Profits 12/12

-> Profits = Total Revenues - Total Costs (Explicit and Implicit)

-> Contracts reduce uncertainty, helping facilitate transaction

-> "Interest" - Price paid to consume today though you haven't earned it yet, and cost for loaner to not have that money over loan period

-> Even if accounting flow brings in positive monetary profits, economic profits may be negative due to implicit and opportunity costs

-> No such thing as guaranteed profits

-> Competition drives prices down and increases worker profits; preventing it does the opposite

-> Losses insulate against waste and curb risk-taking, preventing resource misallocation

The Entrepreneur 12/9

-> Entrepreneurs need 3 things:
1. Land
2. Labor
3. Capital

-> In determining profits, entrepreneurs can't ignore opportunity costs of using the land, labor, and capital they have for their business rather than for other means

-> The formation of entrepreneurial businesses is key to the economy and should not be overlooked in determining policy. 

New Ruling on "Plan B" Contraceptives

Recently, the government overruled an FDA recommendation to allow "Plan B" birth control without a prescription. The decision has come under heavy fire from the left and right, and especially from Female-interest groups and groups dedicated to advancing women's equality and liberty. But as the decision holds, anyone over the age of 17 can get "Plan B" without a prescription, while those under 17 must get a prescription. Hopefully it won't hold for long. 

The rationale provided by the Health and Human Services Secretary Kathleen Sebelius for ignoring the FDA recommendation was that the study conducted failed to assess the impact on girls of all ages. Additionally, she worried that girls under the age of 17 would buy the pill and use it incorrectly. Another argument I have heard is that girls under age 17 could also come to abuse it in other ways, such as relying on it as a form of birth control. Frankly, I find these arguments ridiculous. First, Sebelius wanted the study to include girls all the way down to age 11. I don't think this is a reasonable claim. Second, imagine how easily a black market will develop. Girls who want to get the pill without a prescription will simply find an older friend or even a sibling and have them buy it instead. The same tactic already occurs with alcohol, which, let me remind you, is not hard to get by any measure despite the age limit. Third, girls who are on the fence about taking the emergency contraceptive may now be incentivized to err on the side opposite caution, since the cost of getting the pill has just been raised. And four, the "Plan B" contraceptive only has a 72 hour period of effectiveness after any sort of pregnancy scare. For some, the added time of finding out how to get a prescription, locating a doctor to prescribe it, and then finding a pharmacy to fill it may take too long for some. What if the doctor is out of town, the pharmacy is closed, or there are other extenuating circumstances? 

To give the other side a point I have not yet heard, this does have at least one benefit, which is that now girls must go to a doctor to get a prescription, which means that both a doctor and likely a parent will be involved, which will make the use safer. This will also facilitate discussion about sex, pregnancy, and contraceptives, and promote responsibility. However, these reasons are not enough to offset the high cost of this decision. It will be interesting to see if there are more teen pregnancies in the future.

The Sumptuary Manifesto

"Sumptuary" - Regulating or otherwise limiting consumption

This particular JSOTR piece was a brief satire aimed at dismantling the ridiculous and arbitrary nature of laws that regulate consumption, termed sumptuary laws. The piece was short and pithy, a very easy read. Essentially it was a description of different hypothetical laws that limited various types of consumption, from housing sizes to liquor to facial hair, with the justification being the mutual benefit of society. At the beginning and end, in a nice symmetry, the "Peerless Leader" remarked upon the outdated, misguided view of liberty held by the enemy party of libertarians and the like.

