Adjustments along many margins

We have spent time in class reviewing how firms can adjust to prices by changing no only quantities, but other margins as well.  Here's an example from the Next case 

Para 396: "in the early 2000s paid rest breaks which sales consultants had received were removed following the introduction of the national minimum wage".

Various teaching links

Spencer Dale, Chief Economist at BP on the New Economics of Oil. Very interesting: paper here.  Thanks to my past student Sav for the link.

Various FTMBA teaching links

1. Do agents respond to incentives?

a. How Converse sneakers reduce their tariffs#
b. Cesarian-section deliveries when rewards are higher


2. Supply and demand
Rare earth

3. Elasticities and revenues
The London congestion charge.

4. Two-sided markets.
What Spotify is doing.

5. Barriers to entry.  See table 1 for a very good summary of natural and strategic entry barriers in UK banking, especially around IT and capital regulation.

Various teaching links

Some teaching cases taken from this month's CEP Centrepiece magazine.

1. Selling UK citizenship.  We will learn about how markets allocate according to willingness to pay. Here's a proposal to allocate citizenship this way.

2. Complementary goods. If you ban YouTube videos, you might cause sales of music to fall if there are inter-related demands.  Exactly this happens. 

3. Productivity spillovers.  How wikipedia content spills over to benefit others.

Various teaching links

1. Economists assume that firms will want to profit maximise or loss minimise.  What about otehr motivations like culture?  Here's why Economists are right at least when superstitious investors play in markets with non-superstitious ones.

2. Via John Cochrane, a long essay on whether financial markets are efficient. (answer: pretty efficient actually).

3. The power of compound interest from Tim Taylor:What's the Difference Between 2% and 3%?

4. Do agents respond to incentives?  When it comes to taxation they most certainly do. Here's Tim Taylor explaining the Double Irish Dutch Sandwich.

5. Self-explanatory:

Why Should You Major in Economics?

1. Economics is a General-Purpose Intellectual Technology. It's true that economics can't tell you whether God exists and isn't going to tell you what happens when you mix Chemical A and Chemical B, but an economics degree gives you a set of intellectual tools that can be adapted to any social problem. Economics is about a lot more than money, banking, and interest rates. Recent examples of extremely interesting applications of economics to subjects that might not, at first glance, look like what most people think of as economics include David Skarbek's work on prison gangs, Chris Coyne's work on war, and David Romer's work on whether football teams go for it on fourth down often enough. If you want to understand the social world, you should study economics.
2. Since Economics is a General-Purpose Intellectual Technology, you can do almost anything with an economics major.
3. Economics is a Complement to Information Technology. Data and computing power are getting cheaper by the second. Economics helps us sort through the data to figure out what is really going on.
4. Economics Pays Well and Is The Most Employable of the Non-Vocational Majors. In economics, you can study a lot of the same things you would study in the other social sciences and humanities, but the degree is more employable than a degree in the humanities or the other social sciences.
5. "Economics is Both Practical and Interesting." That's what Jeffrey Miron says in his 2008 discussion of the economics major. Economics is a major that strikes a very nice balance between a liberal arts education and a vocational education.

6. A great essay by Mark Lemley on how the internet has been so disruptive:

Mark A. Lemley, IP in a World Without Scarcity, Stanford Public Law Working Paper No. 2413974, March 24, 2014, https://www.law.stanford.edu/publications/ip-in-a-world-without-scarcity.

Things are valuable because they are scarce. The more abundant they become, they cheaper they become. But a series of technological changes is underway that promises to end scarcity as we know it for a wide variety of goods. The Internet is the most obvious example, because the change there is furthest along. The Internet has reduced the cost of production and distribution of informational content effectively to zero. In many cases it has also dramatically reduced the cost of producing that content. And it has changed the way in which information is distributed, separating the creators of content from the distributors.

7.  Whom gets the returns from innovation?  Lessons from The Wire on Chicken McNuggetts: video here, transcript here. Warning: very strong language.

8.  Wonkish. How two-sided market analysis overturns much of simple economics of anti-trust. 

9. Price discrimination at the Fulton Fish Market.

 with detailed data by race here, "Detailed Fulton Fish Market Data (worksheet format) (dictionary)"

and the price differences by race here (
“Testing for Imperfect Competition at the Fulton Fish Market,” Rand Journal of Economics, 1995, 26, 75-92. table appendix b, page 90. Average price per fish paid, April 13th - May 8th, 1992.  73c, 64c and 80c for Asian, Black and White customers.

10. In case that anyone doubts that demand curves slope downwards and can be shifted by outside events, here's the effect of the Pope on the price of fish.  (When Catholics were forbidden to eat meat on Friday, it was a tradition for them to eat fish on Friday as a substitute for meat. They were allowed to eat fish on Friday. After the pope allowed them to eat meat on Friday, suddenly, for Fridays, they had a substitute for fish; they could choose meat instead. With a substitute becoming available, many chose the substitute instead of the traditional fish. This increased the demand for meat but decreased the demand for fish.)

Various teaching links

http://en.wikipedia.org/wiki/List_of_inventors_killed_by_their_own_inventions

List of innovators killed by their own innovation 

http://on.ft.com/1cAh5IR

Supply and demand strikes again: chocolate

What is Heathrow's Cost of Capital?
1. In 2002 CC estimated a pre-tax costs 7.75%.
2. In  2007 we at the CC (I was a member of the Competition commission at the time and worked on the BAA inquiry) estimated 4.8 to 6.4 and settled for 6.2 for LHR (and 6.5 for LGW)
3.  The CAA is now recommending 5.6 for LHR now and 5.9%% for LGW.

That looks tighter than last year, but not outside the range that we estimated in 2007.

 

Teaching links

A hostile report on evidence-based policy by Jamie Whyte from IEA gives a nice example of adjustment along many margins:

Seeking to improve the diets of its pupils, a school in Northamptonshire
banished vending machines in 2006. William
Guntrip, an enterprising thirteen-year-old pupil of the school,
spotted the profit opportunity this created. He started buying
large quantities of sweets and soft drinks and resold them in the
playground, making a profit of £50 a day.  (School bans boy’s snack empire’, Metro, 4 July 2006). 

Various teaching links: what is value?

Once again Tim Taylor has a great post here.

The word value is overused in business schools.  Companies create value, economies add value, GDP measures value added.  Fortunately, Economics is clear about it via the Water-Diamonds paradox.

The paradox is a nice one. Water is cheap, diamond expensive.  But water is vital to life, diamonds are frippery.  So which has more value?

In Economics, we are almost always talking about "value in exchange".   Water has very little value in exchange since its so cheap and so can be exchanged for little.  That's because value in exchange, or price, is determined by the relative balance of supply and demand.  The price that balance yields tells you the value that the consumers and supplier place on the marginal unit of water. With plenty of water about that marginal value is very low.

But what about water being essential to life?  Isn't the "value" very high?  No.  The price is very low because that tells you the value in exchange of the marginal unit of water.  At the same time water can have a very high "value" in the sense of  "value in use".  But that value is fuzzy since counting the value (what are the units?) is hard to do.

So when an Economist says "diamonds are more valuable than water" she/he means value in exchange. 


Perhaps a final compelling example: what is the value in use of this below?  And its value in exchange?