Tuesday, October 30, 2012


As a long-time reader of Marginal Revolution, I've often wondered what it would be like to take a course from these professors. I now have the chance. MRU is an online university that offers free lectures on economics. One of the lectures on the Solow Growth Model is shown below. This excerpt is from the MRU homepage:
Marginal Revolution University (MRUniversity) is a new approach to online education led by professors Tyler Cowen and Alex Tabarrok of Marginal Revolution. The first course offered is Development Economics. Watch the video to learn why MRUniversity is different.
I received a complimentary copy of the author's textbook in which the Solow Growth Model was so simply explained that even I understood it. If you like this approach to learning, I recommend that you buy their textbook.

Lesson Plan on the FED

This was sent to me from a reliable link at the Chicago Fed:  If you teach Macroeconomics, you might be interested in this free resource.

Dear Educator:

As an educator myself, I wanted to let you know about a great teaching resource you get without cost. It is called, "What We Do"at the Federal Reserve. It features lessons for your students and two packets of real shredded currency.

It is produced by the Federal Reserve Bank of Chicago as a hands-on activity to engage students. Included is a DVD which provides an inside look at the role of the Fed. An accompanying curriculum guide emphasizes key points teachers can highlight as students participate in scenarios to illustrate how prices, inflation, and ultimately monetary policy can affect their behavior and our economy's well-being. 
Fed shreds support conversations around money supply and what happens to old money. 
While the Federal Reserve can be a complex entity, its mission is simple: to help keep the U.S. economy running smoothly. 

"The state of the economy, employment, and Federal Reserve policy are hot topics right now, and make for great classroom discussions," said Cindy Ivanac-Lillig, economic specialist for the Federal Reserve Bank of Chicago. "But it can be difficult to explain to students in understandable language. We developed this packet to give high school instructors tools to complete a lesson that can help explain how the Federal Reserve serves our economy."  

To have a complimentary packet shipped, go to the website below to provide your shipping address.

(click on the link below) 

Let me know if you have any questions. 

Joanne Kuster


Sunday, October 28, 2012

Goofy Econ Thought of the Day

When two goods are perfect substitutes, the indifference curve is a straight line.  Examples of perfect substitutes might be a red pencil and a blue pencil or two nickles equals one dime.  In the textbook case, a fall in the price of one substitute means that the consumer will only buy the cheaper good.

Are the Kindle Fire and iPad tablets perfect subs.  If so, why don't I buy two and a half Kindles instead?  I reckon that that I have a utility function for the two goods in the form of: U = 3iPad + 4Fire.  I would always prefer the Fire but I reach diminishing marginal utility after the first consumption.

Along the same line, what would my demand function look like?  I offer that my demand curve would be vertical at one fire.  Other demand determinates like income, related goods, and expectations are irrelevant.

Hurricane Charley and Price Gouging

As the eastern seaboard braces for a super storm, I thought now would be the time to discuss the morality of  raising prices on goods during a tropical storm.  I began thinking about this topic two weeks ago when I began rereading Michael Sandel's brilliant work, “Justice: What’s the Right Thing to Do?”

You can begin by reading the first pages of Mr. Sandel's book by using this link. 

I will begin with my thoughts which are entirely unorganized.  

During a hurricane where there are shortages, do you believe that sellers of water have pricing power?  Do you believe that people act in their own self-interests?  Do you believe that sellers of water have figuratively won the lottery and aren't entitled to the windfall profits from a hurricane?  Do you believe that individuals have a choice in what to buy?

These are just some of the questions that come to mind.  

I believe that water is sold in a very competitive market.  If weather disrupts the supply chain and people are now willing and able to buy water at the higher price, I have to sell my water at the higher price or I will not be able to compete in the long run.  If I sell my bottled water at a $1 when my competitors are selling their's for $10, I will deplete my stock quickly but I will not be able to replenish my stock at the market price.  My competitors will then sell their water and make ten times as much as me.  When it comes time to replenish the stocks of water, they will now have an advantage over me because they have made a profit.  When the market returns to normal, my competitors will be able to undersell me if they want to drive me out of the market.  

There are many other aspects to consider.  This is just the first.

Friday, October 26, 2012

Quiz Review

The review is right here.

