Sunday, April 29, 2012

Utilitarianism and Equality

In law it is common to proclaim that an action is just if it brings about more good than bad.  In economics utility is the benefit one receives from an action.  It is assumed that a rational actor will seek to maximize utility.  So suppose that as Michael Sandel proposes, there are five people stranded on a life raft and they decide to eat one person.  Four people benefit at the cost of one person, so this action is both just and utility maximizing.  Clearly, behaving in this manner is at odds with economic and moral ideals.

I have been profoundly influenced by David Gould's, Two Sides of the Moon.  Since October, I have spent most of my time researching models of equity and justice.  This summer I want to write a manuscript about Two Sides employing economic models and philosophy.  Two Sides motivated this post.

I'm afraid that both the quantity and quality of my posts have deteriorated as I dig deeper into my writing. I am considering taking a three-month vacation from this blog to pursue writing my manuscript.

Along this line, do you think that blogs have diminished in content and frequency in general?

Friday, April 27, 2012

Peter Diamond on Taxes

When economists think about the role taxes play in an individual’s decision to work, they think about two things. There’s the “substitution effect,” where higher tax rates make you work less, because you keep less of every extra dollar you earn. But there’s also the “income effect,” in which higher tax rates make you work more, because you need to earn more to be able to live how you want to live, or retire when you want to retire.

The rest of the article is here.

I say taxes destroy incentives.

Thursday, April 26, 2012

Comics in the Classroom

This link is an excellent Slideware presentation on the topic.

Cartooning enables rapid learning in economics.

Wednesday, April 25, 2012

Game Theory -- Negotiation

This link was sent to me via Gene Hayward. Steven Landsburg, The Armchair Economist, is the author of this link, Best Negotiator Ever.

Game theory is a complex strategy of taking rival's actions into account when making my choices.  I was wondering what the moral implications of this game theory as applied to life?  Say I know that my rival will always buy my product at a certain price.  Do I have the obligation to show him where there are cheaper substitutes?  Am I using this customer as an object instead of treating this person with respect?  The questions are deep for this simple mind.

Tuesday, April 24, 2012

Cournot Duopoly

How does a rival firm react to a rival's output? This video shows you the math. Later, I will show you the graph, which is pretty cool. I wonder if all rival responses can be quantified. Not just in business but in contract negotiations, use of common resources, social interactions, and learning. In the model in the video, rival one takes rival two's output as given then comes in and maximizes profits where MR = MC. But there are many other situations where I know what my rival will do then I can determine my best response to maximize my utility. Game theory is very scary.

Sunday, April 22, 2012

Day to Day Game Theory

Have you every stopped at an intersection at the same time as another and then you had to coordinate which of you would move first?

I plan my trip to the work room so that I know the copier will be available and I won't have to talk to students along the way.

I try to avoid the grocery store when the store is the busiest.  I slow down when I approach a stop light with a camera enforced system.

It seems that much of my daily life revolves around the strategic interaction of individuals competing for scare resources or seeking to maximize their utility.  Some of my interaction is game theory.  Recently, I  decided to take a class in game theory.  I chose iTunesU and an open class from Professor Ben Polak.  The class is simply brilliant.  You can find a link to it here.

I have just spent the last two weeks working on Bertrand and Cournot theory.  The theory has consume much of my time exposing many weaknesses in my algebra and economics theory.  This was my fear when I started the class.  When I started the class, my thinking went something like, "Should I enter" or "Should I stay out" of the class?  I was already acting strategically so I might as well learn how to behave.

Saturday, April 21, 2012

Phillips Curve

This video is outstanding and lifted from Mr. Gene Hayward's blog.  I am using this video and Mr. Welker's worksheet in my class next Monday and Tuesday.

I am constantly reminded that there are so many outstanding economics instructors in the world. I want to thank them for making my job easier next week. A link to my lesson on EconEdLink is here.

Friday, April 20, 2012

Tragedy of the Commons

Photocopy paper is now running dangerously low at our school.  Apparently there is a possibility that there will be no more paper to complete the year.  I can't imagine how hard it is to budget for a new year and this post isn't a criticism of that process.  Instead, economics seeks to understand how people behave when resources are scare and there are so many demands on them.  I think this is a classic case of the Tragedy of the Commons.

The tragedy occurs when my consumption rivals yours and I don't consider how my actions affect you.  In the case of paper at our school, I see a few teachers photocopying off large sums of materials for their classes leaving precious little for the rest of us.  It's interesting to observe how some react to the scarcity of paper.  Some are nonchalant. some are furious, and some just buy their own paper.

Scarcity doesn't affect everyone in the same way--at least in their reactions to it.  From a macro perspective, I don't see how anyone can make a policy the benefits every member of society.  That is why, I believe, Jeremy Bentham believe that the action that gives the most good to the most people was the moral action.  Mr. Bentham's philosophy is the basis for Utilitarianism and the decision-making model that economists use.