I personally enjoyed reading the piece. It conveyed a simple insight into the arbitrary and often ridiculous nature of attempts to regulate consumption, using exaggerated examples to drive the point across. In our society, there are certainly people who believe that there is too much consumption and wish we could do something to deal with it. Many point to a consumption tax as the solution. Perhaps this would work, perhaps it wouldn't, but is there really an issue of over-consumption? Efficiency should be lauded, and some people certainly do lead extravagant lifestyles, but who are we to tell them what they can and can't do, based on our subjective and vague perception of what is "too much" consumption"? The exception to this rule is when there are externalities to the consumption that directly affect others. However, given that every dollar spent has an opportunity cost of whatever else it could have been spent on, is it moral to give money spent on excess and re-direct it to those who are more needy and would use it to buy food, water, or other necessities? This is the mentality behind wealth re-distribution and social safety nets. The economic argument would be that the dollar to a person who is poor has a greater marginal utility than a person who has much money and spends at least some of it on excesses such as super nice cars or extravagantly large houses. Now, I personally try to live within my means, and would be happy without a nice car, but is it necessarily moral for me to turn to someone else who makes more and say "because you have too much money, you should give some away?" In my opinion, this is an immoral mentality. However, assuming that the money is spent well, and used towards infrastructure and social programs, is it a necessary moral casualty to help those in need? This is an open question and one I am personally still debating.

Legal and Economic Incidence 12/7

1. Cost of taxes includes the deadweight loss and the cost of collecting, in terms of time and money: also includes cost of time spent preparing taxes and cost of hiring others to do it, again in terms of time and money

2. Whichever side of the market is more inelastic will always take the brunt of the tax, despite who the tax is aimed at -> RELATIVE ELASTICITY is the key to analyzing tax revenues and determining who takes the burden of taxation

3. Legal incidence and economic incidence are orthogonal

4. "Incidence" - Who really pays

Supply-Demand Changes 12/5

1. Illegality of drugs encourages:

• Less moral people to enter the market
• Stronger drugs
• Need for enforcement, which takes time and money

2. Taxes are neither a cost nor a benefit, since they only shift money around; however they prevent potential transactions, called the dead weight loss. This is where they hurt the economy.

3. Placing a tax on sellers is essentially taxing buyers; can't just isolate one side of the market for taxation without affecting other side

Golf at Bethpage Grey

This article dealt with the overwhelming demand for tee times at a newly renovated golf course in NYC, one of the most population dense areas in the world, and the legal black market which developed as a way to get people tee times. In the end, the demand created a sort of lottery system: the second tee times were open to buy, people would desperately call in, and the lucky few who got through would purchase a chance to play on the US Open quality golf course, while the others would just get the beeping of a busy signal and be forced to try again. The author detailed his own experience with the system and those of others who have also had difficulty in getting a reservation. Though overseers have attempted to regulate the NY Golf Shuttle company, which constitutes the black market, they have largely failed. Each attempt at shackling it only causes more issues, often to the detriment of unintended customers. How can this situation be fixed, or at the very least improved?

I have one response, which is that the golf course should raise its prices. This is the best way to remove the scalping issue. Though people will cry foul and say that this is biased towards the more wealthy citizens, which it is, it is a logical solution. The scalping business is an example of a de facto "black market" caused by the excess of demand relative to supply, and the forced inability of the market to equilibrate by raising prices. Despite well-intentioned attempts at regulation and keeping the price of the golf course the same, the black market seems to defy all attempts to regulate it. Though the price for a tee time is $120, it seems the only way to actually get a tee time is to use this booking and shuttle service, which for the author of the piece cost $850 and was inconsistent with times. Raising the price would solve this problem, decreasing quantity demanded and letting people realistically plan with the golf course, rather than using a middle-man service that blitzes the phone system and scalps tee times. As Rizzo said, there is money left on the table here for people to earn by exploiting the disequilibrium of the market, and the NY Golf Shuttle is certainly taking advantage.

Saving the Last of my Declining

This week I finally got around to purchasing a clamshell. I don't know why I didn't earlier. Honestly, it is one of the best investments anyone with an unlimited plan can make. For $5, you can buy access to clamshells for the entirety of the school year. Then, you can take as much food as you would like from either of the unlimited dining centers, which are a sunk cost, and bring it back to the dorm to save for times when you get hungry. Instead of going to the Pit or Hillside, you can just take the food you stored from Danforth or Douglass. Over time, the money saved adds up. Maybe I wouldn't have so little declining if I had just invested in the clamshell earlier.

