Post Lesson 17/Pre Lesson 18

Hey everyone,

I hope to have GR's back to you Tuesday along with our updated syllabus through the end of the international trade block. Keep thinking about why people get paid what they get paid. Specifically, if messing with prices is a bad idea how would that relate to wages? If an employer (like a producer "overcharging") underpays his/her employees, what will be the effect on the business?

More generally wages are affected by the seven principles. For example when there are only a few people who can do specific things they might get paid a lot more than others (scarcity). So, a neurosurgeon gets paid more than even a family practice doctor. However, scarcity isn't the only factor that comes into play, alternatives also matter. Normally we talk about alternatives via opportunity cost or comparative advantage. Whether I am a world renowned PhD holding Economist or a world renowned PhD holding English professor, the scarcity of each is about the same but they get paid completely different amounts for the same jobs (proffessor at a university), why? The answer is alternatives, as an economist my skills lend me to have many other alternatives and a much higher opportunity cost than the english professor. Having more alternatives means that my opportunity cost of teaching is higher and so the school must compensate me accordingly.

Finally, what does it mean for someone to be productive? Many times it depends on the people and tools at my disposal. If you put me (with my skills) in Somalia, my level of productivity will change while I haven't changed at all. How many machines (physical capital) I have also depends on how much they cost me relative to other options, like hard labor. There is a tradeoff between machines and people and the relative costs of each will determine equilibrium.... If people are more expensive, I'm more likely to find machines that can do the job.

As for assignments:

Read BE 207-212 & 229-233 and answer this question along with your regular journal entry:
-Would you expect the average hammer to drive more nails per year in a richer country or a poorer country? Would you expect the average worker to produce more output per hour in a richer country or a poorer country? Explain the reasons in each case.

Also, Read BE 212-218 & 222-229 and answer:
-What determines how much people are paid to work? How is this like prices?

Vocabulary terms to memorize:

Productivity – the relationship between inputs and outputs, which can be applied to individual factors of production or collectively.  Labor productivity is the most widely used measure.  Much of the differences in countries living standards reflect differences in their productivity.

Capital – One of the four essential ingredients of economic activity or factors of production.  Money and assets put to economic use.  Examples include human capital, social capital, financial capital, and fixed capital.

Labor – One of the factors of production; determined by the number of people in the population, their willingness to work, laws and regulations, and the health of the economy and firms. 

Wages – the price of labor.  In practice, wages are often sticky, especially in a downward direction: when demand for labor falls, wages do not fall.  Instead, the fall in demand results in higher involuntary unemployment. 

Post Lesson 14

Folks,

best of luck studying. I've included a concept map example on the K Drive.

One of my students put it best when explaining why prices/money are such a big part of what we talk about in economics:

simply put money/prices "are the common language of economics." in otherwords it's the way that we talk about scarcity, tradeoffs, opportunity cost, equilibrium and efficiency.

Post Lesson 13

Today was just terrible, definitely a check minus for the class as a whole. I know first can be very difficult...maybe i need to bring a thermos of coffee ;)

We mainly talked about the worksheet and the quiz...

1) the first thing to always realize is that there are two sides always at play (supply and demand) and affecting one side (forcing suppliers to provide something cheaper) will invariable also affect buyers in some way shape or form.

2) what is so bad about these "imperfect markets" and why is government so (often) terribly bad at fixing the problems when they have the ability to?

The answer all comes down to the knowledge that is conveyed. In a functioning market economy prices reflect economics because they reflect (ideally) true scarcity and alternatives or alternative uses (that is relative value). If prices are "messed up" then they are not communicating the right information about scarcity or alternative uses of time meaning that ultimately we get the wrong QUANTITY NOT THE WRONG PRICE!

Why can't government "fix" the problem? because they dont have the right sets of information either! Keep in mind that government is also a monopoly of sorts which is likely to be swayed by varied groups with different interests and biases. Government has no way to easily/cheaply "sort through" what is truly biased and not.... All of this isn't to say that government CAN'T be or ISN'T helpful...it's just harder than simply saying: well the price ought to be lower. How much lower?

3) it is not enough to say that a monopoly exists by just pointing out that only one company exists. what also needs to be answered is: i) are there alternatives? ii) are there barriers to entry in the market

one reason for barriers to entry might actually be laws and regulations while another might be large startup costs (think utilities/water companies)

4) when might a monopoly be "good?" think about economies of scale and start up costs. If we only allow for many "smaller companies" what will happen to quantity? why is it a good thing that we have patents?