The Tragedy of the Commons isn't just paper.  There is competition for seating in the teacher's lounge during lunch time.  Passing between classes is very difficult.  As long as many individuals share a resource and no one owns the resource, individuals will use the resource until the benefit of the resource is  zero.

Thursday, April 19, 2012

Daily Review -- AD/AS

1.  What problem is this economy facing?
2.  Name one Monetary Policy to correct the problem?
3.  Is the unemployment rate greater than or less than the natural rate?
4.  What would happen if this economy were left alone?

Answers:  1.  Recession  2. Open Market Operations  3.  Greater than.  4.  The supply curve would move to the right equating at LRS and AD at a lower price. 

Daily Review -- Spending Multiplier

Assume that the GDP gap is 100 and the economy is in a recession.  If the MPC is .75, how much should the government increase spending to eliminate the gap?

Answer:  using the formula: 1/(1-MPC), the spending multiplier is 4.  The government should spend 25 to eliminate the gap (100/4).

How much should the government decrease taxes?  If you answered 33.33, then you knew that the tax multiplier was -MPC/MPS or -3. 

Discussion question:  Does Fiscal Policy work?

Daily Review -- Money Market

On the graph, label each curve.  Then answer the following questions:

1.  Is the interest rate nominal or real?
2.  Lord Keynes invented this model.  What is the correct name for it?
3.  If the FED buys securities, which curve will move?  What will happen to interest rate?
4.  Given your answer in 3, what will happen to bond prices?


1.  Nominal.  2.  Liquidity Preference  3.  The money supply curve, the green one, will move to the right, the nominal interest rate will fall.  4.  Bond prices will go up.

What will happen to prices?  As the interest rate falls, Consumption and Investment increase so the AD curve shifts to the right.  Prices will increase. 

Wednesday, April 18, 2012

Logistics PowerPoint

This is a link to my part of my class today in Logistics.  It's just for my class.  I can't share using Facebook or Google Documents so I post it on my blog.

Economies of Scale

A Slate article appears here that explains how mass production techniques have decreased the cost of cocaine.

As the price of drugs have decreased, I think the value of drug enforcement programs have diminished.  If I bust a cocaine cartel with 500 kilos of blow with a low street value, have I really damaged them economically?

When calculating the Average Total Cost of a good, it's important to understand that the costs of producing more of the product are increasing, but the quantity being made is increasing faster than the costs.  So when you divide the cost by the quantity, the average total cost becomes a smaller number.  This is what is meant by economies of scale.  Any improvement in the process can lower costs.

As an aside, the WSJ reported yesterday that Apple makes $1,000 per square foot in their stores while Best Buy only makes $20.  When I think of economies of scale I think of how large the store is because it's easier to spread the costs out over a larger range.  Of course, I think it matters what kind of product is being sold in the store.

Sunday, April 15, 2012

Philosphy and Economics?

When I begin teaching microeconomics in the fall, the first lesson I teach is that economics is about scarcity.  Scarcity results from economic actors having an unlimited number of wants and limited resources.  So these actors have to make a choice and when they choose, they incur opportunity cost. 

Rational actors weight the costs and benefits of each action when making a choice.  Is there a time when an actor should act irrationally.  That is, should a actor complete an act where the costs out weight the benefits?  I would like to take two examples.

Say that you are seated next to someone in a restaurant who starts to choke on a fish bone.  You know the Heimlich Maneuver and it would only take a minute of your time to save this individual from choking.  So you grab the choking patron and save his life.  Now, consider the same scenario but  only this time you are across the street and observe through the window that the patron is choking.  Do you fight your way into the restaurant and save the patron or is the cost of doing so now prohibitory high? 

I would predict that in the second case you would not try to save the patron's life because the cost is too high.  In the first class, there was a minimal effort involved.  That's the economics, but do you have a moral duty as a good Samaritan to save the soul's life? If you believe you do have a duty, then you will act irrationally and this is a problem I'm having with economics.  Economics tries to predict human behavior.  Questions of virtue and morality seem to go beyond the tools of economics.

If you believe that you have a duty to help those in need, then what are you doing to help the people in Syria?  What are you doing to help children in the Congo?  Are you volunteering every second of your time to help in local charities?  I suspect, that you act rationally and only volunteer now and then--when the cost of acting is low.

Over the last month, I have begun to study Game Theory in economics.  I have started to question everything I know.  I hope I didn't offend anyone with this post.  I am beginning to wonder why I act the way I do and where I get my beliefs from.

Interest in the FED

I know there are FED watchers, but what is the interest in the FED by the public?  I think it's declining like our GDP.  This cartoon was only motivated by my attempt to become an artist not in any contempt I have for the FED.  I believe that without the FED, our economy would be in terrible shape.

This cartoon was actually a doodle as I was listening to Ben Polak's brilliant lecture on Cournot Duopoly on iTunes.  If you want to learn Game Theory, Dr. Polak is the best.