Now, here's the interesting thing. I was baffled that the price of the clamshell was so low! Honestly, $5 for the entire year? Given the fact that you only have to purchase the clamshell once each year, the demand should be relatively inelastic, and the price elasticity should be very low. I would pay much more than $5 for access to the clamshell. Even a $20 price would seem low given how much it would save me. And again, I only have to buy it once? I truly would buy it a a lot more than $5. So why is the price so low? Well, I figured it had something to do with the price of tupperware, and the price of other potential containers, which act as substitutes for the clamshell. However, I don't believe people will turn quickly to tupperware. The clamshell is too convenient, and people often don't care to invest the time to utilize the alternative options. For me, it was a relatively spontaneous decision, made when I was in a rush but wanted to eat more. Buying one had been in the back of my mind for some time, but I had denied that I needed one. Guess having $15 left in declining changed that mentality...

Class Notes 12/2

1. Price controls create need for security which creates opportunity costs of what enforcers could be doing. Security is a cost.
2. Housing vouchers would be much better than price ceiling
3. Increase in price decreases quantity demanded, not demand
4. Minimum wage does not help the poor, but admittedly it doesn't hurt too much either; a better system would use an Earned Income Tax Credit (EITC)

Price Controls 11/30

Outcomes of Price Ceilings
1. Reduced availability of good; harder to get! -> Shortages
2. Lower quality goods
3. Development of Black markets
4. Misallocations
5. Other neighborhoods face higher demand and higher prices
6. Lack of fairness
7. Discrimination since there is a lower cost of being discriminatory
8. Costs of enforcement

Market Equilibrium 11/28

1. Prices economize and give information to solve economic problems, without comprehensive knowledge on either side of the market -> personality traits, lifestyles, etc... Despite this, prices force consumers to take into account how much other people value goods

2. Markets have trial and error advantage over politics and central planning

3. Planned economies suffer from a knowledge problem and leave room for side deals and other hidden transactions, despite attempts to prevent this.

The Duke Room Draw

I will give the administration the benefit of the doubt here, and assume that though they may not have taken specific issue with the dorm trade that is cited in the post, they did not want to encourage a market centered around buying and selling assigned rooms. The administration's main argument would likely center around the idea of fairness and the worry that money would become an overly coercive factor.

Is this argument valid?

Is trading in this case unfair? The author of the blog makes the case that the administration is being ridiculous, and I would tend to agree, though he is a little too abrasive and sarcastic. Why would the administration complain about fairness? The fear would probably stem from a situation where the richer students offered overly coercive sums of money to buy the rooms that they wanted, which would likely be the highest quality rooms. Those who couldn't afford to buy a room would be relegated to the left-overs. Freshman who didn't know any better may also sell their room due to the offer of money and then later regret it, another issue the administration probably feared. An interesting question arises: are there situations where trade is immoral? Though the temptation is to say yes, I would argue that in this case and in most room trades, there has been nothing immoral. Take the example that large sums of money overly-coercive and therefore immoral in room trading. If I was the student selling the room, I would love the extra money, especially if I did not have too much preference for which room I was in. The money could be spent on books, food, and other needs. It would be great! Ironically, the more money I get, which is to my benefit, the stronger the argument gets that the money traded is overly coercive. I would not complain if somebody tomorrow offered me $15,000 for my room. It's a lot of money, and like most college students, I could certainly use it! On the side of the supplier, is it immoral for them to offer it? No. If the student with the room does not want to sell their room, they may say no. A room, in my opinion, is not such a key good as to validate the overly-coercive argument. Even in extreme examples where massive sums were offered, I can see no reason why that would be to the detriment of the seller. Surely one college dorm cannot be that different from the next.

And here is the kicker. The only way one college dorm can be that different in value from another is if one group truly values it highly or really does not like where they are at currently. In this example, the frat in the quiet part of campus would have a strong interest in moving. And here is where markets succeed. By offering money, the frat would be able to acquire a better place to live, and the seller would be compensated for the inconvenience of moving their room. Everybody benefits: the frat has the location they want, and the seller has more money. If money wasn't offered formally, a black market would likely develop anyway, since the frat would have a large incentive to acquire a different dorm. Side payments would inevitably be made and then hidden. An even worse outcome could also be overly coercive, and could come in the form of bullying, harassing, or using other means to virtually force people out of their room. A money currency is certainly more desirable.