The content is:

PPF, Comparative Advantage, Marginal Decision Making

Scarcity is the central problem of economics.  Scarcity is a condition where there are unlimited wants and limited resources.  Resources are Land, Labor, and Capital.  
When making a decision, consumers consider the opportunity cost of their decisions.  Opportunity costs are the cost of the next best foregone alternative.  In Microeconomics, this might be called the relative cost.
A production possibilities curve is bowed out from the origin.  The curve when bowed out is called “concave” and represents an increasing cost curve.  When costs are increasing, it means that the next unit, or marginal unit, comes at a higher cost.  I call this the Law of Low Hanging Fruit.  That is, the easiest resources are grabbed first which comes at the lowest opportunity cost.
An increasing cost curve suggests that resources are not perfectly substitutable.  It also suggests that points along the curve are efficient given the choices that society makes.  The production possibilities curve also shows that resources are fixed, points inside the curve are inefficient, and points outside of the curve are unattainable.
When a good is scare, people have to want it.  In other words, people don’t want AIDS so it’s not desirable.
A good is anything that brings utility.  Utility is satisfaction.  A bad brings no utility.  When looking at the circular flow of resources, that why the product market is labeled, “Goods and Services.”
There are three questions that every economic system must answer.  Those questions are: What will be produced;  How should the goods and services be distributed; and How the goods and services should be made.  
A straight-line PPF shows there are constant opportunity costs between two goods.  
A PPF can shift when one of the assumptions are relaxed.  Those assumptions  are: the economy can only make two goods, that resources are fixed, and technology remains constant.  A change in any the quantity of resources can shift the PPF in either direction.
Capital goods are goods used to make other goods.  These goods include tools, buildings, and machines.  A consumer good is like a television, computer, food, or a car.  
Comparative advantage means that the country that can produce the good at the lowest opportunity cost should produce the goods.  
The concept of marginal analysis infers that an activity should continue as long as the marginal benefit is greater than the marginal cost.

iTunes U -- 60 Second Economics

You might be interested in "60 Second Adventures in Economics - for iPod/iPhone" on iTunes U.  I just watched the Phillips Curve and gave the presentation two stars out of five.  The clip was a cartoon animation narrated by a man with an English accent.  Currently, there are 12 clips.  The link is here.

Reasons Not to Date an Economist.  Jodi Beggs has a humorous post and commentary here.

Thursday, October 25, 2012

Will Teachers be Replaced?

As technology finds new ways to improve efficiency and make in roads to education, I think the demand for teachers will shift to the left.  There will always be a need for teachers, but not on the scale you see today.  The WSJ has an excellent article.

At Muscatine High School, Rosetta Stone is being used to teach Spanish.  We still have a teacher in the classroom, but the same technology could be used to replace me.  I am learning how to draw from a video course I bought from an artist in Australia.  The results have been satisfying.  On iTunes, there's a university, MIT and Yale both have open courses that can be taken for free.  YouTube has rich instructional content.  Simple Google searches provide answers to complex topics.

I think that technology will erase much of the demand for teachers but society will not accept that and will continue to institutionalize students in an academic setting.

Comments posted on LinkedIn show aspects and angles of the debate.  Some are partially posted below:

Great teachers do more than teach a subject, they help shape a life.

As for science and math teachers .. in classroom experience will be essential especially since lab work is a core part of those disciplines.

If anything, online material will help students advance quicker to the part where the teacher is able to help with significant improvement in their playing and the expense for lessons becomes justified.

 As an educator I believe that it's never about the content of what is being taught but rather the substance. Any person presenting material must find ways to engage with their audience.

Wednesday, October 24, 2012


Income inequality allows the high income earners opportunities to keep their wealth and protect it by engaging in rent seeking activities.  Rent seeking is just one way that the economy redistributes income.

The Economist has a brilliant 14-page essay on the sources of inequality and re-distributional effects.

Tuesday, October 23, 2012

Marginal Revenue

How do you derive a function for marginal revenue?

What is taught in AP econ is to multiply PQ and P'Q', subtract the answers,and divide by the change in Q.  In the graphic shown to the left, to calculate marginal revenue between $9 and $8, the calculation would be: $9(1) = $9; $8(4) = $32; $32 - $9 = $23/3= $7.67.

Is there a way to derive marginal revenue, MR, in one step?  I offer this solution.