Monday, April 09, 2012

Moneyball Math

A superb blog post is here.

I was expecting to find game theory math behind the calculations.  Instead I found the Pythagorean Expectation and sabermetrics to managing the team.  

I have been learning game theory to prepare my students for mock trial next year.  I will now look at sabermetics too.  

When a friend of mine retired he wrote a poem in which a old maple leaf clings on through winter.  Eventually, a new leaf grows behind it and fresh winds blow the old leaf away.  In this fast paced world, how can one keep up?  I feel like the only way I can keep up is because I'm being pushed from behind.

Best wishes today for a productive and rewarding day.

Sunday, April 08, 2012

Microeconomics Coloring Book -- S D CS and PS

Here's the link to a class warm up.

Students shade consumer's and producer's surplus, shortages and surpluses, calculate the areas of CS and PS.  In a moment of stupidity, I have the government impose a quota so that students can calculate the area of dead weight loss.

Saturday, April 07, 2012

Microeconomics Coloring Book -- PPF

Here is a link to a Google Document I made to teach the Production Possibilities Curve.  Make sure you download and print because Google converts the document from a 2007 Word document to a Google document when you view it.
A picture of the coloring book is shown to the left.

As more and more instruction becomes "interactive" with hyperlinks, flash animation, and graphics tablets, I think students will prefer the interaction with traditional paper and the visceral feel of physically coloring their answers.  On some level, color must heighten a learning response as most of us have been conditioned to stop at a light.

The coloring book is a simple 5-minute warm up for the students to get them ready for your lecture or instruction.  Having this ready for the students as they come in the door will allow you to take attendance and deal with issues that arise at the start of every class.

I welcome any feedback you wish to give.


How has the Internet changed social behavior for baby boomers?

I can remember a time when it was a cool way to spend a weekend night driving around or cruising. In the relic film, American Graffi, teens cruised the one ways for fun.  Often they would drag race.  Getting a driver's license meant having the road to fun and freedom on the weekends.

I can't remember the last time I heard students talking about just cruising around.  I think there are several reasons "invisible" to the the eye that accounts for this change in preference.  1) gas is higher in price so students look for an alternative entertainment.  2) jobs are hard to find so that it is no longer a necessity to have a car.  3)  The Internet is a low-cost substitute that has huge benefits.  4) human behavior directs itself to a low cost behavior.  4) there's been a rise in public transportation.

So a technological innovation has changed social behavior away from time wasting, gas wasting behavior to social networking on the Internet.

Friday, April 06, 2012

Cool Links

I have found this site useful for deep understanding of micro/macro. I have been studying game theory using iTunes U. Mr. Gene Hayward forwarded this link to me on how to buy a car.

Tuesday, April 03, 2012

Is Copying Theft Video

This well done video by Nina Paley makes a good point.

I originally read this on Freakonomics. I think that copying leading to lower prices which is good for the consumer but bad for the producer. I think copying destroys incentives to produce. Furthermore, I think that a prisoner's dilema arises. Why should I produce when I can do nothing a copy a rival's? Thus, less is made. I believe that intellectual property should be protected. It is also true that viewing other's work is also inspiring to me and enriching. I have learned much practicing the work of Chinese painters that I can apply to my own work. Much of what I have copied doesn't look like the original work either. But copying a CD or DVD or a book is different. I believe that in the case of a book, my intent was to steal.

Monday, April 02, 2012

Education and Collaboration

Just about everyone in education is talking about how working in groups is a 21st Century skill.  It is my contention that working in groups is a sub-optimal strategy for teaching.  I can only offer my immediate anecdotal thoughts.

If there are two students working a group, they share the benefits but not the cost.  There's a tendency for one student to do all of the work because the benefit is shared.  So one student will free ride or shirk.

I found this Harvard paper on the topic. But more on this topic will follow as I put this into a game theory context.

Daily Review -- Externalities

What kind of externality is graphed to the left?  If you recognized this as a negative externality congratulate yourself.

When economic actors do not take into account all of the costs they impose on others, the costs to society are higher, as shown by the Marginal Social Cost curve that is above the Marginal Private Cost.

A barking dog, loud music, pollution, and even slow moving vehicles can cause costs to be imposed on society that are not accounted for by the private actor.

You might recall that a Pigovian Tax would correct the externality.  In this case, the socially optimal output would be 4 units.

Sunday, April 01, 2012

Daily Review -- Perfect Competition

In the graph to the right, determine the price the perfect competitor will charge, and the profit.  For those who like to color, color the area of profit green.

My answers are: the price is $4 producing a quantity of 6 for a total revenue of $24.  The profit the firm ears is $6.

In a perfectly competitive market no firm has pricing power so they can't influence the market price.  The firm does not consider the actions of its rivals when making a quantity decision.

This graph was made using my Bamboo tablet.  I still need to master the medium.