Saturday, March 31, 2012

Daily Review -- Monopoly

It's getting close the the AP test on Microeconomics.  Let's do a quick review of monopoly.  1) What is the price and quantity for this firm?  2) What is the approximate price a perfect competitor would charge? 3) If the firm were regulated at the "Fair-Return Price", what would be that price? 4) What is the approximate amount of consumers' surplus?

Answers: 1) Price is 35, Quantity is 8; 2) about $30; 3)$25; 4) $100

This graph is from my Microeconomics coloring book.  If you think that color heightens learning, then color the area of profit green, the area of total cost red.

(Editor's note:  Two weeks ago my mock trial team competed in the area 9 regional.  We did not qualify for state.  As their coach, I can see several areas where we could have done better.  But, I am devastated.  From December to March 17 we worked relentlessly.  At the conclusion of the regional tournament, I began to wonder how game theory could be used in mock trial.  Specifically, best response.  Since March 17 I have spent most of my free time studying game theory.  As a result, I have been posting less regularly than I want to.  In the future, some of my posts will be about mock trial and reaction functions to mock trial.  Please bear with me as I try to build my skill set.)

Tuesday, March 27, 2012

Charlie Brown

Does Charlie Brown always play a dominated strategy?

Here Charlie brings a regular sized lunch while Linus brings a huge lunch.  The title of this strip should be  "Meals on Wheels" as Linus' lunch dominates Charlie's.

Charlie is always left the feeling that he is left out or doesn't fit in.  Charlie fails to put himself in other players shoes and anticipate their behavior.  Often, Charlie moves first and others around him change their behavior.  Good grief, Charlie Brown.  Don't play dominated strategies.

Monday, March 26, 2012

Two Quotes about Economics

"For those of you who don't understand Reaganomics, it's based on the principle that the rich and the poor will get the same amount of ice. In Reaganomics, however, the poor get all of theirs in winter." This quote is attributed to Morris Udall.  What makes the quote funny is that the quote uses a comic technique called a reverse.

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it."  This quote was said by Ronald Reagan.  What makes the quote funny is the simple truth in the statement.  

In both cases there is a hidden hostility, however.  In the first case the hostility is how the poor are always hurt  by policy and in the second, the hostility is directed at how the government always butts in.   

In the following quote, can you find the hostility and the simple truth?

Blessed are the young, for they will inherit the national debt. (Herbert Hoover)

Sunday, March 25, 2012

Fuel Prices and Recovery

This poorly drawn cartoon is my work this morning.
I drew this with a graphics tablet and tried to use the tools from Sketchbook Pro.
I think gas prices will retard the recovery, but it's not the government's policy to keep the prices low.  If prices are raising, then gas prices reflect current social mores and distribution of scarce resources.  Higher gas prices encourage alternatives.

Friday, March 23, 2012

Daily Review -- Savings and Investing

This question from the AP Lystserv:

Q: If the US purchases $100 in products from China, what is the effect on the US Balance of Payments statement:

1. The current account moves in a surplus direction by $100.
2. The financial account moves in a surplus direction by $100
3. Only the current account moves in a deficit direction by $100 as the financial account remains the same.
4. None of the above are correct. 

My answer is 2.  When the US purchases products from a foreign country, the transaction is recorded as a debit.  When the currency used to purchase the products reenters the US, it is recorded as a credit, or a capital inflow.  Thus the financial account moves toward a surplus.

Thursday, March 22, 2012

Logistics Today Notes

Rachel's pipeline assignment is here.

Wikipedia entry is here. cartoons are here.

These questions concern the Keystone XL pipleline. 1) Where does the pipeline begin?  2)  Where does the pipeline end?  3)  Given the 36" diameter, is the pipe a gathering line or a trunk line?  4) What will the pipeline carry?  5) What is a political issue associated with the piple?  6)  What is an environmental issue?  7)  What economic issues are associated with the pipeline?

Monday, March 19, 2012

Cartoons in Economics

Here Anna shows the business cycle heading into a recession.

