Thursday, September 29, 2011

Daily Review--Aggregate Supply

Which of the following are reasons given for the upload sloping aggregate supply curve? a. Sticky prices b. Sticky wages c. Menu costs d. Producer misperceptions e. Resource costs f. Worker misperceptions All of the above are reasons for the slope of the AS curve. When prices rise, some producers can rise prices and some can't. Also, some workers might have long-term contracts but some workers can negotiate a wage increase. It is difficult to predict the inflation rate some both workers and producers will incorrectly guess the inflation rate. For these reasons, the curve slopes upward.

Monday, September 26, 2011

Daily Review--Bond Prices

Watch this video. Answer the question following.

Watch the full episode. See more PBS NewsHour.

How are bond prices and interest rates related? a. Directly b. Inversely If you answered "b" then you answered right. As bond prices increase, the interest rate falls. From the video, bond prices are rising as more and more investors seek safety in US bonds. As investors demand bonds the price increases keeping our interest rates at an historical low.

Sunday, September 25, 2011

Daily Review--Monopoly Power

What is the name of the index used to determine market concentration?  The

a.   n-firm concentration ratio
b.  Sherman Anti-Trust ratio
c.  DOJ Monopoly Power ratio
d.  Herfindahl-Hirschman Index

The WSJ, Monday, September 19, 2011, A15, writes about AT&T and the Economics of Monopoly power. In this article the government has challenged AT&T's acquisition of T-Mobile.  The suit alleges that competition would be lessened if the acquisition were to be allowed.  The Herfindahl-Hirshman index is used to determine if there is market concentration and not whether the concentration would harm customers.

There are over 300 million wireless users on the 3G  network.  Many AT&T calls are dropped.  I think the DOJ should consider more than just the concentration when ruling against AT&T.

Saturday, September 24, 2011

Exam Cram on Amazon

If you are a serious Macro student, my app, Exam Cram is now selling for immediate download on  You will have to go to the app store then search for Exam Cram.

Again, I thank Gagan Bhalla for his brilliant work.

Daily Review--Price Ceiling

For a review of a price ceiling, click here.

On Fox and Friends, Friday, I heard that drugs that effectively fight cancer are extremely costly.  Many patients being treated for cancer, are visiting the illegal black market.  What are some unintended consequences of the higher price?

a.  Poor quality
b.  Increase in illegal activity
c.  Better care
d.  More physicians entering the labor market

My answers are a and b.  According to the news account I heard, the high price of these drugs are forcing patients to substitute a less quality drug that has not been FDA approved.  Many patients report that the pain does not dissipate.  Of course, there is always the possibility of buying a placebo or poison since drug enforcement is weak.  The effects of a high price are the same as a price ceiling in my opinion as both a high price and a ceiling reduce the quantity demanded to an extent that few patients can afford or obtain the benefits.

Hand-Drawn Economic Concepts

I like the clarity of these videos. Consider using these to study from.

Sunday, September 18, 2011

Daily Review--Netflix and Elasticity

At the end of June, Netflix had 24.6 million customers when Netflix was charging $9.99.  According to the WSJ*, Netflix expects to have 24 million customers when the price rises to $15.99.  Calculate the elasticity of demand.

My calculation puts the PED at .02 which makes demand inelastic.  If economic theory is correct, Netflix should see an increase in total revenue.

With less customers, there will be less problems dealing with difficult customers.  Interesting.

*(Friday, September 16, 2011, Section B1, "Netflix Pricing Gets Thumbs Down".)

Cartoon for Free Trade

We are so interdependent that trade is the heart of the global economy.

Buy American?

My editorial for the Muscatine Journal

Suppose that buying American created jobs because foreign goods were excluded from domestic consumption.  Suppose that the money stayed here in the USA and didn’t find its way abroad.  Would this be desirable and humanitarian? 

Recently, I hired a programmer in New Delhi, India, to make an Android app.  Gagan was hired for a price less than what many Iowans spend to attend an Iowa football game.  The wage I paid Gagan became his seed money to build his business.  Gagan was able to use the money he earned to build his business, which has grown 1,000% since last May.  He hired more programmers and his wife and children now enjoy a hirer standard of living than before.  Gagan, in return also buys many “Made in the USA” products too.  My point is that buying abroad improved living conditions around the world and relieved some of the misery of the human condition.   Paul Krugman writes about children in the Philippines who scavenger through mountains of garbage in hopes of finding a half eaten banana.  If buying a product from the Philippines improved this child’s life, I think it would be worth it.

The iPod is almost completely made with foreign labor and foreign parts.  According to Hal Varian, the chief economist at Google, all of the value of iPod comes from the selling of the iPod in the US.[1] For example, the iPod is assembled in China where the value added by Chinese workers amounts to $1.  When all costs are accounted for from Korea, Japan and Southeast Asia, about $80 of the iPod’s selling price is retained as profit to Apple.  U. S. producers earn by far the most profit along the supply chain.  Likewise, A Barbie dollar earns Chinese workers about $1 of the $9.99 selling price.  Most of the value is retained as profits in the U. S.  American labor can make a Barbie just as well as a Chinese worker, but Chinese labor is cheaper.  So the Chinese laborer earns a dollar and the U. S. manufacturer earns $8.99.  The profits stay here to build schools and reward the creativity of marketers, designer, and advertisers.