Begin with TR = PQ.  Next, TR' = (dPP)(dQQ);  Subtract the first equation from the second and ignore dPdQ since this is small; now divide by dQ.  Your answer is: P + dP/dQQ.

Inserting our numbers into the equation yields: 9 + -1/4(4)= $8.  This is close to our original $7.67 because there's an area under the curve that is eliminated when i subtracted (dPdQ).

This was fun.

Monday, October 22, 2012

Today's Notes, Links, Assignments

Welcome to Microeconomics, the branch of economics that studies individual choice, utility maximization, and market structure.  The goals of microeconomics are efficiency and equity.  Today, we are going to study:

Opportunity Cost
Positive and Normative economics
Production Possibilities

Monday, October 15, 2012

Sunday, October 14, 2012

Recession Indicators

This index is meant to be a tongue in cheek Macroeconomic lesson to know when the economy is slipping into bad times.  Some of the indicators show an increase in the purchase of inferior goods or a decrease in the purchase of normal goods.  Some of the indicators show how future expectations of bad times prompt spending now or saving.  But it's good fun.

Economics is about examining human behavior and deciding what incentive or invisible hand is behind the behavior.  It's like peeling off another layer of an onion.

Saturday, October 13, 2012

Fisher v. Texas

This video shows how monkeys react when they are compensated unequally for equal work. (Thanks to Freakonomics.)

This is from the Huffington Post.

Fisher v. University of Texas is perhaps the most consequential case on the Supreme Court's docket this year, and will determine whether the University of Texas' efforts to promote diversity and increase educational opportunity by considering an applicant's race in the admissions process will be permitted to continue. The Court's decision could have wide-ranging ramifications for similar admissions programs across the United States.

In my law class, we have been discussing this case and weighing the pros and cons.  Given the monkey's reaction above, how should the Supreme Court rule?

Friday, October 12, 2012

Cartooning Today's Economy

This cartoon is from the Economist.

This cartoon is excellent, but I challenge you to remember it and repeat it in two days.

Mean Voter Theorem --Today's Lecture

Median voter Theorem.

From Wikipedia:  One possible model; here, if parties A and B want to catch the median voters, they should move towards the center. The red and blue areas represent the voters that A and B expect they have already captured.

This is interpreted for this election as conservative and liberal voters are far apart in ideology and thus compose only a small amount of the votes.  A candidate can gain more of the votes by moving towards the middle.  Eventually, both candidates are indistinguishable.  This might explain why the candidates make states that are contradicted.  This would happen as a candidate relaxed their opinion on a topic to gain more votes.

A link to the vice president debate from October 11 is here.

Two Ice Cream Vendors on the Beach

 In this game, two vendors can gain more market share by moving their carts to the middle of the beach.  When they move, they capture more market share.  Eventually, the vendors locate in the middle of the beach right across from each other.  Here's a mathematical derivation.

Prisoner's Dilemma

In this game, the players are arrested and given choices to confess or not confess.  The cons both confess since it's in their best interest.  However, the cons end up in a worse equilibrium than if they had both worked cooperatively.  The very didactic version is here

Dilbert's version is below.

Thursday, October 11, 2012

Game Theory and Lance Armstrong

First, the news from the Washington Post.
Now comes the theory.

The graphic to the left is from the Baseball Economist.

The players must use steroids or they be at a competitive disadvantage to those who do.  Game theory predicts that a rational player will use steroids and will not play at a disadvantage. 

Economics tries to understand human behavior by examining incentives and the utility economic actors derive from their decisions.  Game theory also assumes that the actors are mutually interdependent on each others behavior.  Economists call this behavior strategic thinking.  Let's look at another "game" in which one players actions depend on his rival's. 

This PowerPoint is an excellent primer on games including games with a dominate strategy, mixed strategies, prisoner's dilemma, and zero sum games.  Let's look at a game with a mixed strategy that I call, "The Meek Shall Inherit the Earth."

In this game there are two pigs in a box with a lever to dispense food on one end and the dispenser on the other.  It takes 10 utils to run from one end to the other and 100 utils are dispensed.  Here's the game.

If the little pig pushes the dispenser, he runs to the other end using up 10 utils but the big pig pushes him out of the way and eats all of the food.  The cost to the big pig was 10 utils for a gain of 90.  If the big pig waits and the little pig pushes the lever, the big pig gains 100. The little pig will quickly find out that he should never push the lever.