Cartoons in Economics

AP Economics ace, Anna, drew this cartoon to show how inflation takes a bite out of savings.  Anna was showing the real balances effect of an unexpected change in the price level.

TSA Facts

This link was passed on to me. When people are asked if they will trade their privacy for security, most will say that they will. In this graphic, is it worth it? TSA Waste
Created by: Online Criminal Justice Degree

Sunday, March 18, 2012

Dan Dolan for Congress

Mr. Dolan is a friend of mine who trusts me to teach his children.  He also built my home.  We often talk about economics.  Recently, Mr. Dolan gave a speech at the democratic convention.  After the speech someone asked Dan if he had just spoke at the wrong convention since Dan was a republican.  This story has made all of the major media including Fox New and Huffington Post.

Economists often talk about asymmetrical information.  Usually incomplete information leads to negative externalities, but in Dan's case positive.  I conclude that predicting human behavior isn't for me.

Okun's Law

Wow.  I'm blind.  The numbers don't seem to add up.

The WSJ ran the graphic to the left.  Okun's law suggests empirically that for every 1% decline in unemployment GDP grows at 2.5%.  So in the graphic GDP is on the Y axis and unemployment is on the X axis.  Notice that the unemployment rate is quarterly.  This is awful close to 1% so if two quarters are measured there should have been a 5% increase in GDP.  GDP actually increased by 1.6%.  The article claims that the government is misleading us.  I think the article is just making a stink.

Okun's law is an empirical relationship and not a law.  There can be several reasons why GDP didn't grow.  One reason is that machines have been substituted for labor.  Another is that employers are just working their labor force less and giving voluntary layoffs.  Unemployment is hard to measure any way.

Still, I love the relationship of the data.  It's a beautiful thing.

Daily Review -- Excess Reserves

This from the AP Listserv:

Suppose a commercial banking system has $240,000 of outstanding demand deposits and actual reserves of $85,000.  If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of ______.

So the math I did was .25 X $240k = $60k. Then $85k - $60k = $25k. Then $25k X 4 (money multiplier) = $100k.

This is correct.  When the excess reserves get loaned out, the money supply will expand by $100k.  The real question is will the excess reserves get loaned out?  That depends on how optimistic the bankers are.  Right now, reserves are piling up.

Friday, March 16, 2012

Median Voter Theorem

The Wikipedia entry is here.

A brilliant lecture from Professor Ben Polak is here.

I cannot stress enough how brilliant Mr. Polak's class is and it's free on iTunes.  If you want to grow, I highly recommend completing the game theory class.

After listening to "Iterative Deletion and the Median Voter" I am more convinced than ever that the Democrats will reelect President Obama for another term.

Daily Review -- Exchange Rates

This question off the AP Listserve:

If Mexicans increase their investment in the US, the supply of Mexican pesos to the foreign exchange market and the dollar price of the peso will most likely change in which of the following ways?

Supply of Pesos Dollar Price of Peso
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease
E. Decrease Not change

My answer is B.  When Mexican investors demand more USD, they supply more pesos.  As a result, the Peso depreciates while the USD appreciates.

For teachers who want an excellent resource on teaching foreign exchange, the St. Louis Fed has an excellent lesson here.  The lesson is Econ Ed Live — Currency Crusaders of Justice.  

Wednesday, March 14, 2012

Laptops and Humans

This post shows how laptops could have been used to alter history.

HT: to Chris, a loyal reader.

Daily Review -- Interest Rates

This question was asked to the AP Listserv:

US dollars and the European Union's (EU) euro are exchanged in global currency markets.  Which of the following are true?
I.  If inflation is high in the EU and the price level in the US is stable, the value of the dollar depreciates.
II.  If the fed increases the money supply, the value of the dollar depreciates.
III.  If EU consumers are less inclined to purchase American goods, the dollar appreciates.
IV.  If US income levels are rising relative to incomes in the EU, the euro depreciates.

Here are my answers: The answers given on the Listerve are I and II.  The only way I could be true is if interest rates are higher in the US.  Otherwise, the USD would appreciate.  I disagree with this answer.  In answer II, an increase in the money supply would lower the interest rate in the US and might cause US investors to invest in world bonds. IV would see the value of the Euro to appreciate.  