The Hatfields and McCoys battled for years and refused to trade with each other.  Assume that the Hatfields land was better suited to making corn and the McCoy’s labor was better suited for making cloth.  Because they both hated each other and would not trade corn for cloth, they both had less than they would have if they could have traded.  This is because they could have utilized each other’s talents and natural endowments through trade.  Both families could have had more, but they only consumed what they could make with their land and labor.  Like I tell my students, the United States can make bananas so we would not have to import them, but at what cost?  It’s cheaper to import.

Here’s a hypothetical example.  Suppose you go to the store planning to spend $10 on a widget.  When you arrive you find that the price of the Widget is $5.  Now you can buy two.  You probably feel good because you can now consume more goods.  This is why foreign countries can compete against the US.  When foreign goods are cheaper, Americans buy the cheaper goods so that they can stretch their budget and satisfy more wants.  To ask Americans to just buy American is asking them to pay more for their goods and satisfy less wants.  I doubt if many Americans would.  It’s fine to buy American if you’re willing to pay more for your goods.

I buy from local merchants as much as possible. I believe that as an employee of the MCSD I should support the local economy as I’m supported with their tax dollars. I don’t believe, however, that many believe the same way as I do because they are trying to stretch their budgets in difficult times.  Buying American sounds good, but in reality, most cannot.

When you say, “Buy American” what exactly does that mean?  Does it mean that you can’t eat at Salvatore’s, River View, or Guadalajara restaurants because these people are foreign born?  Or does it mean that you can buy from these establishments because they have been here a long time—you just can’t buy from their family back home.  So it’s okay to buy from foreign nationals here, but not over there?  This sounds like protectionism and jingoism.

When you tell people to buy American you are essentially telling people that Americans are more worthy of your dollars than foreigners.  The United States was founded on the principle that people should be free to choose.  By telling people to “Buy American” is morally wrong because you are telling them they don’t have a choice.  Chanting the “Buy American” mantra is materialistic, not moralistic.  You might as well be saying, “Buy White” which is a racist.  By insisting on buying only American made goods, if there is such a thing, you are inferring that Americans are better and that all people are not created equal.  And that’s un-American.

Tuesday, September 13, 2011

How Does Your Bank Stack Up?

Thanks to Chartporn for this excellent site.

I was able to find my local bank and compare its troubled assets to the national mean.  This site also had enough information for me to make a balance sheet and find profit ratios.

Sunday, September 11, 2011

Using Technical Analysis on 9-11

Using Candlesticks, I observe that on 9-11 currency trading in the USD dips into what I call the Twin Towers formation. On this day, let's remember.

Saturday, September 10, 2011

Demand Shifters

brought to you by Livescribe
Here's the three-minute version of Friday's lecture.

Daily Review --PB and J

Listen to this podcast.

Bad weather including Hurricane Irene, has destroyed many of the resources used in peanut butter and jelly.  Prices are predicted to increase by 30% as fruits, sugars, and peanuts, the resources used in these food items are to increase.

If resources are more costly, which curve will shift and what direction?

My answer is the supply curve will shift to the left and prices will rise.


Economics predicts that an equilibrium will result as a result of peoples' actions.  These actions might be maximizing utility or comparing alternatives.  So if I can get a lower rate on a credit card somewhere else, ignoring transaction costs, buyers will switch until the rates become equal.  Are the rates shown here close enough to be considered equal?

Daily Review--Nintendo 3DS Sales

After Nintendo slashed the price of the gaming system, 235 units were sold with about 80% of the unit sales related to the price cut.  Were the sales the result of a change in demand or a change in the quantity demanded?

The best answer is a change in quantity demanded since the price was lowered.

Friday, September 09, 2011

Daily Review

6. Which are not counted in GDP?

a. work Juan does around the house
b. buying a used car
c. purchasing HNI stock
d. new residential construction e. final prices paid for goods
f. Autos made in US by Honda

7. Which equation calculates GDP?

a. Y= C+I+G-Nx
b. Y= C+I+G+Nx
c. Y= C+I+G+E-I
d. Y=C+I+G-E+I

The answer to question 6: a, b, and c. The answer to question 7 is a and c. Although work around the home is important, the work does not result in a factor payment so it's not counted. GDP is concerned with current production. A used auto would have been counted in the year it was made. Buying stock in a business is a financial transaction that does not result in a factor payment to a productive resource. In question 7, net exports, Nx, and E-I describe the same identity. Thus, a and c are correct. These questions are from my FREE app developed solely for the Android market. You can install it here.

Thursday, September 08, 2011

Today's Lecture

brought to you by Livescribe
Demand slope explained.

Daily Review--Unemployment

Last night's debate, inspired a couple of econ 101 review questions.

