GOT A QUESTION?Students tell me they like real world context for quiz questions. So, students of Env-Econ, here you go: Using the basic tools of supply and demand described here, predict the effect of a recession (decreased income for consumers) combined with increasing supplies on the price of natural gas in Ohio.
Read below the jump for the answer...
In my basic econ classes I usually use minimum wages as an example of bad government policy. I tell the class that a binding price floor in the labor market will create a surplus of workers (unemployment). I go on to explain that the situation is worse than that, because the likely victims of this unemployment are those for whom the minimum wage is binding--low-skilled and teen workers. In other words, minimum wages cause unemployment among those they are intended to help.
But any good economist knows that there is plenty of evidence to contradict this. As a reader asked in a past discussion we had on minimum wages:
...are you all essentially ignoring all of the work by David Card that suggests that in many cases minimum wage increases do not have large employment effects?
My gut reaction was always, well, yes, because price floors have to cause surpluses. It's just intuitive and it seems that the evidence is just hiding. Well, it's hiding no longer. Respected labor economist David Neumark, in today's Wall Street Journal, writes:
Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage, the bulk of the evidence -- from scores of studies, using data mainly from the U.S. but also from many other countries -- clearly shows that minimum wages reduceemployment of young, low-skilled people. The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults. This is on top of the continuing job losses the recession is likely to throw our way.
Yep, I knew it all along.
Last Novemeber, I wrote:
Take the case of high gas prices. From Reuters:
Millions of Americans will drive their cars to visit family and friends over the Thanksgiving holiday even though gasoline is above $3.00 per gallon, travel and leisure group AAA said Thursday.
About 38.7 million Americans, 1.5 percent more than last year, will travel 50 miles or more from home this holiday, AAA estimated, based on a national Web survey of 2,200 adults.
The price per mile of travel is increasing (gas prices are increasing) and miles traveled are increasing relative to last year. The only thing consistent with higher prices and higher quantity is an increase in demand. If high gas prices were supply driven we would see consumption decreasing, not increasing.
Well, ditto:
With the Memorial Day weekend and summer driving season approaching, motorists are facing a familiar trend -- surging gasoline prices.
The undercurrent seems to be that drivers are the victim. Gas prices rise each May in anticipation of the increased demand for gas in late May and into the summer. In this case, drivers aren't the victim, they're the cause of higher gas prices.
Want lower gas prices? DRIVE LESS!
As the housing slump drags on, Triangle home sellers are lowering expectations and prices. And buyers, buoyed by low mortgage rates and new tax incentives, are starting to respond. It's a subtle crack in a frozen local housing market, where 13,393 unsold homes still await buyers. ...
The average price of new and resold homes sold in April was $216,000, down 9 percent. The average price of resold homes in April was $198,000, down 8 percent. They were the biggest year-over-year declines in at least eight years.
Source: Housing Market Loosens
Flipping through the channels and came across a new episode of the Deadliest Catch. The description reads:
I watch so I can say I have evidence that changes in future prices shift supply today.
On Friday Tim excerpted this:
Organizers of the Preakness Stakes, the second event in horse racing’s Triple Crown, want a tamer experience on Saturday for the 134th running of the race. Fans can no longer bring their own beverages to the infield. Sixteen-ounce beers will be sold for $3.50, and they will come in plastic cups instead of unopened cans.
...[Tom Chuckas, the president and chief operating officer of the Maryland Jockey Club] said infield ticket sales were down about 15 percent from this time last year, though he expected potential losses to be offset by the increase in beverage sales. The price of admission remains $50 for tickets bought in advance and $60 for those purchased on race day
On Monday Rick Bozich, columnist at the "hoity-toity, prim and proper, frilly hat wearing, mint julep drinking home of the Kentucky Derby" local paper, says:
What we learned on Saturday is the folks who usually pack the Pimlico infield are more interested in an outrageous party than a good race. Preakness attendance plunged nearly 31 percent from 112,222 to 77,850, the smallest crowd for the Triple Crown's second leg in 26 years. And last year's turnout was down 7.5 percent from the 2007 Preakness record of 121,263.
Even holding income constant in a recession year, the folks from Balmer really love a party and hate when they can't BYOB.