5) the previous point led us to a graph: what does this picture mean...you need to be able to explain how/why a supply and demand graph looks the way it does. the model is meant to simplify and communicate information about a situation so we can evaluate how/what will be the effect of changes on the seven principles.

Concept Map/Final Journal before GR A

Folks,

I want you to look at what we've covered and create a "concept map." 

(ie http://cmap.ihmc.us/publications/researchpapers/theorycmaps/Fig1CmapAboutCmaps-large.png)

Ideally at the "center" or "top" you'd start with the idea economics. From there you should focus on the definition and principles and then move to specific things we might have covered and how they might relate to the principles and to each other. Hopefully this is an exercise in connecting all the disparate lessons together. I'd also desire that you include objectives in places where you feel them to be relevant. If you're not sure about objectives look at the objectives linked to reading portion in your syllabus or on the K drive (K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser).

If it helps think about this question: How are the seven principles and the definition of economics related to prices? why isn't economics just about money?

Post Lesson 12/Pre Lesson 13

Man this semester is flying by! Yesterday we discussed different ways in which prices "fail" and we talked about why prices fail.

Recall that prices coordinate information. Specifically prices, when working properly, will accurately reflect without any work on our part the relative scarcity of different items so that we can accurately weigh the costs/benefits and tradeoffs of different decisions. In cases like monopoly it's not the high prices that are really the problem...the problem is that the high prices reflect a scarcity that does not truly exist thus creating an inefficiency (we have too few transactions). This is the same reason that price controls are so bad...they also create an artificial surplus, at least in the case of price ceilings that we have talked about.

All of these cases are failures from an economists point of view because scarce resources with alternative uses are being kept from being used or produced how they ought to be.

On lesson 11 we talked about asymetric information as one example and yesterday we talked about monopolies. Other market failures similarly result in prices that don't acurately reflect the information they ought to and like the used-car case there are often various potential solutions. We need to be aware of how different solutions will actually get at the root problem. So we could set a price ceiling to keep a monopolist from "overcharging" but what effect might a price ceiling have on a business' production?

As for monopolies, it is hard to have a monopoly if:

• consumers can turn to other products if you prices are too high (there are close substitutes)
• for example it would be really hard to have a monopoly on apples because even if you owned all the apple farms in the world you still have to compete with oranges
• another way of saying this is that the product has to be unique in quality (think water)
• consumers can turn to other firms that is you can't have a monopoly if there is more than one company
• a prospector could start up a new firm in your industry relatively cheaply and easily
• the easier it is for someone to enter the business the harder it will be to raise prices so that you can raise profits.
• so if you are a corn "monopolist" and raise prices so that you have large profits what will happen? probably, wheat farmers will start planting corn since it's cheap to switch so that quantity supplied will again increase and prices will decrease thus leaving the monopolist right back where he/she started.
• on the other hand if you are a monopolist of electricity and you raise prices there is a large cost for someone else to come into the market. Just to get started a new company would have to lay miles of utility lines. This is an expensive endeavor! You'd have to believe that your profit margin would be extremely large and large for a long time to even attempt to challenge the current provider of electricity.

With all of this in mind I want you to read BE 156-164 and either the section on regulatory commissions, 164-170, or anti-trust laws, 170-182. For your journal respond to this scenario:

Two cadets conspire and cheat on a test and their teacher brings them up for an honor hit. Each cadet knows that if they both don't talk they'll will fail the class but get no honor probation. However, if one of them talks, the one who talks will have to redo the assignment while the other will be disenrolled. If both talk they'll each redo the assignment but receive honor probation. What is the best outcome for the cadets? What do you think will happen?

Initial Refl Paper II

Again I have some general comments on the initial papers. You need to talk to me if you are confused...I can't read minds:

1. In addition to the current rules you can write about a current intervention which you think is good and explain why
2. Made up situations can't be vague or far-fetched. You need to explain why they are realistic and what the root cause of the issue (a monopoly) for example is.
3. About prices: what does it mean for a market to be inefficient? Why point to higher prices? Are higher prices neccesarily bad? what should prices communicate (or what knowledge are they communicating, think about the connection to the definition of econ)?
4. You ought to be referencing scarcity...are things under your situation more or less scarce than we'd like....why?

