Wednesday, November 28, 2012

TEST Review

This is for the test over cost curves intended for my class.

1.       Look at the total product curve and determine where there are increasing returns to scale, decreasing returns to scale and constant returns to scale.
2.       Know the formulas for calculating AVC, AFC, and ATC.  Be able to convert AVC, ATC, and AFC into VC, TC, and FC.
3.       Calculate ATC when given data.
4.       Define the short run.
5.       Define, calculate, and interpret marginal cost.
6.       Be able to draw the LRATC for a firm.
7.       Define and interpret the total product curve.
8.       The slope of the total cost curve is marginal cost.  The slope of the total product curve is marginal product.  Be able to calculate average product and explain the relationship between MP and AP.  Be able to calculate the marginal product.
9.       Define “fixed input”.
10.   What are “economies of scale” and “diseconomies of scale”?  What is the slope of the LRATC when a firm faces diseconomies of scale?
11.   Be able to explain “diminishing marginal returns” and show on a graph.

PBS--Stealing Africa

Watch Stealing Africa on PBS. See more from Why Poverty?.

I have been writing a series about economics in Africa when I found this. I have not watched the whole show since it takes an hour, but the first ten minutes looks excellent. This is from PBS about the film.
In an age of global trade, multinational corporations motivated by maximizing profit often end up working against the interests of the world’s poorest and most vulnerable people. Stealing Africa investigates reports of widespread criminality by well-known multinational companies operating in Africa. Featuring interviews with heads of state, corporate insiders, and officials from the major global financial institutions, the nature and extent of the problem begins to emerge.

Sunday, November 25, 2012

Fixed Costs and Market Size

A student asked what is so intriguing about fixed costs.  This is part of my reply.

Suppose the market for t-shirts is 1000 customers.  The shirts are sold for $20 each.  Suppose that the shirts can be produced in a thousand different color, but the set up cost for a shirt is $100 and to produce a shirt costs $15.  In a competitive market, a firm will produce as long as they are covering their variable costs.  In this example, variable costs are $15,000 ($15 x 1000).  Since revenues in this market are $20,000 ($20 x 1000) that leaves $5,000 for profit.  Now divide $5000/100 (profit divided by fixed cost), and that means that only 50 colors can be made.  Therefore, the market doesn't satisfy half of the market.  The half that isn't satisfied must choose a color close to the one that they want.  If fixed costs were higher, then there would be less color choice.

This example was modified from, The Tyranny of the Market, by Joel Waldfogel. His book gives a complete treatment of the subject.

How Does A Current Account Deficit Affect The Host Countries Currency

A reader asks, "How does the trade deficit affect the value of the country's currency?"

When a country has a trade deficit, the country imports more than it exports. that means that foreign countries hold American dollars. the foreign country can buy use exports or us bonds. Whatever the foreign country buys will appreciate the dollar. 

There are many factors that influence the value of a country's currency.  AP Economics suggest that income and interest rates are a couple of factors that influence the value of a country's currency.  I would like to add that technical analysis by traders is another factor.  Traders often get a feel for the trend and trade on their gut feeling rather than on supply and demand fundamentals.  

The interested reader should review the relationship between the Current Account and the Financial account to see how imports and capital inflows recorded to make sense of my explanation.

Saturday, November 24, 2012

Economics Every Day

Here is my schedule for the day:

4-5 am Wake up, caffeinate, check my email, and practice drawing; 5-7 am workout; 7-5 pm go to work and coach; 5-7pm workout, eat, and make lesson plans; 7-8pm family time then bed.

So where is the economics in this schedule?  This is how I interpret the economics.  First, my supply of labor is inelastic.  If my boss at work demanded that I work longer, I would be unable to respond to his demand.  My schedule shows my preferences and choices come at an opportunity cost.  If I want to go to a movie, I will have to give up something on my schedule.

Economics is a way of making decisions when wants are greater than the resources to satisfy them.  I have been looking at how I make decisions under conditions of scarcity.  This post was one example of those decisions.


