Friday, August 31, 2012

Jobless Recovery?

A "jobless recovery" is when GDP begins to improve by the unemployment rate stays constant.  This might happen is jobs that have become obsolete are weeded out, employers substitute machines for labor, or the existing workforce works longer hours. In the latter condition, employers are not certain that the economy will recover so they play it safe and don't hire more workers.

Hiring is a long process of searching and training workers.  Hiring involves paying payroll taxes and making choices on long-term employment.

Employment has stayed around 8% now for 6 months, but GDP is rising.  If I were unemployed, I would take any job because the job I was waiting for isn't there.  Business confidence fuels investment in machines, employment, and housing.  As Bloomsberg reports, confidence is down.

Data today showed that confidence among U.S. consumers fell in August by the most in 10 months as households grew more pessimistic about the economic outlook.

Thursday, August 30, 2012

Opportunity Cost

There is an old saying in economics that "There's no such thing as a free lunch".  This is an example of opportunity cost. In textbook economics the time spent going to lunch was given up and that time spent could have been used doing something else.

When writing this morning about using comics in education, I ran across this quote which I think is just as good as no such thing as a free lunch.

Wednesday, August 29, 2012

Trading Possibilities

This was a problem we were doing in class, so I posted it.    Rayland can make 12 hats or 3 bikes.  Would Rayland trade 5 hats for 1 bike?  Rayland would not make that trade because when they make bikes, it costs 4 hats.  Trading 5 hats for one bike is worse.  Rayland would be better off trading 3 hats for 1 bike then Rayland would be above the PPF.

Artland would not trade one bike for one hat because you can see that they would inside of their PPF.  Artland would have to trade at least for 2 hats just to break even.  A trade of three hats for one bike would be excellent.

Supply OR Demand

This cartoon shows that the interaction of supply and demand creates a market.  The humor plug-in was a twist on an old cliche -- "can't sell snow to an Eskimo".  The humor plug-in could be a Play On Words, POW.  But the humor comes from unveiling the simple truth about the snow cone vendor's actions.  That truth is that it's hard to sell something if there is no demand.

The snow cone vendor has a monopoly on the market.  How come he can't sell the cones at whatever price he chooses?  How easy is it for other vendors to enter the market?  This is stretching the intent of the cartoon far, but I think this cartoon illustrates that markets, for the most part, are competitive. 

If Walmart suddenly rises their prices, other competitors will enter the market because it now profitable for them to do so.  If Walmart maintains their pricing strategy, then others will be barred from entering. 

Tuesday, August 28, 2012

Aldi's Food

There was a time when shopping at Aldi foods meant consuming food barely edible.  Now, the food at Aldi is comparable to the higher end supermarkets for most products.  Aldi doesn't have a meat market or a food court and you still bag your own groceries.  But, the food is almost indistinguishable from Eagle, Fareway, and HyVee.  It is my thought that the supply chain has developed so that all stores can buy the same groceries for the same price.  The price difference comes from the perceived value that the consumer places on the location of the supermarket, the service, and the placement of the goods in the store.

While driving through a local fast food, a student filled my order for me.  The student had been working at this place for about six years.  She started in high school and now she manages the place.  She works every day and she works long days.  When she was in high school, she could afford to drive a nice car, act in plays, and wear beautiful clothes because her parents met many of her needs.  Now, she's stuck in a low wage job with little chance of upward mobility.  How is it that a student's choice to work at a fast food restaurant imprisons that child for life?

Monday, August 27, 2012

Can You Balance the Budget?

The New York Times will let you try to balance the budget.

A HT to Jodi Beggs.

Zoo Keeping and More

Mr. Welker has a nice lesson plan to show how scarcity affects choices.  The Economics of Zoo Keeping has students decide which of the 25 animals to allow in their zoo.

The Hungry Hobo has a rewards program that rewards frequent visitors.  After each visit, you enter your cellphone number.  After you have visited the store 11 times, you get something free.  I was wondering if the rewards program acted as data to build the company's demand curve.  If I've eaten at HH 8 times, there's a likelihood that I will continue to eat there at current prices.  Among other things, keying in my phone number also shows location which can be a source of monopolistic competition.