From the News and Observer (Patrol says ...):
If a state trooper calls a wrecker to tow your mangled car off the highway, you could be swallowing a steep bill.
A spokesman for the state Highway Patrol says it is classic price-gouging. Capt. Everett Clendenin said wrecker companies are taking advantage of drivers in a desperate situation with business guaranteed by the patrol.
The Highway Patrol tried to regulate the fees by adopting policies that set maximum fees for tow truck drivers. Tow companies turned to legislators to order the patrol to stay out of their business. State senators are expected to vote on a bill this week blocking the patrol from setting wrecker prices. ...
A combination of higher production costs and inelastic demand leads to higher prices. The question is whether towing companies should be allowed to set price according to willingness-to-day? If the Highway Patrol wants to reduce prices, couldn't they award contracts to low bidders?
Today's Econ 101 topic--actually AED Economics 200 but same diff--the deadweight loss from taxes in otherwise well-functioning markets. In my neverending--futile?--attempt to stay current, I plan to use this example from today's Wall Street Journal:
Senate leaders are considering new federal taxes on soda and other sugary drinks to help pay for an overhaul of the nation's health-care system.
The taxes would pay for only a fraction of the cost to expand health-insurance coverage to all Americans and would face strong opposition from the beverage industry. They also could spark a backlash from consumers who would have to pay several cents more for a soft drink.
The Center for Science in the Public Interest, a Washington-based watchdog group that pressures food companies to make healthier products, plans to propose a federal excise tax on soda, certain fruit drinks, energy drinks, sports drinks and ready-to-drink teas. It would not include most diet beverages. Excise taxes are levied on goods and manufacturers typically pass them on to consumers.
...
The Congressional Budget Office, which is providing lawmakers with cost estimates for each potential change in the health overhaul, included the option in a broad report on health-system financing in December. The office estimated that adding a tax of three cents per 12-ounce serving to these types of sweetened drinks would generate $24 billion over the next four years. So far, lawmakers have not indicated how big a tax they are considering.
Proponents of the tax cite research showing that consuming sugar-sweetened drinks can lead to obesity, diabetes and other ailments. They say the tax would lower consumption, reduce health problems and save medical costs. At least a dozen states already have some type of taxes on sugary beverages, said Michael Jacobson, executive director of the Center for Science in the Public Interest.
Questions to consider:
When is a shprtage shortage not a shortage? When a supply decrease is mislabeled as a shortage.
From the Financial Times article titles "Shortages stir coffee and sugar prices":
Caffeine addicts face higher prices for their daily fix as the wholesale cost of both coffee and sugar rise sharply because of poor crops and robust demand.
When costs rise, that's a decrease in supply. In simple supply and demand analysis, that means that the supply curve shifts to the left. Or put in simple words, at the current price, suppliers are willing to supply left. If prices don't adjust, then there would be a shortage of coffee (the amount of coffee buyers are willing to buy is more than the amount of coffee sellers are willing to sell). But that's only IF prices don't adjust.
Shortages put upward pressure on prices to alleviate the shortage by making buyers want to buy less at the higher prices (law of demand) and sellers sell more (law of supply). IF prices can fully adjust, then there is no shortage, just higher prices and a lower quantity of coffee sold in the market (See the bottom right graph in the picture to the right for a graphical representation. See here for a full explanation of supply and demand).
So what caused the supply decrease in coffee?
The [coffee] crop in Colombia was damaged by heavy rains and the scarcity of supplies from the country is now “absolute”, says Néstor Osorio, head of the International Coffee Organisation.
Just yesterday I played Gordon Gekko's 'Greed is Good' speech (below) from the 1987 movie Wall Street in my principles of microeconomics class to illustrate the thinking behind market efficiency.*
Today, this:
Wall Street's all the rage again -- literally. And Oliver Stone and Michael Douglas have decided they have more to say about it.
Stone has just closed a deal with Fox to direct the follow-up to "Wall Street," now tentatively called "Wall Street 2," with Douglas starring. This would provide an unusual amount of continuity since Stone directed and co-wrote, with Stanley Weiser, the original 1987 exploration of the inner workings of the finance sector and its complicated relationship with greed.
*I contrasted that with this clip on the perils of capitalism from the play Marx.
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