The death of the Twinkie has been attributed to strong unions.  I haven't kept up on my union research, but the last I looked, unionized labor composes only 13% of collective bargaining agreements.

I have been a stanch union member of the MEA for over 33 years, but I can see union power diminishing in strength.  On Black Friday, union Walmart protesters at 100 stores took center stage to show that their $8.70 wage was not high enough.  What effective result did they achieve?  Besides being an inconvenience, do you think that Walmart rose their wages?  Walmart officials claim that they had over 5 million applications last year.  I believe that workers at Walmart supply their labor in a perfectly competitive market and are termed "Wage Takers."

A friend explains the union perspective like this.  He says that if I hire a plumber to fix my toilet, does the plumber own my toilet?  His answer is no, because we traded mutual benefits and detriments.  The exchange would not have happened if we both didn't gain.  So his answer to Hostess workers and Walmart workers is to find another job.  That is, find another job if you can.

As social institutions change and new technologies disrupt order, I find it necessary to constantly reinvent myself through education.  It is only through education that I can insulate myself from globalization, politics, and technological advances.  I also find that I am one of the few Americans who would constantly work to develop my human capital instead of watching a football game or shopping on Black Friday.  Could it be that the demise of the unions in endogenous and not exogenous?

Thursday, November 22, 2012

In this post I welcome guest blogger Estelle Shumann.  
We’ve known for quite some time that online learning is less expensive than most traditional educational options. In today’s post, Estelle Schumann, a longtime Mikeroeconomics reader, highlights the role that online college courses might play in alleviating the crunch of student debt. Estelle is an education writer whose work frequently appears on the e-learning website

Online School Programs Provide an Alternative to the Rising Costs of a University

More students are enrolling in baccalaureate programs every year. At the same time, the cost of college has risen, as well. The situation has made it difficult for students coming from poor families to receive a competitive degree. In essence, this upward surge in costs has stratified the educational system. It has become clear that students coming from affluent families have a significant advantage over those who do not.
Historically, it was much easier for families to afford a college education. Kevin Carey, the director of the Education Policy Program at the New America Foundation, reported that the discrepancy between the rise in education prices and increase in the average U.S. salary has quadrupled the cost of college since the 1980s. Instead of sending four children to school, a family today is often lucky if it can send one; likewise, instead of sending one kid to school, a family can afford to pay one-quarter of the bill. The remainder often falls on the student in the form of loans and other financial assistance.

Costs notwithstanding, students today are often well aware of just how beneficial college is. Loans are now more available than ever before to meet the demand of the students who need them. Consequently, student debt has skyrocketed. According to National Public Radio, more than $1 trillion is now owed on student loans, and two-thirds of students who have received baccalaureate degrees took out loans in order to attend college.

Scholarships and other means of financial aid help to some extent. According to CNN Money, these financial resources bring the average tuition cost of private colleges down by an average of $15,530 per year. Public-school students receive an average of $2,500 per year. However, an increasing amount of funding has come from merit-based scholarships, which are more often awarded to students from higher income families anyway. That exacerbates the stratification problem.

The current job market makes the issue even worse. Graduates cannot find jobs with salaries that allow them to make headway on their loans. According to a report by the Associated Press, 53% of recent college graduates were either unemployed or underemployed. These kids are unable to start paying off their loans and are forced to watch the amount they owe slowly rise while they look for work.

Students who cannot find gainful employment after they graduate build compounding interest on the debt they owe. In fact, many are so burdened that they do not recover financially. Americans over the age of 60 account for $36 billion of total student debt. These individuals have been financially handicapped by the debt they accrued forty years ago. Though relatively rare (3.5%), these are clear-cut cases in which college was a bad investment. If it was a bad investment for students 40 years ago, then take a moment to consider how many of today’s students will find themselves still catching up after they pass retirement age, 40 years from today.
If the situation is not reversed, then either education will become more rare in low- and middle-class households, or even more student debt will accrue, leaving many citizens insolvent. Looking online is a solution for some, but it is not always an equal option. Whether through government intervention or otherwise, an effective solution should be found so that all students, whether they come from affluent backgrounds or not, can afford an education.