After reading Greg Mankiw's blog, I decided to watch Breaking Bad, a story about a mild man, Walt White, who becomes a drug dealer after learning that he has cancer.  Many of the scenes can be analyzed economically.  For example, there's one scene in which Walt is thinking about killing Crazy Eight.  Walt ponders whether Crazy Eight is rational and will weight the benefits and costs of the situation.  The show is on NetFlix and AMC on Sunday nights.

Sunday, August 26, 2012

Politics and Economics

With the GOP National Convention set to start on Tuesday, I thought it was a good time for some political humor.

Will Rogers said something like 'all you have to do to be funny is to watch the government."

In this cartoon, Mr. Obama has just been elected president.  The artist is making the point that the Republicans have crashed the economy.  Since the republicans control the house, the GOP will still be in the driver's seat.

I think there are other factors that determine the course of the economy besides who is president.  In our global economy, the European Union has influence on our markets as well as currency valuations in China.  But this cartoon captures the spirit of the election.

In the current presidential race, both candidates have made the economy a large part of their campaign.  I think the campaign will come down to whom the voting public thinks they can trust.  In my opinion, that will be a dead heat.

Monday's Lesson Plan

Today we are going to focus solely on Gains from trade.

The worksheet we are using is from a link from David Mayer's website.  Scroll down to Activity 50.

The answer key for problems 1 and 2 are here as a Google Document.

The answer key for problem 3 is here.

Saturday, August 25, 2012

Income Inequality

This cartoon is how most people think the upper 1% got rich.  Unfortunately, it's wrong.

If the wages are too low, employees will quit and move to higher paying jobs.

This cartoon ignores that markets are competitive and prices for the product gravitate towards their marginal cost.

Even in monopolized markets the labor is perfectly competitive so there's many substitutes for the labor.  If machines are substituted for labor, then wages can go lower.  This would happen in an unskilled labor market but not in the skilled labor market.

This cartoon shows the rich in a negative light.  Many entrepreneurs earned their income by working long hours and taking risk.  Often the entrepreneurs work with a high opportunity cost.

Friday, August 24, 2012

How to Determine Comparative Advantage

I think is this really good.

Can There Be Too Much Specialization?

The economy works toward efficiency when people work in the area that they have a comparative advantage and trade for all other wants.  But there can be too much specialization.

Economics also predicts that rational consumers will weight the costs and the benefits of each action.  If the cost of transactions for working in the area of their area of comparative advantage is greater than the the benefit, then the action will be completed inefficiently.

I often find it is easier to just do it myself because it saves time.  But in the major things in my life, I use comparative advantage rule.  For example, having my car fixed is an activity that is better left to a mechanic.

Suppose two countries specialize and trade in the area of their comparative advantage.  Can changes in technology and workforce, change the comparative advantage?

Thursday, August 23, 2012

Comparative Advantage

In the cartoon, both lovers will have more time for each other if they do the activity that has the lowest opportunity cost and share each other's output.

The basis for trade is what David Ricardo called "Comparative Advantage".  There's no doubt Rachel could provide content and intellectual property rights, but she would have more time dividing the labor.

Countries also behave in this matter and is the source of imports and exports.

Because many countries have a comparative advantage relative to the United States, the US has a large current account deficit.  Some criticize American schools for not providing the skills to compete in a global economy has the source of the deficit, but perhaps resources in those countries are more suited to the production of the goods the US imports and the economy is working at its comparative advantage.

Is it possible to have too much specialization?

Wednesday, August 22, 2012

Inflation Tax

 What is an inflation tax?

David Anderson and Margaret Ray define an "inflation tax" as the reduction in the value of money held by the public caused by inflation.

This is how the inflation tax works.  The government runs a deficit and pays for the deficit by having the treasury print bonds and the central bank purchase the bonds using open market operations.

If inflation erodes the value of a dollar, then the "inflation tax" is the value of the dollar less inflation.

Wikipdedia has a slightly different definition.

Since 2008 the United States has seen an explosion in money growth.  Where is the inflation?

I am now convinced that the best book for AP Economics test preparation is the book written by David Anderson and Margaret Ray.  The Amazon link is below.

Daily Review -- Basic Concepts.