Sunday, March 11, 2012

Gas Prices

Blogger, Gene Hayward, passed this on to me.

In a country as large as the United States, it makes sense that different parts of the country pays different amounts for a gallon of gas.  Some reasons are state and local taxes, moving the gas to different regions have different costs, monopolized markets especially in trucking, and supply and demand fundamentals lead to the disparity.  Here's a breakdown for a gallon of gas.

For the absolute best in cartoons on gas prices, click here.

Snow in Hell -- Greece

Greece Austerity in Cartoon

A NYT article is here.

There doesn't seem to be an end to the vicious cycle of borrowing that Greece is caught in.  The definition of insanity is doing the same thing over and over and expecting a different result.  Something exogenous has to happen to shock Greece out of this cycle.

For the time being, Greece is bringing down the whole EU.

Saturday, March 10, 2012

Mikeroeconomics: Greek Financial Crisis Through Cartoons

Mikeroeconomics: Greek Financial Crisis Through Cartoons: A haircut is the term economists use to describe a cut in bond principal when a country renegotiates its debt.  In March, 2005, Argentina ...

Daily Review -- Loanable Funds

Print off the market for Loanable Funds graph to the right.  For each question, determine what happens to the interest rate and which curve moves.

1.  The government uses deficit spending to finance a new public works program.
2.  The government runs a budget surplus.
3.  Investors become pessimistic about the future.
4.  There's a huge capital inflow.

My answers are: 1. D shifts right, interest rate increases; 2.  S shifts right, interest rate decreases; 3.  D shifts left, interest rate decreases; 4.  S shifts to the right; interest rate decreases.

Greek Financial Crisis Through Cartoons

A haircut is the term economists use to describe a cut in bond principal when a country renegotiates its debt.  In March, 2005, Argentina restructured their debt for 32 cents per dollar.

Greece just negotiated a 50% restructuring of their debt slicing off 100 Euros off the amount Greece owes.

If Greece defaults on their debt, economic turmoil could follow.  The banking system would be shaky and the public would lose confidence in the country.  Greece would have trouble borrowing for future growth.  I think the austerity that the pundits keep talking about is that Greek officials want to pay the loans back so they will have to raise taxes during a recession.  Greek officials will have to decrease government spending.

In the table to the left, I compare Greece, a country close to default, Argentina, and the United States who might default.  It is clear to me that Argentina has recovered.  I think Greece will go into default and the United States will experience a lot of problems but will never default.

Here is a link to where there are 15 cartoons on Greece.

My cartoon was drawn on paper with a mechanical pencil and Copic Markers.  I'm disappointed in my work.

Friday, March 09, 2012


Does believing make it happen?  Econ predicts that investor optimism fuels growth?  The University of Michigan reports a consumer confidence index.  I believe that an strong belief can change aggregate demand and people's choice.  Just look at Obama's message of hope.  His message changed voter preferences and America.  I think America is becoming optimistic again.

About a quarter of million new jobs were added to the economy even as the unemployment rate stands at 8.3%, but structural unemployment is weeding itself out.

(Cartoon is from econ ace, Anna Kramer.)

Mixed Economies

Many economies are mixed -- that is they contain elements command, market, and traditional.  China seems to be eating up the world with it socialist form of government.  This is the start of an AP article on China's form of government.

BEIJING—China's government vowed Friday that it will not deviate from its socialist path, defending anew its authoritarian system and saying Western capitalist political systems are not suitable for China. 
It's interesting how an ideology frames the viewpoint of how resources are used, who gets the resources, and what is made from the resources.  Before embracing the socialist model of governing, one should consider the Solow Growth Model.  Is it possible that China is just beginning to converge with other developed countries?

Thursday, March 08, 2012

Monte Hall Problem

Play this applet to see if you can pick the right door and win the prize.

My interest in game theory is exponentially increasing.  I am beginning to wonder if I have a free will.  If you want an entire course on game theory, iTunes has a free course offered by Yale.  I started this last year and gave up.  I'm beginning again.

