Thursday, April 28, 2011

Gas Prices

A recap of the video:  Obama wants to end subsidies.  Higher gas prices hurt the low income earner more than the high income earner.  There are alternatives to buying foreign oil such as natural gas.

A subsidy increases the amount of gasoline that is made.  So ending the subsidies would decrease the amount of gas available to consumers.  A decrease in supply would increase gas prices.  Many goods are subsidized including mass transit, education, and health care.  Do we really want higher prices on these items?

Tuesday, April 26, 2011


Today I approached an four-way intersection.  The intersection was deadlocked with no one moving.  Finally, some risk taker zoomed through the intersection.  What followed was many cars going through the intersection illegally but eventually the intersection cleared.  The wrong equilibrium resulted.  There was another equilibrium which was efficient. I think markets can work like this too.

Russ Roberts on Econ Talk

Game theory is the topic of EconTalk.  Highly recommended.

Would you rather listen to a podcast or read the highlights?  I read the highlights skimming to find points that interest me.  Brain researchers are finding that students read differently now because of technology.  Researchers are finding that where you place material on the page determines if it gets read.  According to researchers, this blog is now too long so it's time to quit.

Sunday, April 24, 2011

Random Economics

While walking to the men's locker room, I debated whether to walk in front of a gentlemen watching a racquetball ball game.  If i walked in front of him, then I would not be considering the cost I'm imposing on him and therefore exerting a negative externality on him.  If I walked behind him, then it would take me longer and not equate the costs and benefits rationally.  Alas, economics has left me with two choices.  I could do nothing but let the problem solve itself.

Does dog food now cost more than human food?  If so, then I must consider the relative cost and substitute steak for Bacon Bits.

Pure Monopoly Power Point for Inservice

This is a powerpoint lecture I'm giving tomorrow.

Sunday, April 17, 2011

Debt Primer

When the economy slid into a recession, Juan, a factory worker was laid off from his job. The government lost Juan’s payroll and income taxes, a revenue and began to pay unemployment benefits and transfer payments. In a recession, tax revenues decrease and government payments increase resulting in a deficit. According to the Bureau of Labor Statistics, the March unemployment rate stands at 8.8% with 13.5 million workers displaced. The last time the unemployment rate has been this high was in 1983.

The government budget is approved by the house in January and remains constant. If a flood, hurricane, earthquake, or political instability in other parts of the world requires emergency aid, the government has to increase spending by borrowing in the form of treasury bills. The interest from the t-bills is added to the deficit for the fiscal year. The national debt is the accumulation of all deficits. The national debt currently stands at $14.2 trillion. The government is on pace to reach the debt ceiling by May 16, 2011. Some tough choices will have to be made on whether to raise taxes, cut spending, or raise the debt ceiling. All have political charged ramifications that now have the Democrats and Republicans fighting. What is so bad about a large national debt?

Say you have a friend who borrows money from you every day for lunch, but never pays you back. How long are you going to continue to loan this person money? In addition, say that this person doesn’t have a job. What is their ability to repay you? The U. S. has reached a point where the debt level is dangerously high when compared to our ability to repay. Economists call this the debt to GDP ratio. Currently, that ratio is about 90%. This means that our output growth is barely staying ahead of our spending. USA Today reports that the annual interest on the debt is one trillion a year. The US is earning enough to just pay the interest off and not the principal. It would be like just making the minimum payment on your credit card. You’ll never pay it off. Foreign countries might refuse to finance American spending.

Why not just cut defense spending? Why not cut entitlement programs? Why not cut the largest component of government spending—health care? I don’t believe there’s anyone who could seriously argue that cutting these expenses are in the best interests of the American people. The only fiscal policy solution is to raise taxes.

As long as the US is mired in recession government revenues from personal income taxes that make up 48% of the revenues, will remain constant or will continue to fall. The only way for the government to repay the debt and continue to spend on defense, health care, and education is to raise taxes. Already, 1% of the population pays 38% of the taxes. I believe that increasing taxes will destroy incentives to work, taxes generated from increased employee contributions from payrolls or higher income taxes from increased employment are more easily accepted.

Raising taxes will not be enough to eliminate a debt that is increasing faster than GDP. The government will have to eliminate some spending. This will make tax revenues greater than spending so the government will run a surplus and can pay back debt. This is called public saving and must be larger than the interest payments. As the government saves several effects happen. When government spending on infrastructure decreases, roads begins to deteriorate, education suffers, and all other capital goods begin to depreciate. This means that a future generation will have to pay for rebuilding infrastructure. This is what economists mean when they say future generations will have to pay for the debt. Currently, each citizen carries approximately $14,000 of the national debt. To increase tax revenues, Americans are going to have to work longer and give up many leisure activities.

Tuesday, April 12, 2011

Does A Reduction in Government Spending Lead to Unemployment?

A striking graph here.

I have always maintained that government spending crowds out private. The only way to spur employment is for new, small businesses to begin investing. I think this graph shows this. N. Gregory Mankiw points out that the direction of causality can run both ways.

Gas Prices Around QC Area


As gas prices increase, people look for substitutes as this video shows.

Sunday, April 10, 2011

Core v. Headline Inflation

I have written a lesson about which CPI is best for reporting inflation here.

Is it better to use inflation without food and energy?  In this lesson, your students will decide after reading an article on the St. Louis Fed website.  You can review construction of the CPI before giving this assignment if you want to build core concepts.

Monday, April 04, 2011

Burger Game for Logistics

Try this game.

In economics, human behavior is strategic.  Try this game of strategy.

Sunday, April 03, 2011

Battle of the Sexes

For the last month, I have been studying game theory.  There's a saying that goes, "If all of your tools are hammers, then your problems can only be nails."  I felt that I needed more tools to analyze behavior.  I have been studying game theory in Hal Varian's Intermediate Microeconomics textbook, taking an open course from Yale, and using another textbook, Strategies and Games: Theory and Practice by Prajit K. Dutta, and studying Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life by Avinash K. Dixit and Barry J. Nalebuff.  As always, this blog is used for deep reflection so please pardon any inaccuracy as I analyze "The Battle of the Sexes."

In this game, both partners want to spend time with each other and they receive no utility when they do separate things.  The payoff for both are: 2,1; 0,0; 0,0, 1,2 where the order is row, column, top, left, top right, bottom, left, bottom, right.  Suppose Row values NCAA Wrestling 2, and Column 1.  Suppose Column values Opera 2 and row 1.  If row goes to wrestling and column to opera their utilities are 0,0.  Thus, they will have to coordinate so that they can both receive the maximum utility.  Suppose that given each other's probabilities, that the beneficial equilibrium is 2/3 for row and 1/3 for column.  In this case the payoffs are equal and there's no incentive for either to change their strategy.  Hence they are in a Nash Equilibrium.  

I disagree that a pure strategy is a Nash Equilibrium since both could move and increase their utility.  Plus a pure strategy would not be in their best interests since they would receive no utility.  Both partners should coordinate their plans.

This blog literally took me two weeks to write as the math involved calculating probabilities, which is a new tool for me.  If you are interested in the math, I will send the calculations to you if you supply a valid email address.

Simple Interest

This lecture is for my record keeping class on how to use the formula: I = PRT.

Simple Interest
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Monopoly Characteristics

Here's a quiz I made for microeconomics. I kind of proud of it.