Wednesday, December 17, 2014

What came first: the egg or the California regulation on cage sizes?

A new regulation is set to take effect in California at the beginning of next year that will force hen houses to allocate significantly more room to each egg-laying chicken. 
Birds, long afforded a minimum of only 67 square inches a piece, will now need roughly 116 square inchesa more than 70 percent increase—if eggs are to be sold in the state. That extra space won't come free of charge, a cost that will almost certainly fall on consumers.
Lets say I have a hen house operation with 10,000 hens.  Prior to the passage of this law, I needed a building to house those hens that was at least 670,000 square inches. In square feet that would be 4,653 sqft.

With the new requirement of 116 sq inches, I would need a building that is 8,066 sqft---73% larger.

I could invest in expanding the building or constructing another, but the number of productive chickens I have would stay the same. More cost (however, only a "fixed cost"), same number of eggs.  I would have to receive a higher price for my eggs and/or cut expenses elsewhere to stay where I was before in terms of making a living.

I could make modifications to my existing building to make the cages bigger but I would have to reduce the number of egg-laying chickens I have by 4,224.  Now instead of 10,000 hens I have 5,776 to lay eggs for me. I would have to receive a higher price and/or cut expenses elsewhere to stay where I was before in terms of making a living.

What is chicken farmer (or is it rancher?) to do?

This is a terrific article with LOTS of opportunities to practice supply and demand and analyze the cost structure of a firm in a competitive business.

"Sugary Drinks" and Dead Weight Loss. Lets go to the graphs.

Many communities around the US  (and some other countries) have passed, or want to pass, a law that places a tax on "Sugary Drinks".  It is believed these types of products contribute to health problems and lost productivity within the economy.

The main argument is the production and consumption of sugary drinks does not explicitly include the tertiary costs to society in terms of treating conditions and diseases associated with these type of products. If we did include this cost, then the price would be higher and the market quantity would be lower.  I am going to use $.50 as the additional cost that is NOT considered in the private market production and consumption of these drinks.  This is known as an "external cost" that is not "internalized" in bringing this good to market.

The intent of the tax is to internalize ALL the costs of producing and consuming sugary drinks--even ones that have NO direct bearing on production and consumption.

Lets go to the graphs and see how this plays out.

Here is the market for "sugary drinks" in equilibrium where we ONLY consider the Private Market Demand (Marginl Private Benefit (MPB)) and Supply (Marginal Private Cost (MPC)) of this class of drink.  Right now the price of sugary drinks is $1.00 and the market quantity is "Qe".

The main policy goal is to DECREASE the market quantity produced and consumed in the marketplace.  Supporters of this policy believe the "Socially Optimal" amount of sugary drinks is LESS than what the market currently produces and consumes (graph below).

At the "Socially Optimal" market quantity, the cost to bring this good to market is $.75 (just go up to the Supply Curve) at Point "B".

However, if we include the $.50 not previously accounted for in production and consumption we see at the Socially Optimal market quantity, the producer would need at least $1.25 in order to supply that amount---Point "C" (look at the next TWO graphs to get this idea).

What is true between Points "B" and "C" is going to be true (certerus paribus) along all other points on Supply Curve "S* (MPC)---Points "A" to "D".

IMPORTANT POINT:  If we connect those new points we will derive a NEW market Supply Curve that now INCLUDES the external cost not previously included of producing sugary drinks.

We label this Supply Curve "S1 (MSC)"---MSC stands for Marginal Social Cost.  This curve includes the private costs of production and consumption AND the SOCIAL COSTS as well. Read that again!

Think of the original Supply Curve as "what is" and the new Supply Curve as "what should be". The difference between the two is the social cost.

The market is now in equilibrium at Point "C" where quantity demanded=quantity supplied---at a higher price ($1.25) and a lower market quantity (Q socially optimal).

The graph below is the same one only a little cleaned up.

Lets now consider Points "A", "D" and "C" and the neat triangle it forms.

Point "A" represents the market price and quantity as it "is". Point "C" represents the market as it "should be" if we internalized the exteranal cost of sugary drinks.  Point "D" represents at the private market quantity what the actual cost of producing each unit of sugary drink is---$1.50 as opposed to $1.00.

Graph below.  This triangle between "A", "B" and "D" represents the area of DEADWEIGHT LOSS (DWL) due to the under-pricing and over-production of these drinks.

In other words, when we include the external costs associated with the production and consumption of this good we can easily see that all the quanitities beween "Qe" and "Q socially optimal" now cost more to supply than consumers are willing to pay.

Prove it to yourself.  Pick any point on the horizontal axis between those to areas.   Go up staight up. You will hit the demand curve at at a lower price than you will hit the supply curve---cost to produce is greater than the price willing to be paid.

INEFFICIENT use of resources!

These units would not be produced if all costs associated with the good were included in the price paid and received!

Remember: The market IS at Point "A".  It is suggested that it SHOULD BE at Point "C". The difference is Dead Weight Loss.

