Wednesday, May 25, 2011

Ebook on Loanable Funds

While working on an eBook for the loanable funds market, I found this outstanding link.

The authors, Steven Reff and Dick Brunelle, have done an outstanding job conceptualizing a difficult concept.  If you visit their website, please sign the guestbook.

Monday, May 23, 2011

Budget Constraint

When a good is a normal good, a change in income shifts the budget constraint curve.


I have been saying for the last two years that products are becoming standardized.  Tim Harford, a best selling author of economics books, writes, "Modern life tends towards standardization. The likes of McDonald’s and Starbucks try to replicate the consumer experience, the branding, the size of the drinks cups. In such cases, economists often look for signs of “economies of scale”, a term used to describe a business operation whose average costs decline as the size of the business expands. Annoyingly, economies of scale are analytically inconvenient – if you want to build a textbook model of an industry with scale economies, the mathematics are messy – and yet Adam Smith’s famous example of the pin factory simply illustrated how fundamental economies of scale are to economic progress."

So here's my point.  If goods are becoming homogeneous, then how are businesses going to compete?  My answer is logistics.  

Sunday, May 22, 2011

New App for Android

Here's what the splash screen on my new Android app will look like.  This is an exam cram for the AP Macro exam.  I'm proud of the content.  A heartfelt thanks goes out to Gagan Bhalla, or EonSemantics, in New Delhi, India for his tireless devotion to this project.

If you want to have Gagan develop your app, I'll provide you with an email.

Present Value and Student Engagement

This present value table shows the time value of money at given interest rates.  If a borrower wanted to borrow a dollar today and pay it back at a given interest rate, this table shows how much the borrower should receive today.  For example, Juan values a dollar in 7 years at 9 cents today if the interest rate is 40%.  So 9 cents today would grow into a dollar seven years from now at 40% interest rate.

This might sound absurd to you, but this is exactly how I think many students value their education.  Since the value of a dollar might only be worth nine cents now, they don't study.  This is because the benefits and costs arrive at different times.  A student might value messing around right now a lot more than the nine cents.  This is especially true if the teacher isn't providing a lesson deep in rigor that is also engaging.

What's Important Now, WIN, will beat out the future almost every time.  That's why students say, "I'll study later."  They mean that the value of studying later when they have nothing to do will outweigh the opportunity cost of doing nothing.

In education, our challenge is to make the here and now more important.

Saturday, May 21, 2011

PPF -- Resources Are Not Subsitutes

The PPF is still a straight line showing a constant trade off, but the production of Good X, comes at a higher opportunity cost than the production of Good Y.

PPF--Constant Cost and Perfect Subs

This is an effort to rebuild my AP econ classes using short, pithy, videos to explain the major concepts.  I thank Jacob Clilfford for the motivation.

Saturday, May 14, 2011

Negative Externality

A negative externality exisits when a party only considers their own costs and benefits of their actions.  When a party's actions inflict a cost on an innocent third party who is neither a buyer of seller of the good, a negative externality exisits.  Here's an example.

The two girls walking in front of me in the narrow hall were talking to themselves and walking slowly.  The girls did not know I was behind them in a hurry to get to my class before the tardy bell rang.  The girls had timed their gait to arrive to their class on time and to talk to each other as long as they could.  Thus, the girls were only considering their costs and benefits but not the costs they were pushing on to me.  When my costs are included, their actions have a higher social cost.  This is a negative externality.

One day a man was walking down a road and saw a farmer lifting a pig up to take a bite from an apple tree.  I said, wouldn't it be faster just to pick an apple and feed it to the pig?  The man said, "What's time to a pig?"  And that is a perfect example of how the two girls hogged the hallway.  Their time was different than mine and they didn't even consider someone else's.

Tuesday, May 10, 2011

Tastes and Preferences

In this online article I read on MSN, the author claims that buyers can be influenced to buy on exogenous variables like who we shop with or the layout of the store.  I know there are times when I'm not in the mood to buy something.  This article suggests that psychology fuels our buying behavior such as operant conditioning and how the store is laid out.  I don't doubt that psychology plays a part, but so does income and related goods.

When we recently sold our house, the Realtor said we should bake cookies to make a pleasant aroma and leave all of the lights on.  This is non price behavior which infers that we have little control over the price.  I believe that people compare the prices of relative goods then make a decision.  Few buying decisions are made by impulse.

Sunday, May 08, 2011

Muscatine Students teach Colorado Elementary Students how to THINK

            Muscatine high school senior, Emily Summers wanted to make a difference in how students treated other students.  After listening to Daryl Scott talk to the high school and middle schools last October she started Friends Of Rachel, FOR, a club dedicated to the traits that Rachel Joy Scott wrote in her journal.  One of those traits was to inspire kindness and start a chain reaction.  Thanks to a generous grant from the HNI foundation, Summers began FOR that meets every Thursday after school.  Summers along with Ali moss, Nate Howard, Chris Jones, Emily smith, Paris white, and faculty advisors mike Fladlien and Michelle Kurtz meet every week to find a way to start a chain reaction.

“Kindness is the key to making a difference in this world.  If every person just added kindness to their life they will make a huge difference in the people’s lives around them. Kindness can impact someone’s life forever. This is why I think it is so important to teach kids at a young age the importance of being kind and the consequences of being mean,” said Summers.  Throughout April and May FOR have been talking to elementary students about kindness.

            On Friday, FOR presented a play to Colorado Elementary on how to THINK.  THINK is an acronym for Think before you speak or act, How would you feel, I can make a difference, Now is the time, and K is kindness.