I also don't need descriptoins of free-markets or for you to tell me that free markets are usually efficient. That is fluff, it's unneccesary and it obscures the things you ought to be focused on. Here is an example structure, it could just as well be written in paragraphs or in bullet format:

• Claim: Market X is inefficient
• Premise 1: Efficiency exists when A occurs
• Premise 2: Because of B, A is not occuring and/or is distorted from reality
• explanation of why the distortion is occuring
• Solution: We want A to occur, We might intervene by doing C or D.
• C will cause _____________changes. (how will it address the root problem or issue of incentives? are there costs? are the costs greater than the benefits?) 
• D will cause ______________ changes (same as above)

Post Lesson 11/Pre Lesson 12

Folks for next time read BE 128-134 and 139-143. Also complete the worksheet on the K drive.

I thought again today you all stepped it up. You had answers to questions, participated together and had great insights. I have today down as a check plus.

However, the next time I correct someone on a computer issue both the offender and any neighbors will be penalized severly and so will the class.

Takeaways from today:

• All systems, capitalism included, have costs. In particular for capitalism to function properly means that losers will exist.
• It is important to first identify how and/or why prices are or are not working.
• If prices are failing to do their job it is not enough to merely say there ought to be intervention. Instead you need to evaluate how different alternative solutions will change costs, benefits, incentives and how such changes might affect equilibrium solutions and efficiency.

Again great job today! See you wednesday.
 

Post Lesson 10/Pre Lesson 11

Folks,

Read BE 89-91 and 112-117 and journal on this question: why would i pay more to buy a used car (the same make, model, miles etc) from a dealer than from an individual?

Don't forget your inital reflection paper is due next time.

thank you so much for today's lesson, check plus. I honestly think that it was a great conversation because it was organic. Some major takeaways:

• Address the question that is asked. If you don't know what the question is your first step should be to clarify.
• Think about the incentives to all parties involved. think about how their actions always in the best light. In other words try to assume first that someone is doing something out of a desire to help and then explain why incentives result in a failure of that to happen.
• Premises matter to the incentives that you think are in place and the outcome you think will occur.
• Problematic premises (doing or believing X is bigotted) can prevent a discussion or dialogue alltogether.
• Nuance is important
• Prices convey information. If a government dictates prices then they are attempting to centralize all knowledge/information.
• There are three basic ways that prices change which we have talked about:
• Shifts in supply
• Shifts in demand
• artificial price controls (often via gov't intervention)
• each will have different effects on incentives, equilibrium and efficiency
• Prices and Profits/Losses are similar in that they convey information. Profits/losses tell owners/investors whether one should or should not stay in business or if they need to get better/more efficient at what they are doing. More to come next time
• Next time we'll focus on the value on profits/losses and start in on questions about when prices fail and what the best response is to such failures.

Reflection Paper II

Detail an instance where free-markets fail to produce an efficient outcome and explain why. Explain why government intervention will create greater efficiency.

(Hint: on a deep level you should be thinking about when/how prices work AND whether the alternative structure to prices, government intervention, would provide any better incentives for efficient allocation. What is the cost-benefit and incentives to each solution?)

Note: you are free to invent a situation of your choosing it does not have to be real-world.

 

Post Lesson 9/Pre Lesson 10

For next time: Read BE 95-98 & one section from 98-112. I also want you to reflect on a very basic question in your journals: what are the things that can cause a change in price? what are the effects on demand? on supply? what do the different reasons for the changes in prices mean for you?

Today we focused exclusively on our quiz as a review of Block A.I specifically focusing on the role of prices in the economy and how supply and demand is useful to us in understanding the role of prices. Remember that prices too are affected by our principles...in fact prices merely reflect the reality of economics (the 7 principles) and CONVEY INFORMATION.

Your reading for today talked about the role of profits and losses, which we touched on briefly. Profits and losses like prices, convey information to businesses about their practices. We also discussed briefly the need for competition for prices to work...this is true also in applying economics to businesses and we'll begin to think, in this block, about what happens when prices (or profits/losses) fail to do their "job" and what choices we have to alleviate problems that might arise.

Your reading for next time discusses what happens when the world changes around a business and what happens if the business fails to adapt. We'll hopefully circle back on this and your previous reading!