1.      1.    Which of the following are Micro topics and which are Macro?
a.        How long should Juan workout in the morning before work?
b.      What is the inflation rate in Greece?
c.       How much utility does Juan get from kissing his girlfriend?
d.      How fast is the Gross National Product of the United Growing?
e.      How can the unemployment rate be reduced from 8.3% to 5%?
f.        What price should Juan charge for his car?

1.      2.   Which of the following are positive economic statements and which ones are normative?
a.        The minimum wage should be increased to $10 per hour.
b.      People on welfare should have to work to earn entitlements.
c.       The inflation rate is 1.2% in the United States.
d.      There should be a ceiling price on gasoline such as $4 per gallon.
e.      Population in the United States is growing at 2% per year.

 Here are my answers: a,c, and f are micro topics.  a,b, and d are normative.

Real Balances

I've been studying inflation and have been having a lot of problems with "Real Money Balances."  First the definition found on Encyclo:

The real value of the amount of money held by a person, household, or firm, or the amount in circulation in the economy.
the real value of money balances, their purchasing power in terms of goods. 
Next, a discussion from

So as inflation perks up, the real buying power of my money decreases.  I want to prove this mathematically, but can't as a function of money demand.  Any help would be appreciated.

Tuesday, August 21, 2012

Monetary Crisis

How does hyperinflation begin?

First there is a large deficit to finance a war or revolution that destroys the ability to collect taxes.  The government loses its ability to borrow from foreign markets and domestic residents won't buy government bonds.  So the government resorts to other means to pay for the things that it wants.  The government prints money.

As money growth increases so does inflation.  As inflation increases, people hold less money because inflation eats away the buying power of money.  People then prefer to hold their money in real assets or they barter for the goods that they want.  As people reduce their stock of money they use for buying goods, the government prints more money to pay for the things it wants leading to a higher rate of inflation.

As an analogy, suppose a business raises its price on its goods to increase their revenue.  People buy less of the good so the business raises its prices again.

I've wondered why there's not hyperinflation in Greece.  The current inflation rate is 1.34%.

Today's Lesson Plans

This post is intended for students in my AP Microeconomics class.

Here is the course syllabus.

Today's topics, reading assignments, and homework are here.

Here is a link to the first cartoon.

Here is the cartoon analysis worksheet.

Here is the first cartoon for you to analyze.

Monday, August 20, 2012


Over time, inflation robs the value of the dollar.  Inflation is a rise in the general price level so some goods can be rising in price while others are falling.

Inflation effects should be measured in the real buying power of the dollar.  Economists like to compute the real value as equal to M/P where M is the money supply and P is the price level.  If P is increasing more than M, then the real value of money is decreasing.  During times of high inflation, people might spend their money quickly so that inflation will not rob the buying power of their money.

Currently, the unemployment rate is 8.3%.  What is worse in your opinion:  high unemployment or high inflation?

If you want to know about the different ways inflation is measured, click here.

Entitlements and Employment Incentives

How do you get off of public programs?  Many times workers want to have meaningful employment but can't afford to take the job because they will lose entitlement benefits.  This is rational behavior.

How do you see welfare reform?

Do you think that public assistance encourages people to stay on welfare and have children out of wedlock?

Do you think that people on welfare simply lack the skills and education to get a well-paying job?

This is a complicated issue.  I believe that generational poverty makes social mobility extremely difficult.  Yet, in school, I see many children who have given up any hope for success.  I think the greatest ill of poverty is that it robs children of hope.

Sunday, August 19, 2012

Inflation and the Prime Interest Rate

This cartoon is taken from Dick Adair, Honolulu Advisor.  Let's analyze the cartoon.

1.  A banker is jumping on a chair and he is labeled "prime rate".  What is the prime rate?

2.  The mouse is seen here as inflation. What does effect does inflation seem to have on the prime rate?

3.  Can you use the Fisher equation to prove that the prime rate will increase? Assume that the real rate is 5% and the expected rate of inflation is 3%.  What is the prime rate?