If both pigs wait for the other to push the lever, they receive zero utils.  Since the little pig will never push the lever, the big pig must.  He will receive 20 utils because he will lose 10 running to the food and by that time the little pig has eaten 70 utils.  The big pig will push the small pig out of the way, and consume the remaining 20 utils. 

The little pig has a dominate strategy to wait.  The big pig has a mixed strategy since his behavior depends on what the little pig does.

Let's look at an example of a game where there is tacit collusion.

In the music download industry the marginal cost of a download is zero.  In Bertrand competition, prices are driven down to their marginal cost.  So in the music industry then, music should be given away.  No musician will write music and no store would give away music if this were true.  Instead, the rivals reach a "tacit" agreement not to lower the price.  Let's look at a fictitious example.

In this example, if both rivals sell their digital downloads at $1, the industry will sell $20 million and the firms will split the difference.  If one firm lowers the price of their downloads to fifty cents, then they sell more downloads, 24 million, and capture the market, making a profit of $12 million.  If both competitors lower their prices, then the industry makes $12 and each rival earns $6. 

In this example, it's best for the firms to keep the price of their downloads at $1.  It is against the law to fix the price in the United States, but in this case each firm tacitly colludes with the other to artificially keep the price at $1.

This is all of the game theory I can handle in one blog. 

Has Technology Made Us More Human Again?

Wednesday, October 10, 2012

TI-83 Project for Mono-Comp

I love my graphing calculator.  These simple functions are intended to be a down and dirty way for students to quickly analyze monopolistically competitive markets.  Using the screens below to enter the functions and set the window, answer the questions that follow.

1.  Using the graph, identify the AR, P, MR, D, ATC, and the MC curves.
2.  Label the x and y axis.
3.  Show the area of profit the firm is making.
4.  Identify the area of consumers' surplus.
5.  Find the unit elastic point on the Demand curve.
6.  Assume that there is free entry into the market.  Show the long-run.

Tuesday, October 09, 2012

Diminishing Marginal Utility

In my economics class, one reason why the demand curve slopes downward and to the right is because of diminishing marginal utility.  But where in this indifference curve analysis is diminishing marginal utility?  The entire movement along the demand curve is due to the income and substitution effect.  I now believe that diminishing marginal utility is not a reason why the demand curve slopes downward.

The graphic is from ECON 150.  If you click on the graphic the graphic will enlarge.

Sunday, October 07, 2012

Monday's Lecture

Today we are going to begin our study of monopolistic competition.  The market is characterized by a large amount of producers selling a slightly differentiated good.  The market usually earns positive profits in the short-run and a normal profit in the long run.  The firm has to be able to serve differentiated products at both peak times and at closing times.  As a result, the firm has excess capacity.

Excess capacity is: The excess capacity theorem refers to the profit-maximizing equilibrium for firms with market power at levels of output less than those which minimize average total cost.

In the long run, the firm will earn a normal profit.

For a brilliant assignment on mono-comp, click here.

Saturday, October 06, 2012

Textbook Videos

A really nice complement to any economics course can be found at TextbookVideos.com

This site produces high quality videos for the student who must instantly learn about micro and macroeconomics.  The accompanying guides are like PowerPoint slides that explain clearly economic concepts that any econ 101 student can learn.

Mt. Dew, Coffee, and Engle Curve

When income increases for $12 to $18, I still don't buy coffee.  Instead, I increase my consumption of Mt. Dew from 4 to 6.  For me, Mt. Dew is a normal good.

On the graph to the right, I showed how my consumption increased as my income went up.  I showed income on the y-axis so 4*3 = $12 and 6*3 = $18 instead of just income.

This concludes my thoughts on my preference for Mt. Dew over coffee when the prices of each good are the same.

Friday, October 05, 2012

Today's Lecture

Today's topic is Natural Monopoly.

1,  Review monopoly.  Monopoly and perfect competition. Characteristics of a Monopoly. Profit Maximization for a monopoly. All about monopoly.

2.  Let's assume that the natural monopoly is a public utility that has huge fixed costs.  But after the pipelines have been laid, the marginal cost of pumping the next unit of energy or electricity is very small.