            Senior, Paris White, shared a personal story and acted it out for the students to show why it is very important to think before you speak or act. Then Sophomore Nate Howard played a part in a skit where everyone is playing a game, but he is excluded.  Nate is asked to join the group playing, “Duck Duck Goose,” by Sophomore Chris Jones to show the students how the act of including Nat into the game can show kindness and impact a child’s life forever.  “We talk to the kids about how it’s really important to THINK about how you would feel if you were the one being left out or made fun of,” said Jones. 

            Summers explains that FOR shows how kindness can spread.  “We invite five students from the audience up to show everyone how kindness spreads. Each person does something nice to the person standing next to them like giving them a high five or giving them a compliment. The last person is then challenged to pass the kindness on to someone in the school and the whole school is challenged to pass on kindness to every person in the school and start the chain reaction like Rachel Scott said would happen when you are kind.” 

            Jones and Howard challenge the students to make a positive change in their live.  Howard challenges the students to take the if’s and but’s out of their dreams.  Jones explains, “There is no telling how many miles you have to run to chase a dream and THINK encourages people to get a head start on their dreams.
 White says, “THINK is a great program for kids because everything starts when you are young and if you can learn these lessons when you are young it will help you through out your life.”

            (Pictured: Josh Wheaton, guitar; standing: Nate Howard, Emily Summers, Chris Jones, Paris White, Emily Smith, and Ali Moss)

Thursday, May 05, 2011

Market for Lemons and Adverse Selection

Inspired by the book, A Cartoon Introduction to Economics, I show how adverse selection can affect the insurance and used-car market.

Wednesday, May 04, 2011

Vocabulary for the AP Macro Exam

I have made a list for review for students taking the AP Macro next week.  The link is here.

This vocab will appear on my Android App which I hope to complete by June. 

Sunday, May 01, 2011

Primer on Gas Prices

Exxon Mobile just released first quarter earnings of $11 billion, the best since 2008.  With gas prices in the Muscatine area around $3.73 per gallon, I often hear comments like, “Obama should do something about gas prices,” or “Oil companies should be regulated,” or “The government shouldn’t subsidize oil companies.”

In this editorial I want to explain why gas prices are beyond the control of the government and should not be regulated.

According to Energy Information Administration[1], about 68% of the price of gasoline is oil.  About 30% of a gallon of gas is refining, transportation and taxes.  This leaves about two cents profit per gallon.[2] 

When there are disruptions in the Middle East, the price of oil soars on the fears of higher future prices.  Sellers raise the price of gas because replacing current inventories will cost more.  Buyers rush to the station to fill up their gas tanks and storage tanks for lawn mowers because they know that the cost will be higher in the future.  This combination of sellers removing oil for sale at a higher price and an increase in demand for gas now makes the price climb.  Since March, 2010, the price of crude oil has climbed almost 37.3%.  During the same time, coffee has increased 81.6% and corn 82.7%.[3] Gold, which commonly reflects inflation fears has risen 27.9%.  These commodities reflect future expectations of price increases.

When a good like gasoline is subsidized, more of the good is produced since it is now cheaper for the producer.  Ending subsidies on gas and blended Ethanol would mean less fuel and higher prices.  Ending subsidies would hurt those people dependent on gasoline to commute to work.  Probably, ending subsidies would hurt the low income earners who often work two or three jobs more than those who earn more.  Removing subsidies would hurt everyone.

Prices in the United States are set by free market supply and demand.  President Obama is not a dictator and doesn’t set the prices.  In addition, inflation has contributed some cost-push inflation to the price of a gallon as well as changes to our tax structure..  Adjusting for inflation and comparing a cost of a gallon of gas today to a gallon of gas in 1950, the cost today for a gallon is $3.13.[4]

Some critics will argue that the United States should begin drilling.  NAFTA partners Mexico and Canada should be encouraged to begin drilling and exploration.  If these partners tap into their vast reserves, critics argue that the supply of oil would increase and the price of gasoline would drop or meet world demand.  So why aren’t those countries drilling?  My answer is that the price of oil isn’t high enough to act as an incentive for these countries to give up their wilderness and landscape to fill our oil demand.  When the price of oil becomes high enough then these countries will find it beneficial to drill.  Costs for drilling and refinement of oil are as much as 8 times higher in Canada than in the Middle East. 

Drilling domestically would create jobs.  In a market where 20million barrels a day[5] are filled, it’s hard to believe that the United States could increase the supply of oil enough to lower the price.[6]  ExxonMobile perspectives[7], claims the company owns less than 1% of the world’s oil.  It is possible that a domestic production of oil might encourage OPEC to cut production and prices would stay in check. This is what economists mean when they say the firm is a price taker.  That is, the company can’t influence the price.

Gas prices are a reflection of supply and demand fundamentals, production costs, distribution, and taxes.  Gas prices are determined by a number of independent variables unrelated to market manipulation.  If gas prices were manipulated, why do they go down too?

[2] National Association of Convenience Stores
[3] IMF, World Bank, and EIA. 

Gas prices and industry earnings: A few things to think about the next time you fill up

Gas prices and industry earnings: A few things to think about the next time you fill up

Summary:as prices have risen almost 37% in the last week. Did you know that coffee has risen by 81%? ExxonMobile owns less than 1% of the global supply and produces less than 3% of the daily supply. Exxon is not a price maker. If the price of a good increases and total revenue increases, then the company must be on the inelastic part of the demand curve. What monopoly would operate on the inelastic portion of their demand curve?

About the Author: Mike Fladlien is an AP Economics teacher from Muscatine High School in Muscatine, IA. He is an author, and also publishes the Mikeroeconomics and iMacroeconomics VB blogs.