Elasticity 11/9/11

• Elasticity - % change in quantity demanded / % change in whatever you are interested in
• > 1 means demand at that point is "elastic" (quantity demanded is sensitive to price changes)
• = 1 means demand at the point is "unit elastic"
• < 1 means demand at that point is "inelastic" (quantity demanded is insensitive to price changes)
• What impacts Elasticity?
• Time
• Budgets
• Substitutes
• Elasticity of 2: Change in quantity demanded is double the change in prices
• Changes in the market may take time to occur and become apparent
• Elasticity is not constant along a demand curve

Market Demand 11/7/11

• The more aggregated we get, the flatter the demand curve gets
• If prices go up with wages at a similar rate, the change in demand will be minimal
• What changes consumption?
• Income
• Substitutes and relative convenience
• Expectations
• Tastes, individual preferences
• # of individuals in the market
• INCOME NOT PRICES IN ANALYZING ECONOMIC GROWTH
• What affects demand
• Income
• "Normal" - When income goes up, quantity demanded goes up
• "Inferior" - When incomes goes up, quantity demanded goes down
• Normal and inferior goods are subjective and relative

"Job Creation" in New Jersey

I had almost forgotten this ridiculous law, but it was recently brought back to my attention. In New Jersey, you are not allowed to pump your own gas. Why not? Because it creates jobs of course! What kind of crazy economist would criticize this law? It creates jobs, which must be a good thing, right? Don't you care about the jobs?

Let me begin by explaining the mentality that leads to the belief that this is good for the economy. Self-sufficiency is bad for the economy (only when it prevents specialization of labor, comparative advantages, etc...but let's ignore those for now). Jobs are good for the economy (again there are constraints to this and this overgeneralizes and assumes a contextual vacuum, but again let's move on). Therefore, we should prevent people from being self-sufficient to then create jobs, which are good for the economy.

This is entirely backwards, and I cannot believe this law hasn't been repealed. If I pull up to a gas station, get out of the car and pump my own gas (imagine!), I will be fined. Implicit here is the concept that pumping your own gas is damaging to the economy. Really? Does this make any sense? Think about it. If this were true, why should we do anything ourselves? Here's an illustrative challenge: Take everything you do during the day, and break it into its smallest components. Now imagine you had to pay someone else to do each individual job, one person per component. Would this help or hurt the economy? More specifically, would this make you better or worse off? Now imagine everyone had to do this. Would we have time to do anything? Or any money left to spend? NO! The cost of doing anything would rise significantly, since the costs would be spread over a larger population. Efficiency would become non-existent.

Here's another illustration. When I go to Danforth, I should sit down at a table and have people serve me. If I want water, I pay someone to do it for me. If I want to get food, I don't have to leave my chair, I just pay someone to do that too. Voila! I have created two jobs. Forget the fact that the jobs are useless, isn't this good for the economy? As Rizzo mentioned, jobs are a cost, not a benefit! It is now harder for me to acquire water and food. Where there was previously minimal cost for getting my own food and water, there is now a real, tangible cost. I have to pay people to walk for me. Water and food are now less available to me.  I have just wasted money paying someone to do something I could easily do myself without paying anything. Instead of spending the money on a more useful endeavor, I have just put it towards having a servant.  What an awful concept. There is no benefit here.

Markets in Prison

This article explored the spontaneous formation of a market within a criminal system, in the absence of any planning. A new money system evolved, centered around cigarettes.

What is Demand? 11/2

1. Demand is NOT an all or nothing concept, it is a Marginal Concept


2. Demand - The relationship between the amount of something you wish to obtain and the sacrifices required to get it

3. "Quantity Demanded" - Amount of a good that buyers are willing and able to purchase at a particular price


Willing - Subjective Preferences
Able - Concept of whether you have enough income to purchase the things you want

4. "Law of Demand" - Given other factors held constant ("ceteris paribus"), the quantity demanded of a good falls when the price ("cost") rises; essentially, that cost and demand are inversely related

5. "Law of Demand" describes human nature and applies to any trade-off we must face; not just a theoretical economic concept

6. Be wary of "helium balloon" paradoxes which seem to violate the "Law of Demand"; instead, ask "How can this be reconciled with what we know about the 'Law of Demand'?"

7. Money prices in trade-off analysis and demand curves stand in for the goods given up due to opportunity costs

8. $0 does not equal infinite demand, due to other costs and varying preferences among the population

Theory of Supply and Demand 11/4

1. Transaction Costs - The cost of arranging and negotiating contracts and agreements, may include:

• time
• physical costs
• "ignorance" or a knowledge problem
• interference (social norms, religious values, cultural institutions)

2. Transaction costs are essentially limiting factors that inhibit trade

3. Great entrepreneurs know how to minimize transaction costs

4. Middleman - Anyone who gets buyer and seller together by removing transaction costs

5. There can be comparative advantages in reducing transaction costs

6. Small groups have less of a knowledge problem and can more easily overcome them, in addition to having more responsive feedback loops and less of an incentive problem.

7. Prices - Allow each of us to act on information, acquire knowledge about value, and make informed decisions about goods

8. High price signals value and scarcity (high demand and low supply); you can't have scarcity without demand

What is a market?

• Collection of (potential) buyers and sellers 
• Can be a physical market or a virtual market
• Any decentralized, unorganized interaction between potential buyers and sellers

Order - "Stuff's there"; equilibrium between demand and supply

Class Notes 10/31

1. There is no such thing as a positive or negative trade balance -> the balance is always 0.

2. Trade deficits often lead to an increase in economic growth and employment, or at least there is a correlation

3. Buying "local" leads to significantly higher costs in both money and time by preventing specialization

4. Economics does not change across geographical or political borders

5. Definition of "local" is often arbitrary

6. Why do we care about American poor, yet ignore world poor?

7. Often we only see who is hurt by outsourcing and job displacement, and ignore who it benefits

8. Concentrated damages and spread benefits are no excuse for preventing economic change

9. The concept of "Race to the Bottom" is laughable when you look at the data

10. FDI (Foreign Direct Investment) often flocks to more environmental, humanitarian, etc... countries