4.  Inflation helps debtors and hurts creditors.  Why would bankers rise their rate at the first sign of inflation?

Daily Review -- Perfect Competition

As a review of perfect competition, answer these questions:

1.  If the price is $13, what quantity of output would maximize profits?

2.  At what price would the firm shut down?

3.  If the price the firm takes is less than $10 but greater than $6, will the firm continue to operate or shut down?

Answers: (1) 3; (2) less than $6; (3) continue to operate since they will be able to cover some of their fixed costs and some of their variable costs.

If any reader would like to see the the algebra that generated this graph, click here.

Did Mr. Obama's Stimulus Work?

The Economist has an excellent review.

Here's an excerpt from the article:

THE word “boondoggle”, Michael Grunwald points out, was coined back in the days of the original New Deal, to describe “make-work” bits of arts and craft paid for by the government at a price that was out of all proportion to their actual value.

The Kindle edition is $15 dollars while many used are selling for about $18. All comments (5) are five star rating. This is a book over 500 pages that attempts to sort out where the money went.

Second AP Economics Cartoon

Economics is defined as having unlimited wants and limited resources.  This cartoon suggests that a consumer can dream about all of the things he or she wants, but can't obtain them all.

What is the AP term for a condition in which wants are greater than resources?

Suppose that the man sleeping in the cartoon has problems sleeping, perhaps he has sleep Apnea.  Also suppose that the man is in the upper 5% of all income earners in the United States.  If this man chooses to have his sleeping condition corrected with say an expensive surgery, he will live a better life.  For the sake of argument, say the surgery costs, $10,000.  Should he have the surgery when there are millions of children dying of hunger?

According to Global Issues there are approximately 660 million people who live on less than a $1 per day.  This many could choose to feed 10,000 people instead of having his sleeping problem corrected?  Is this moral?  Is this rational?

Economists assume that consumers act in their own self-interests.

If everyone acts in their own self-interests the market will distribute goods and services among those who want and desire them.  The goods may not be distributed equally since exchange is voluntary.  Each consumer weighs the costs and benefits of each trade and will trade only if the benefits are greater than the costs.

In this cartoon, I have tried to explain the concepts of scarcity, rational decision-making, voluntary exchange, and the distributional effects of exchange in the market.

The answer to the question "What is the AP term for a condition in which wants are greater than resources?" is intended to be "scarcity".

How Do You Say "Economics?"

Do you say "eek-onomics" or "eck-onomics?

Economics is something to be scared of or something that makes you sick which is why there's trouble pronouncing the word.

Which do you favor?

Saturday, August 18, 2012

Who Creates Jobs?

This viewpoint is from a censored TED Talk.

Expectations of a Higher Price for Gasoline

With the threat of $4-a-gallon gas once again hanging over the economy -- and over President Obama's re-election campaign -- the White House on Friday left the door open to tapping the country's oil reserve to ease prices. 

Read more from Fox News.
When consumers think the price of a good will be more expensive in the future, they will buy now at the lower price.  As the number of consumers increase, the demand curve will shift to the right pushing the price of the good higher.  The market mechanism, the price, then allocates the good among those consumers willing and able to purchase the good.  This concept of future expectations is captured in this graph. (Note how only the demand curve moves as economists assume a static equilibrium and ceterius paribus.)  Note also, that there's a change in the quantity supplied.

As the price of a good increases, producers respond by supplying more of the good.  In order for producers to supply more, they have to make choices.  When producers make a choice, they incur opportunity cost.  In the case of ethanol, producers plant more corn that can be converted into biofuel and less corn for edible consumption.

Using a graph is mathematically rigorous, but does a cartoon say it better?

In this cartoon, Mr. Toles uses exaggeration to how the relative differences in supply and demand.  The cartoon suggests that when there is a large demand for a good, the price rises.

I think this cartoon makes the point that the general public is ignorant of fundamental economics.  A cartoon allows the reader to laugh at the man buying the gas because he is ignorant.  But in the graph above, the reader might become angry at himself because the reader can't interpret the information contained in the graph.

I think cartooning allows the reader to learn with negative self-talk and ego defense mechanisms in a non threatening way.  Plus, cartoons make learning fun which is what the high school learn wants.

Friday, August 17, 2012

Monopoly--Barriers to Entry

A monopoly has no competitors.  Rivals cannot enter the market as there are significant barriers to entry such as a patent, exclusive ownership of a resource, or economies of scale.  In this cartoon, the Big Oil company is vertically and horizontally organized so that they own the resources.  The cartoonist makes a great point that no one owns the sun, but Big Oil uses its power to keep its monopoly power. 