3.  Review how fixed costs are "spread out" over a range of output.  Since fixed costs are so high, a large amount of output would be necessary to spread out the costs.  Using the usual cost curves, Demand, and marginal revenue curves, let's analyze the natural monopoly.  How much profit is the firm making?  What price is the monopoly charging?  Is this price socially optimal?  What would be the "break even" price?  What would be the socially optimal price?  What would be consumer's surplus at the P=MC price?

4.  For this monopoly to operate and serve society, it will need a subsidy.  What is the amount of the possible subsidy?  

Before we leave this topic, let's look at the logic of the natural monopoly.  Suppose Muscatine wants to  have raw sewage disposed of in a way that doesn't harm the environment or presents health issues.  The city would undergo construction of a sewage pipes and incur a large cost to dig and install the pipes and treatment plants.  But after all costs have been sunk, the cost of disposing of raw sewage is minimal since machines, or capital, complete all of the work.  The same can be said of electricity and natural gas. 

I would also like to add, that in planning for sewage, gas, and electricity, the planners probably took into consideration peak usage times and future expansion.  In this planning, the fixed costs are a one-time event and thus become a "sunk cost".

Thursday, October 04, 2012

Utility Function for Mt. Dew and Coffee

Both diet Mt. Dew and coffee have 200 mg of caffeine.  In theory, they should be perfect subs, but an economist observing Flad notices that when given a choice Flad always chooses Mr. Dew.  The economist derives Flad's utility function as: U = 4D + 3C.  Both Mt. Dew and coffee cost $3.  What is the budget equation?  Direct calculation shows that 4 dews equals 16 utility where as 4 coffees equals 12 utility.  Flad wold max his utility at 16 utils by drinking 4 dews and no coffee.  What would Flad;s indifference curve be?  Flad would always be willing to give up -4/3 coffee for 1 dew.  Given his preferences, coffee is never a choice.

In the graph above, the orange curve is the budget line and the blue line is the indifference curve.  As you can see, the indifference curve is tangent to the budget line when only dew is consumed (Mt. Dew on the x-axis.)

So even though coffee is a good substitute for dew, coffee doesn't maximize utility.  If you assume a utility maximizing individual then the above curves demonstrates exactly the choice I have made for the past 32 years.

P = MC

In micro, one definition of efficiency is when the price to make a good equals the marginal cost of making the good..  In this graph, P > MC.  You can get an intuition about how misallocated resources are when the efficiency condition doesn't hold true.

When P = MC it's impossible to make one person better off without making another worse off.  This is Pareto efficiency.

Wednesday, October 03, 2012

Tuesday, October 02, 2012

Study Guide for Test Wednesday

Here's the study guide for the test Wednesday.

Bonus:  pictured at the right is John Smith, the father of economics.   When we were studying the production possibilities curve, John was credited for postulating this theory of trade.  For one bonus point, what was that theory.  You earn this point if you are the first person to tell me.

Affirmative Action

I love books like this: This is an excerpt from the book's website:
Two legal experts make the explosive argument that affirmative action hurts minority students’ educational and career chances—and that liberals are in denial about it.
The controversy over affirmative action will take center stage this fall, when the Supreme Court hears Fisher v. Texas. Mismatch—a bold, nonpartisan, and scrupulously researched exposé of a well-intentioned policy’s flaws—will be essential reading for anyone seeking to understand the real impact of this contentious social program.
HT: Marginalrevolution.com Here's Harvard genius, Michael Sandel on Affirmative Action.

Monday, October 01, 2012

Econ Thought of the Day

Today, while walking into the Y for a workout, I observed a woman leaving.  She had her keys in her car and she remotely started her car from about 30 yards away from her Buick Le Saber.  In my opinion, her actions show how people form future expectations and behave now.  So this woman was acting in a way now to save time in the future.  This is like, buying gas ahead of an anticipated price increase.  In fact, I think this behavior is so engrained that most behavior can be decomposed to reveal future expectations. 

For example, I might plan my route through a grocery store to save time so that I have more time later.  I might pack a lunch so that I don't have to go out to a fast-food restaurant on my 30-minute lunch break. 

Expectations shape behavior even if the expectations turn out to be incorrect.  How do you plan your day to save as much time as possible so that you have more later?