If they do not object to a voluntary trade system, there is no valid reason why the Duke administration should prevent money from playing a part.

The Thanksgiving Holiday

Thanksgiving is here again, and I was lucky enough to see my family and friends after traveling home for the first time in months for a much needed break. To get home, I flew out from the Rochester airport to LaGuardia and from there took a shuttle home. The flight was delayed for four hours, and a little turbulent, especially when landing, but it was great to be home. Flying above NYC is an amazing experience, seeing the sheer size of the city and how complex it must have been to build is not a sight that I hope to ever take for granted. It is truly a testament to human ability. Seeing random lights from cars or houses in the darkness is always welcome and gives me a sort of vicarious experience as I try to place myself in the position of whomever I am observing from way above, and wonder what it must be like to be where they are. I would comment on the shuttle ride too, but traffic isn't quite as appealing. Still, I made it home, and I was glad to be there. 

Now, over the break my parents gave me a curfew (which in my mind was absolutely ridiculous, and embarrassing I might add), and thinking economically, I decided to counter with the argument that they were only incentivizing me to drive faster, and that if I really wanted to stay out I would anyway. Of course, this argument was entirely bogus, but I thought it would be funny to make. Well, as you would expect, it got a chuckle but no sympathy. Their argument for a curfew was that if I stayed out late,  I tended to sleep in during the day. Aha! To this, I can make a much better economic argument. So I did. I explained how I valued staying out late more than I valued waking up early, since my evening hours are often more productive than my morning hours. At night, I can stay up late hanging out with friends, and on Thanksgiving I even stayed up late to do work. How responsible! On the flip side, in the mornings I am usually at a loss for what to do: my friends are asleep, plans always occur in the afternoon, and I usually do not have the drive to work. So of course I want to sleep in! I get more sleep and get to use the time I value more in the evening. Who are they to tell me what time to get home? 

Well, unfortunately, it didn't take long for them to counter that too. I wake them up when I come home late, and typically my dog starts barking, which potentially wakes up the whole house. And they also worry more when I am out late, finding it difficult to sleep if they know that I am not home. Oh well, it appears that they have a point. Still, I thought my argument was good.

Class Notes 11/23

1. Change in prices DOES NOT change demand, it only changes quantity demanded
2. Prices demanders who cannot afford the good and suppliers who cannot produce it cheaply enough are forced out of the market
3. Changing this equilibrium arbitrarily leaves money on the table, incentivizing black market deals and other corrupt transactions

Equilibrium and The Price System 11/21

1. Money reduces exchange/transaction costs and helps facilitate trade by encompassing the value of goods
2. Surplus - At that price, quantity supplied is higher than quantity demanded
3. Shortage - At that price, quantity demanded is higher than quantity supplied
4. Double-Coincidence of Wants - Have to find someone with good you want who is willing to trade for what you have

Rationing Continued 11/18

Two Major Things to Consider

1. How will rationing determine competition?
• Constructive?
• Destructive?
2. Long-term consequences of rationing?
• How does rationing alter incentives?

• "Need" system incentivizes need, not production
• People can cheat "need" system by hiding income, assets, etc...
• Will moral people claim "need"?
• Price system allows for Consumer Choice
• Other systems claim to be better for poor but are often worse
• Needs no policing, since consumers determine distribution and price organically
• Other policing systems often fail and are cheated because there are no true incentives, only negative threats
• If a shortage is threatening, people's consumption will increase to prepare
• worsens shortage by immediately decreasing supply
• EXPECTATIONS
• Price system raises price in a shortage, decreasing consumption and forcing efficiency
• Forces Cost-Benefit analysis
• Consumers have to find out best way to use good
• Automatically makes consumer consider value of water to others, conveying needs honestly and organically
• Allows mobilization of goods to areas that need it
• Saying "You Must" does not work nearly as effectively
• Markets allow for long-term planning, an advantage no other system has

Posters and Propaganda

Each of these posters deals with the rationing that occurred to World War II. At the time, supplies for the average domestic citizen were very limited, as much was sent overseas for the soldiers. To encourage the citizenry and boost morale, the government attempted to portray frugality as a sign of patriotism. Conserving resources made one patriotic, since it helped keep demand down and increased supply, and consuming resources in excess was unpatriotic, as it increased demand and limited the supply available for other citizens and the soldiers who were fighting for liberty. By simply shifting the connotation of rationalization, associating it with patriotism and glory rather than limitation, the government's stream of propaganda sought to encourage thrift and discourage waste during the national supply crisis that was World War II.