Thursday, August 16, 2012

First AP Economics Cartoon

This year I want to supplement my economics instruction with cartoons.  I believe that one picture is worth a thousand words.  But there are other reasons.

Public schools have been criticized for not teaching critical thinking skills.  I believe that critical thinking skills and creativity can be taught through the use of cartooning.  I will be working with Dr. James Allen to develop a course of study on implementing cartooning in the classroom.  Today, we worked on using this cartoon on the first day of class.

This cartoon directs the eye from left to right in an sweeping motion. The reader first starts with Mother Nature then arcs upward to the driver and finally settles on the starving child in Haiti.  The cartoon uses exaggeration to show how the demand for fuel is large.  The cartoonist also used the underside of the vehicle to "frame" the child so that the eye stops there.

Economics is how consumers satisfy their unlimited wants with limited resources.  Because resources are scare, consumers must make a choice.  That choice has a cost.  In AP economics the cost of a decision is more than the nominal dollar amount but the "opportunity cost" of the decision.  In this cartoon, when motorists choose to fill up their tanks with ethanol, 10% corn alcohol, there is less food for starving children world wide such as those children in Haiti.  At the time of this cartoon, many starving people in Haiti would eat dirt cookies for what minerals there were in the dirt.  So this cartoon shows the the opportunity cost of cheaper gasoline prices in the Midwest is to let children starve.

How accurate is this cartoon?  When the government subsidized ethanol, the government encouraged more ethanol production.  The corn that is used to make biofuel is not the same corn that is fed to cattle or consumed by people.  But farmers choose to plant more corn to be used in biofuel and less eatable corn.  On a side note, they also planted less corn for popcorn since it was more profitable to plan corn for ethanol. I am not sure on what effect the subsidy had on corn since there is a lot of corn, but the point is clear.  American drivers could have paid more for their gas so children could eat.

When a good becomes profitable, it pays producers to make more of it.  In the case of ethanol, there was both an income and substitution effect and consumers react to incentives.  Even though the license plate says "biofool" the consumer's behavior is hardly foolish.  In economics, it's rational.

Balance of Payments

This graph is from the  OECD Factbook 2012 with a hat tip to Economics - The Power of Numbers.  The snapshot is of the Balance of Payments, the difference between the Current Account and the Financial Accounts that tracks imports and exports.  Look at the United States and you will see that over a three year time, the country is importing more than it is exporting.  In theory, the summation of all BOP across all countries would equal zero.  It's pretty close if you observe the OECD BOP in the middle next to Brazil.  I think this graph is intended to show the direction of trade and not make value judgments about the policies of the OECD countries.  

How would this graph change if an alternative fuel was found?  

Wednesday, August 15, 2012

The Power of NO

Economics of Gay Marriage

The full article is here as it appears in the Washington Post.

The authors make the point that a man and woman married for the benefits they would gain from a division of labor.  After several innovations such as the microwave oven, this business model of marriage fell apart.  Now, couples marry for different reasons such as sharing interests.  The business model of marriage as fallen apart that opened the door for alternative marriages.  Interesting.

Mariana Adshade writes, "Why we Marry".

Friday, August 10, 2012

Mad Men and Inflation

Mad Men is a television show about an advertising agency on Madison Avenue in the 60's.  Don Draper is the star of the show.  This link shows his inflation adjusted desk in 2012 dollars.  I have watched every episode since I get NexFlix on my computer.

Tom Richmond of MAD Magazine ruined the show for me with his brilliant satire of the show, Sad Men.  The show was worth watching just to remind me of what it was like growing up during the Vietnam War, Marilyn Monroe, and cigarette ads on television.

Wednesday, August 08, 2012

Shoeleather Costs of Inflation

When inflation is expected, the nominal interest rate raises through what economists call the Fisher Effect. When the nominal interest rate is relatively high, people hold less money for transactions. As a result, they make frequent trips to the bank to withdraw money and in making the trips, they wear out the leather on their shoes.

Tuesday, August 07, 2012

Penny Candy

How To Determine Your Wait in Line?