After playing the Monte Hall game, a contestant stays with his original choice and wins a donkey.  The emcee, says, "Well, most people loss their ass playing in Vegas.  But on this show, you win one."

I think humor aids in understanding, retention, and recall.  But I find that being funny is serious work.

Wednesday, March 07, 2012

Econ Statistics

Several years ago I heard a joke about two macroeconomists who went hunting with a non-economist colleague.  As they tracked a deer up a slope and over the crest of a hill, they noticed it edge into a clearing, making a perfect silhouette on the horizon.  Within heartbeats of each other the two economists fired.  One missed by ten feet to the right and the other missed by ten feet to the left.  The deer ran off immediately, unharmed and the two men yelled in joy and began to hive five and slap each other on the back. Their colleague asked how they could be so excited when they had both missed by a substantial margin.  They replied. "Yes, we missed.  But on average we hit him right between the eyes!" (HT to

Statistics can be misleading.  How the government reports unemployment is often debated since the figure does not report those out of the workforce.  Inflation figures exclude food and energy prices.  And I have a problem with averages like the joke above.  Isn't the natural rate of unemployment really just the moving average of the last 10 years of unemployment?  

Tuesday, March 06, 2012

Daily Review --Loanable Funds

Loanable funds is a theoretical market where funds for investment is obtained.  Do you know what happens to the real interest rate when laws are passed to lower the taxes paid on investments?

Print out the graph on this blog, then move the supply or demand curve.  Then explain what happens the real interest rate.

My answer is the supply curve will move to the right as the supply of loanable funds increases.  The interest rate will fall.

I like to say that the supply of loanable funds equals private plus public savings + kapital inflows.  Lowering the taxes paid on savings would increase the supply of savings and shift the curve to the right.

Monday, March 05, 2012

Greece or Grease?

As Greece slips farther into misery, here are some facts about the staggering debt the country has.

 * 5 months ago, the yield on the 1yr Greek bond passed 100%. Wow! What a yield! Worth taking a bet on maybe? Well, yesterday it passed 920% looking on its way to 1,000%! Anyone who bought at 100% or 200% has lost nearly all their investment.

* As one part of the recent austerity package forced on Greece, many public servant salaries were RETROACTIVELY slashed, including for 21,000 teachers!!! This means many public servants including teachers now owed the government money and were facing working up to a month for free to pay off their retroactive salary cut!! Mmm, who feels like working for a negative salary?

Sunday, March 04, 2012

Daily Review -- Income Inequality

Scott Wolla, St. Louis Federal Reserve Bank, has prepared a lesson on income inequality.  The pdf can be found here.

Friday's Lecture Notes -- Savings and Investing

My notes from Friday are here.

Make sure you download and not just view.

Student Cartoon

Anna Krammer is an outstanding econ and artist.  She drew this after a lecture on Fiscal Policy.  The whole cartoon doesn't fit, so I only put what I could on the blog post.

Government is just too big.  Government will disrupt equilibrium with their policies and spending.  This cartoon comes before any lecture on crowding out.  Kudos.

Saturday, March 03, 2012

Can You Beat Juan?

This is a game in which you try not to pick up the last ball.  I found this while studying game theory.

Juan beat me 5 to 1.  The games get harder as your skill increases.

Economics assumes that people act rationally.  Game theory assumes that people act strategically.  I wonder what I am.

Daily Review -- The FED

The Federal Reserve Bank of Atlanta has six video about the role of the FED here.  From the Atlanta Fed website:
Mike Bryan, vice president and senior economist at the Federal Reserve Bank of Atlanta, gives an economist's view of the role of the Federal Reserve System in setting monetary policy. He describes the tools of monetary policy and highlights the role that the banking system plays.
 The St. Louis FED has a lesson about the role of currency and FED operations here.

I tried drawing Mr. Bernanke with my Wacon Bamboo Tablet.  I really struggled to make this.  I finally had to use MS Paint to get the text in.  I hope to use the tablet in the future to eliminate scanning, resizing, and all of the stuff that slows down the process.

As part of the review, can you name the three tools of Monetary Policy?