4. The non accelerating inflation rate of unemployment is:
            a. the natural rate of unemployment
            b. the full employment line
            c. long-run equilibrium
            d. can vary over time
            e. all are correct

5. Structural unemployment is:
            a. obsolete skills
            b. equal to cyclical unemployment minus frictional unemployment
            c. related to job search
            d. procyclical
            e. non existent

The answers are: e and a.  Here's a fact.  When I post daily review questions, readership falls dramatically.  I think that structural unemployment is the reason behind the 9.1% unemployment rate.  All of the politicians can talk about job creation, but there's nothing they can do about it.  

Tuesday, September 06, 2011

Popcorn at the Movies

Say you go to the theater an want to buy popcorn. The price of the popcorn is $10 and you think the cost of making the good is only $1. You feel ripped off. You have to buy the popcorn at the theater and can't bring food in. The feeling you have about being ripped off is what I think is market inefficiency. In this case, productive resources are held in a monopolized market above their opportunity cost. Since the resources used in making popcorn have alternate uses, the higher price retains them into making popcorn. When resources are used in a manner were the price paid equals the cost, then economists call this situation resource allocative efficiency. When you say something like, "The price of popcorn should be $1" then you are making a normative statement. If you say the price of popcorn is $10, then you are making a positive economic statement.

Monday, September 05, 2011

Consumer Equilibrium

brought to you by Livescribe

I've condensed Friday's notes to this 3 1/2 minute pencast.

Daily Review -- Complementary Goods

Sales of Amazon's reader, the Kindle, are projected to reach 4 million by Christmas, 2011.  Amazon has 630,000 ebooks available for sale with approximately 510,000 books priced at less than $10.  Currently ebooks outsell the traditional hardback and paperback by a ration of 1.5 to 1.  As the price of the Kindle has fallen from $234 to $134, the number of ebooks sold have increased.  Economics would define the behavior of ebooks as a "complementary good."

A complementary good goes along with another good such as cookies and milk or gasoline and a automobile.  When the price of one good decreases, the demand for the complement increases like the ebooks.

The Daily Review is intended for AP economics students.  I have written an Android app to bring this blog to your Android phone.  On the Android Market, search for Mikeroeconomics or type copy and paste this address into your search engine:

Economics Review.

Daily Review--Spending Multiplier

From 1965 to 1966 American presence in Vietnam greatly escalated.  The number of troops in southeast Asia increased from 25,000 to 350,000.  Government spending increased from 744 billion to 816 billion and GDP rose from $3,243 billion to $3,433 billion.  The change in GDP from 1965 to 1966 was 190 billion, and the change in Government spending was 72 billion.  Calculate the spending multiplier for government spending during this time.*

To find the multiplier, divide 190 by 72.  You will find that the spending multiplier is 2.64.  With a spending multiplier of this magnitude, you would expect inflation in the future.

The Daily Review is intended to help students prepare for the AP microeconomics and macroeconomics exam.  A FREE app for the Android is  I can't explain why I can't make this a link.

*(The figures for this post were taken from Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, Chapter 23, page 599. ) 

Sunday, September 04, 2011

Sylvia Nasar "Grand Pursuit"

Sylvia Nasar new book, Grand Pursuit, looks to be an intellectual reading on genius.  I hope to find meaning in the trials of immortals like Keynes, Hayek, and Dickens as I read this book.  The book comes out on September 13 on Kindle and hardcopy.

For a Fastdraw presentation that is outstanding, click on "this" below.

For this link, I owe a debt of gratitude to MV=PQ.

Saturday, September 03, 2011

Salary and Labor Supply Curve

The theory of labor supply suggests that as my wage increases, I will supply more labor.  What happens if my wage is as high as it can be, perhaps capped by a salary?  I feel this has happened to me this year.  I am being asked to work 2.5 hours more a week without a salary increase so my labor supply curve looks like the diagram.  I have bigger class sizes, a more diverse group of learners than ever before, a longer day, no budget, and more institutional regulation.  So am I acting irrationally by working?  I think teachers work for different reasons than just monetary, but I am beginning to wonder if there's another career choice.

Oliver Blanchard writes in his fabulous Macroeconomics book that firms will hoard labor by making them work harder during a recession.  I am hopeful that when this recession ends, if ever, that some of the job stress will be relieved.

The Thidwick Theory of Unemployment

In the Dr. Suess book, Thidwick the Big-Hearted Moose, a moose is slowed down by all of the free riders on his back.  I like to think of the free riders as jobs in which structural unemployment is weeding out inefficiencies.  Let me elaborate.

The moose is a metaphor for economic growth.  When the economy is growing, many jobs are being created and business are hiring new employees and taking risks.  When the economy is rife with inefficiencies, it slows down just like all of the free riders on Thidwick.

Until these inefficiencies are weeded out, our economy will grow even slower.  Some of these inefficiencies are the result of technology replacing workers and the reluctance of businesses to layoff because of uncertain demand.  Paul Solmon reports on PBS that the average number of weeks of unemployment is 30.  I'll say it again.  Look for the natural rate to remain at 9% forever.