of entry in the production of one product but innovation leads to the invention of a comparable good that may have different or lower barriers of entry that make entry more accessible to more people. As this happens, the numbers of companies in these emerging companies grows. More companies generally means more capital. A line chart in the Economist article shows that GDP growth in emerging markets has outpaced that of GDP growth in the U.S. since the year 2000. What this demonstrates, I believe, is that many of the classic models inhibit creativity and in many ways, growth. The models therefore become somewhat self-fulfilling in the sense that since there is no account of entrepreneurship, it can inhibit this type of activity. One who believes in and works within the model will not see the options of innovation or trial and error. Those who look beyond the models are the ones utilizing their creativity and are rewarded these days with higher growth rates.