Mike Sudal, WSJ, has a nice graphic here. Economists weight the benefit of waiting in line with the costs. I will opine that once you have selected a line, you should stay in that line and not jump.

Monday, August 06, 2012

How to Teach The Benefits of Voluntary Trade

This is from a post from Julia M. Chrismar on the GATE Forum: I teach AP Macroeconomics at Saint Joseph's High School in South Bend, Ind. As you noted, this isa student'sfirst experience with economics. The first thing I do tellmy studentsis that it is called the "dismal science" and they will be using a Web site called to prepare for their Fed Challenge class presentation at the end of the semester. As you can imagine, the eyes grow wide. As mental notes are being made to see their counselors to drop this class,I pass out the brown paper bags. Each student is given a brown bag and instructions to open it but not to show anyone what is in it. Each bag contains something different. I purchase things from garage sales in the summer, the Dollar Store, Big Lots, etc. Items vary from a large candy bar, a school supply, screw driver, paper clips, balloons, nail polish, shoestrings, nightlight, glitter pens, sidewalk chalk, rain poncho--something interesting, useful, even humorous. The students are then asked to rate their satisfaction with the item on a scale of 1-5 (5 being the most satisfied). I make a note of this on an overhead transparency. I then divide the room into four sections. Students are told they may tradewith anyone in their fourth of the room to try to increase their satisfaction. After the first round of trading, I again ask how many traded and for levels of satisfaction. This information is recorded. The room is now divided into two halves. Students are told they may trade with anyone in their half of the room. The recording procedure is repeated. Students are then asked how they might continue to increase their satisfaction. By now all students realize that they are better off if they are able to trade with anyone in the room. Before this final round of trading takes place, I ask each student to "advertise" with a short "show and tell" of their product. After the advertising takes place, the students participate in the third round of trading--no barriers to trade--they may trade with anyone in the room. Results are recorded and compared to the other rounds of trading. Before the end of class, I debrief to see what the students have learned from this experience. What was each of them trying to accomplish through their trade? What were the "costs"? Did trade make them better off, were they more satisfied at the end? Is trade good? Who benefits? And so on. Should the United States enact tariffs to protect U.S. industries from foreign competition? The purpose of this activity is to stimulate thought and to immediately engage the students in economic thinking. The result? Their first introduction to economics and economic thinking is far from "dismal." Students leave class with their final trade, proud ofhow they maximized their satisfaction through trade, and importantly, talking about how they "liked" their first economics class. (GATEkeeper: A version of this activity is Lesson 1 in Focus: International Economics, , 1998.)

Sunday, August 05, 2012


Source: via Matt on Pinterest

This cartoon mocks the bailout, but I was wondering if it also shows a moral hazard as well. I am seasonally employed by a painting company this summer. I saw one of the workers laid off. The mental effects on this man were devastating to him. If you multiply his pain by the nearly 15 million unemployed, the recession takes on a persona. What I'm working toward is this. Should banks, business, and entrepreneurs be helped financially if they fail? I think they should.

Modern Economics in Cartoon

This is deep on so many levels. The ants are workers who never rise above the fruits of their labor. The grasshopper actually comes out ahead if you measure utility. The division of labor leads to an unequal distribution of income. I suggest that the cicada also is a worker--he's just called an entrepreneur. As school starts up, I have to say that I learned that if you worked hard like the ants, good things would happen to you. Hard work does not guarantee success anymore than good ingredients guarantees a good pie. There's so much more to wealth creation that just having the resources.

An Excellent Definition of Unemployment Using a Cartoon

A person is considered unemployed if they searched for a job in the survey week.  This cartoon shows that a marginally attached worker is looking for a job.  The balloon above the worker suggests that he is discouraged and is dropping out of the labor force.  When a worker drops out of the labor force they are no longer counted in the unemployment calculation.

The survey taker is happy that the worker drops out as it might reduce the official rate of unemployment.  Currently that rate is 8.3% and climbing.

Saturday, August 04, 2012

Food Prices and the Drought

Production Possibilities?

As I think about teaching again, I still believe that pairing a cartoon with a concept is a good teaching strategy.

In the bottom cartoon I try hard to infuse math into the cartoon.