As an aside, Marginal Revolution author, Tyler Cowen, explains that online learning is better than traditional.

The St. Louis Fed publishes the Regional Economist that explains why Private and Catholic schools outperform public.

Wednesday, November 21, 2012

MR, MC, ATC, and Profit Max

Today, Muscatine was so foggy that school was delayed for an hour.  This combined with the Mr. Muscatine Pageant and an early release for the holidays, left me with four students to teach.  I gave this problem and welcome you to work through it.

Suppose you produce fingernail clippers in a perfectly competitive market.  The price of your product is $4 and you have fixed costs of $2.  Suppose that your variable costs take the form of a function and the function is: .05Q^2 where Q is the quantity produced.  Using a spreadsheet, calculate the profit maximizing quantity and the profit earned at the profit maximizing level. Using the spreadsheet software, draw the graph, shade the area of profit then answer the following questions:  What happens if fixed costs increase from $2 to $3?  Does the profit maximizing output change?  Explain the shape of the ATC curve.
Here are my answers.

You should find that the profit maximizing output is 40 where MR = MC.  MR = P since this is a perfectly competitive market.  I used calculus and took the derviative of the total cost function and found that MC .1Q describes the cost.  I found that ATC = 2/Q = .05Q.  The graph follows.  You should find that the profit max quantity does not change as fixed costs increase.  The ATC curve takes the shape that does because fixed costs are spread out over a larger portion of output then diminishing marginal returns set it.

Tuesday, November 20, 2012


This cartoon suggests that the rich countries such as the United States and Europe take from Africa.  Is this true?

One one thing, unless it is oil, most of Africa's products are produced in perfectly competitive markets where the prices can be driven down to nothing.  If the cartoonist was referring to trade exploitation, then the taking of resources from Africa must happen for direct foreign investment.

This is a complex topic that I will return to later.

World Bank on Africa

If you are interested in Africa, the World Bank has a free ebook here.

Africa - Yes Africa Can has studies  that "Sheds Light on Policies behind Africa’s Development Successes".

The book shows how growth has usually been achieved by stabilizing government, reforming policies, and listening to the people.

I am writing a series of article on Africa for the Africa Star News.  If you have suggestions on articles that you think might be interesting, please leave them in the comment section.  I have wondered what role the exchange rate has in the direction of trade, Fair Trade Coffee, corruption, freedom, and logistics play in the development of a country.

This author believes that statistics in Africa are derived from poor metrics.

Sunday, November 18, 2012

Why MC = AC At The Lowest Point

One questions I always get in Microeconomics is why does the marginal cost curve intersect the average cost curve at the lowest point.  I normally show the students how a grade point goes up or down based on the next class.  So if the next class grade is lower than the grade point average, the GPA falls.  If the next grade is higher, the GPA increases.  But students seldom get this.  So I derived this graph to show that when MC-AC/Q is negative, marginal cost is below AC.  When this quantity is positive, MC is above AC.

The equation was derived from using the product rule for derivatives.  The table shows how easily it is to now show this relationship.

Saturday, November 17, 2012

Fiscal Cliff

Will the United States end up like Europe?  What is meant by a fiscal cliff?

In my words, the "fiscal cliff" refers to austerity measures such as payroll tax increases and a decrease in government spending.  If the United States follows these measures, does it follow that she will slip into a recession?

I don't think that the United States has ever recovered from the 2008 recession.  We are in a recession. Austerity measures might drop us into a depression, however.

There's an old saying that "If you do what you've always done, you are going to get what you always got." It is clear to me that fiscal policy does not work.  If the United States is going to recover, recovery is going to have to come from innovation and entrepreneurship.  Growth is going to have to come from withing the creative spirit and profit incentives from the private sector.

Will the United States fall off a cliff when austerity measures are taken?  I don't think so.  I believe that businesses will respond to the challenge.