Due to the limited supplies and need to conserve resources, this seems like a viable marketing campaign. In most cases, self-sufficiency is the road to poverty, but due to the short term nature of the crisis, conserving the readily available resources was a necessary step. In the long-term, more resources may be discovered, but until then, the US had to work with what it had. In terms of supply and demand, the lesson here is simple: diminished supply with a constant demand leads to rationing. This is the raison d'être of economics. What this did to the market is probably more interesting. Prices were probably very high, due  to the disparity between demand and supply. Market inefficiencies were probably huge, as nobody was well-off enough to predict into the future. People had to live by the moment and had much less expendable income. Trade likely became much less frequent, which would have depressed the economy. Generally, the posters were right in the need to conserve, but the effects of rationing were certainly not a sign of increased economic growth.

On this note, Keynesians like to say that war spending boosted GDP. A large portion of the population stood in lines waiting for food and other needs, due to high backlogs and limited quantities. Imagine all the cumulative time spent in lines. What else could the time have been used for? Imagine how much of it was spent idle in line, rather than producing, or at the very least doing something. How it could be argued that this boosts economic activity is beyond me. High unemployment, rationed supplies, soldiers fighting and dying overseas, where is the prosperity? Where is the greater economic activity? Any production that went into GDP was likely formed from the concessions of the citizenry, as these posters clearly illuminate. Arguing that WWII ended the Great Depression by boosting the economy is one of the most heinous of all applications of the broken-window fallacy. These posters clearly show the damage to the wealth of each and every citizen, who were forced to make sacrifices for the greater good. May these posters serve as a reminder of that which is not seen.

Rationing 11/16

• Need for rationing arises when you have too few goods for too many people
• Examples of rationing mechanisms
• Need
• Queues
• Lottery system
• Equal shares
• "Kickin' Ass!"
• Merit -> "beauty", "smarts"?
• etc...
• How much other people are willing to pay impacts price
• Not taking higher offer is a real opportunity cost for the business, which raises prices
• Lower supply = Higher Prices; scarcity increases
• Businesses respond rationally to demand and expected willingness of consumers to pay
• If one tries the "need" metric, which is hard to define in itself, Rizzo claims that neither the neediest nor the people who want the good the most will receive it
• This is why you need prices
• Lottery system may be "fair", but it does not guarantee that the neediest or those who value the good the most and can use it best will get the good
• Inefficient in outcome
• May be rigged
• Equal shares mechanism dilutes value to the point of worthlessness
• Some goods can't divide well
• "Kickin' Ass!" is destructive competition and does not allow for planning
• We compete because of scarcity, not "capitalism"
• Capitalism doesn't create competition, it deals with it; competition is inevitable

Theory of Supply 11/14

TODAY IS MY BIRTHDAY!

Theory of Supply

• What changes supply?
• Own Price ("Quantity Supplied")
• Something else ("Supply shifts")
• Supply Elasticities
• = % change in quantity supplied / % change in price
• < 1 = "inelastic"
• > 1 = "elastic"
• Supply cost is the opportunity cost of not using the materials for a different good
• Leads to differences in prices
• Low Wages may be caused by a lack of other potential or real employers
• Lack of competition among employers
• Lack of demand for workers
• Lack of choice among employees to find other work
• Supply and demand are very similar in their trends and analysis
• "Law" of Supply, NOT "Law of Supply" -> first is indefinite, second is definite; supply is not truly a law
• As the price a consumer is willing to pay increases, supply increases
• If a future price increase is expected, short-term supply will decrease since suppliers will pull back in expectation of greater future profits
• The opposite occurs if price in the future is expected to drop
• Each point on a supply curve represents the marginal opportunity cost of making the product
• Other things to learn from a supply curve
• Total Revenues = Price sold x Quantity (P x Q)
• Consumer surplus / producer surplus
• If there is a supply curve in any factor market, attached goods will have a supply curve, even when they are otherwise "perfectly inelastic", though this is impossible
• Change in input (factor) price will change supply
• When input prices fall, supply increases
• When input prices rise, supply decreases
• Technology can shift supply curves out (increase supply)
• Substitutes can shift supply curves in (decrease supply)
• Expectations matter a great deal in shifting supply curves