My answers are: open market operations, reserve ratio, and discount rate.  Whether they are effective is another debate.

Game Theory has an explanation of Game Theory here.

I begin rambling here.  When I interact with other people, do I always take into consideration their actions?  When I go to the store, do I plan my visit so that I avoid some people and not others?  How do I know where to park at the store?  If I anticipate rival responses, then I'm acting strategically?   Some people  believe that all human interaction is strategic.

Now, Hayek concludes that equilibrium occurs naturally like geese flying in formation or other self-ordering lists.  But if I anticipate rival responses I might not act naturally so that I can influence the outcome more favorably.  This is especially true with committee voting where I might vote strategically one time then vote by my preferences another.  A brilliant discussion of this tactic is found at Electowiki.

As long as there are few rational actors in the interaction, I can influence the outcome and defeat the natural equilibrium that Hayek suggests and the wrong equilibrium will emerge or there will be two equilibriums.

When the government creates a new tax law, people change their behavior to avoid paying the new taxes.  If people change their behavior in response to government regulations, I'm voting for limited government intervention in markets.

Friday, March 02, 2012

Is Government Too Big?

AP students: some believe the government is too big and that's why you should favor a reduction in government spending and not higher taxes to fight inflation.

The Tools of Monetary Policy

Mr. Jason Welker is a highly respected teacher and economics author. I highly recommend this website for the serious student.

Some topics include:

Mr. Welker's analysis is thorough and hits on points that might not be obvious.  For the serious student wanting to receive a five on the AP, these videos are a must view.

Daily Review -- Classical Position

What this video and then explain the classical position.

The classical position maintains that in the long run wages and prices are flexible so that they can quickly adjust upward or downward to changing suppliers and demands in the market place. In this view, the product and resource markets will automatically adjust to full-employment output as if guided buy an invisible hand. This is because aggregate expenditure equals aggregate income or output.

Thursday, March 01, 2012

Daily Review -- OMO

When the FED buys securities from a bank, all of the money is entered into the bank's reserves as excess reserves.  These excess reserves can be loaned out.  Here's a question from a reader.

I am getting confused on the issue of Fed actions and their impact on the money supply. My confusion is on whether Fed bond purchases which increases banks assets are subject to the reserve requirement. I thought the RR was linked to demand deposits so any purchase the Fed does increases the Monetary Base and therefore goes straight into excess reserves and potential loans.

The 2007 exam says "a)      Assume that the open-market operation that you indicated in part (b) is equal to $10 million. If the required reserve ratio is 0.2, calculate the maximum change in loans throughout the banking system."
The money multiplier is 5 (1/RR).  So 10 times 5 equals 50.  This only makes logical sense because the reserve ratio is set up to ensure that bank customers can come back and get their funds.  When the FED sells a security, the FED is not going to come back and ask for their security back.

Monopsony Lesson

Steven Reff has a monopsony lesson here.

Some economists think that this model is out of date.  I think this model explains wage disparity among women and men.  I can't prove it, but I think this model will become more and more relevant because many people are going to use a computer to work from home.  Working from home should destroy the model but I think it reinforces it.

The vast majority of the labor force are unskilled workers.  As skilled workers use computers to work from home, the only opportunities left to the unskilled workers will be local jobs that can't be digitized like working at a fast-food restaurant.

Moore's Law

Technology changes quickly.

This cartoon captures that notion more than a thousand words and formulas.

Daily Review -- Money Aggregates

Here's a question passed to the AP listserv:

Table 1.  Monetary Aggregates
Monetary Aggregates (in billions)
Currency in circulation $500
Money market funds $550
Time deposits $800
Savings deposits $1110
Checkable bank deposits $380
Traveler’s checks $15
American Express gift cards $25

11. Under Table 1, the value of M1 is:
a. $880 billion.
b. $895 billion.
c. $2005 billion.
d. $920 billion.
e. $1050 billion.

The M1 money supply equals currency in circulation plus checkable deposits plus traveler's checks.  Did you mark answer B?  Since the M2 money supply is a more stable measure of money, should economists be using this measure?