Wednesday, November 14, 2012

Why Are Uggs So Expensive

Megan Beauchamp was wondering why the price of Uggs are so expensive. Megan wanted to apply supply and demand fundamentals to a real world situation. I have recently noticed that the price of Uggs have gone up in the past year or so. Uggs may be more expensive if they are now created with more fur and may have a higher quality than when they were first made. Uggs are also the brand name to buy for young teens these days because they are more expensive. Instead of buying emus, which is another type of boot that looks, like they have the same features as uggs and which are cheaper than Uggs. Uggs are also sold in stores where they are fancy and expensive they do not sell uggs at Wal-Mart due to the high price. People buy things that are higher in price and are “status symbol”, like things being hip, hot, or even trendy items. Like jeans most teenage boys and girls buy jeans from the store called buckle and the jeans they sell are big star, silver, and Misme jeans. They are the trend that they teens are wearing so if you don’t wear them then you aren’t like “cool”. Being able to afford these brands your parents have to have some type of income where they can be able to buy things that will not put them in debt as much. Most parents want to please their kids in life so they will buy these brand name items so therefore that increases the number of buyers and also increases the number of sellers. The more the customers buy they more the stores have to sell. Uggs are a substitute good for emus because emus are cheaper than Uggs are so some people might buy the emus because they are cheaper and you technically only need one pair of boots. The Uggs are also a normal good. Christmas time is approaching and this holiday will make the market for Uggs a stronger competitive market because more and more kids want their parents to buy them Uggs. Uggs all the around the world as roughly sold at the same price sometimes ten or fifteen dollars more depending on what store you go to so that would mean that the Uggs are placed into the competitive market. The demand curve is always shifting for many goods like Uggs during the holidays the pricing may go up depending on how many are made and sold. But some people are willing to buy the higher priced uggs and some are not.

Sunday, November 11, 2012

Economies of Scale

This beginning paragraph is from the November 3 edition of The Economist.
SOME things only get bigger. From boats and planes to skyscrapers and shopping malls, size records are routinely broken. Companies are operating at record scale, too. But if the trend towards growing ever larger is clear, the economics of bigness are far murkier. In some cases, like boats, greater size still promises greater efficiency, as fixed costs are spread over higher output. In others, like buildings, the gains from scale may be running out. Where do firms lie on this spectrum?

Test Review

These concepts will be on the test tomorrow. I set the testing software to randomly copy 30 questions. Many of the questions are a repeat of a concept. 1. Determine the equilibrium price and quantity in a perfectly competitive market. Remember that a perfectly competitive market has many buyers and sellers, selling a homogeneous good with no control over the price. 2. Determine the effectiveness of a price control that has been placed below the equilibrium price. 3. When the government uses a quota to limit the quantity of shrimp determine the equivalent tax that would arrive at the same quantity. 4. Define a quota rent. In the case of a quota, resources are held captive over and above their opportunity cost. 5. Explain the inefficiencies of both a price floor and a price ceiling. For example, when a rent control is placed on the housing market, is the quality inefficiently low or high? 6. Be able to determine the amount of a surplus when a price floor is imposed on the soda market. 7. A binding price ceiling is a price control that is lower than the equilibrium quantity. This creates a shortage. 8. When given the equilibrium price and quantity, determine what happens to the price and quantity when a tax is imposed on the producer. 9. When a quota is imposed on a market, determine the new price of the good. 10. What happens when a price ceiling is placed above the equilibrium price? 11. In a market where there is a price control, explain how the market will adjust to equilibrium. 12. What is a black market and how does it develop? 13. What happens in the labor market when the government mandates a minimum wage.

Tuesday, November 06, 2012

Lecture make up notes for tomorrow. Price Ceiling.Price Floor.Tax incidence.We will also look at how a quota is placed on a good.

Sunday, November 04, 2012

Legalization of Pot

The Rand organization analysis of legalization of pot is here. The Economist analysis is here. When pot becomes legalized, demand will increase but supply will increase by more. The price of marijuana will fall by 80% as the market succumbs to Bertrand pricing. As society's attitudes towards drugs changes, more and more states may legalize pot and the race to the bottom will continue.