Keystone XL Pipeline

There recently has been a lot of controversy over a proposed oil pipeline running from Canada to Texas. Coverage of the movements against the pipeline have been smothered by Occupy Wall Street, which is a seemingly indomitable media force. Regardless, the resistance has been fierce - at one point protestors circled the White House, demanding that the project be scrapped - and the White House and Obama recently caved, calling for the State Department to further investigate the proposed pipeline before approving it. It is a controversial issue, and one that features two typical combatants in today's economy: environmentalists vs. businessmen. Which side are you on?

At first, I was skeptical of the public outrage, fearing that it was a product of misplaced passion which lacked full knowledge of the details of the pipeline. The clear benefits of the pipeline also made it difficult for me to comprehend why anyone would fight its development. For an opening point, the pipeline would help provide a significant and consistent source of oil from a friendly, neighboring country, rather than the often semi-hostile Mid-Eastern countries. Valid theories abound that our wars in the Middle-East are motivated at least in part by oil interests. Building a pipeline would help the US withdraw from foreign oil investments, disentangling us from messy middle-eastern governments and insurgency groups. And what about high oil prices? Gas is very expensive, and its rising prices are oft-quoted as a rising problem for middle to low income families, who cannot afford to spend more at the pump. In addition, high oil prices have been cited as an element which could damage our economy and dampen the already slow, if not non-existent, recovery. (On a side note, maybe environmentalists should desire high oil prices. This would shift consumers towards more eco-friendly and environmentally sustainable resources, and away from dirty fossil fuels.) This spike in price has been caused by a spike in demand and a constant supply curve. In short, the scarcity of oil has increased, due to an increased disparity between demand and supply. If all goes well, the Keystone XL pipeline would drastically increase our oil supply, and in doing so would drop the price of gas. As an added perk, a pipeline is one of the more effecient and cheap ways to transport oil.  The last benefit is the most over-used term in all of economics: "job-creation". So in short, allowing the pipeline to continue would increase our supply of oil, drop oil prices by increasing supply, increase our energy security, saving lives by decreasing our foreign interests, and create American, yes, American, jobs while simultaneously boosting Canada's export economy and providing them jobs. 

Now for the counter-argument. The company running the pipeline has a terrible spill record, with something around 12 spills attributed to them over the past year. This is inexcusable, especially given that the pipeline will run directly underneath one of the main fresh-water reservoirs in the United States. In the event of a spill, adding more chemicals to neutralize other chemicals and clean the water is unappealing at best. But didn't an independent third-party company review the project and its safety merits, and approve it? Unfortunately, a little research into this statement and you will find that the company hired by the US government to assess the project is basically a subsidiary of the company building the Keystone pipeline. The conflict of interest is immense, almost entirely discrediting the "objective" analysis which legitimized this project. The final point is that tar sands extraction releases 19 percent more carbon emissions into the air than Mid-Eastern crude oil, contributing to global climate change. To be honest, this side has a more compelling argument than I would have expected. The risk of contaminating a major US aquifer is the most worrying aspect to consider. 

Should we build it? 

Despite the draw-backs, which are both legitimate and great, the Keystone XL pipeline should be allowed to continue, though only after further investigation and effective regulation to mitigate dangers. I support its final construction, but currently find it hard to support because of the compromised analysis of its safety and the company's record of spills. I support the pipeline, but the protestors have a valid point. Let's wait for a more comprehensive analysis, then build.