Sorry for the repetition at times. I attempted to make this a step by step as possiblefor the beginning learner.  It can be a difficult concept to explain and learn in AP Microeconomics.

But is is a necessary one.  Guaranteed to be on the AP Test!

Let me know if you have any questions or can point out where I might have gone wrong.  Constructive criticism is always welcome.

The Russian Ruble (Rouble) turns to rubble. Apple Products edition.

This snapshot of the Russian Ruble (you see it spelled "Rouble" sometimes) value relative to the US dollar is from today's Bloomberg website:

Right now, the institutional market price (different (lower) than the market price we would pay) is $1.00US will exchange for 65.7746 Russian Rubles.

One year ago (look in red circled area) $1.00US exchanged for 32.4834 Rubles.

This means the US dollar can exchange for approx 33 more Rubles than it did one year ago. The dollar "buys" more Rubles than it did before, hence we can say the US dollar has APPRECIATED relative to the Ruble by about 102%  (rounded).

Exchange rates are reciprocal to each other.  If $1.00US exchanges for 65.7746 Rubles then 1.00 Ruble will exchange for 1.5 US cents

One year ago, Russians could exchange a Ruble and get 3.1 US cents. The Ruble "buys" fewer cents than it did before, hence we can say the Ruble has DEPRCIATED relative to the Dollar by 51% (rounded).

This has major consequences for US businesses that do business in Russia and want to expatriate profits or investments back into US dollars.

Simple example.  A year ago, a  business that earned 1,000 Rubles in profits could exchange those Rubles and receive $30.78US (1,000 Rubles/32.4834 Rubles per Dollar).

Today 1,000 Rubles would exchange for $15.20US (1,000Rubles/65.7745 Rubles per dollar).

Exchange rates matter because they can change the relative value of goods and services across borders WITHOUT changing the properties of those goods and services.

While writing this post, I checked the BBC and coincidently they have this story:

Rouble turmoil leads to Apple halting online sales in Russia

The company stopped sales of its iPhones, iPads and other products in the country after a day in which the currency went into free-fall. 
The rouble has lost more than 20% this week, despite a dramatic decision to raise interest rates from 10.5% to 17%. 
By afternoon trade the rouble was flat with one dollar buying 68 roubles.US Dollar v Russian Rouble 
$1 buyschange%
Its all time low, set on Wednesday, saw one dollar buying as many as 79 roubles. 
Apple last month increased its prices in Russia by 20% after the weakening rouble left products in the country cheaper than in the rest of Europe.
Timely! I hope this helps you understand exchange rates a little better.

Thursday, December 4, 2014

Cranberry production is out of control....

The supply of Cranberrys is almost double the amount the global market commands.  Bet you did not know that.  I didn't.

Here is an article and a short PPT I put together using supply and demand analysis to illustrate what is going on and the role govenments could play in this scenario.

The US govt is not buying all the surplus in the presentation below, but collectively governments in Cranberry producing countries could do so.

Feds buying surplus cranberries

The federal government’s decision to spend $55 million on cranberries may dent a global glut, support prices and speed up payments to growers. 
The purchase, however, won’t address production continuing to outpace demand, a step the U.S. Department of Agriculture declined to take this year.
“We have a very serious problem,” Long Beach Peninsula cranberry grower Malcolm McPhail said. “You don’t want anyone to have a crop failure. But you’d like to see average crops to keep things in perspective.”
U.S. and Canadian cranberry farmers produced this year a crop expected to be nearly as big as last year’s record harvest of 12 million barrels.
Between this year’s cranberries and fruit still unsold from 2013, the global cranberry supply stands at 16 million barrels (1.6 billion pounds). Demand over the next year is expected to be about 8.2 million barrels, according to the U.S. Cranberry Marketing Committee.

Thursday, November 20, 2014

Losing your Cool over COOL. It is (insert any time of day)--Do you know where your food comes from?

Here is an excellent example of a "Non-Tariff Barrier"(overt, non-monetary tax or quota) a country can impose on a good (or class of goods) coming into a country to (1) increase the price of that good or (2) discourage the importation of it.

The "Country Of Origin Labeling ("COOL")" requirement, part of the 2008 Farm Bill, on various food items is one such barrier.   

People like to know where their food comes from in the supply chain.

This imposes a financial burden on certain importers of food items. In this case it is beef producers:

Country of origin label for meat cuts endangered

The U.S. is running out of options in its effort to tell consumers where fresh cuts of meat originated after a successful challenge to package labeling by Canada and Mexico. 
A 2008 farm law requires that packages of steaks, ribs and other cuts of meat identify where the animals were born, raised and slaughtered. A label might say the meat was "born in Canada, raised and slaughtered in the United States" or "born, raised and slaughtered in the United States." 
The World Trade Organization agreed more than once with Canada and Mexico that the labels give the U.S. livestock industry an advantage. In a ruling Oct. 20, the WTO said the labeling requirement forced meatpackers to segregate and keep detailed records on imported livestock, giving them an incentive to favor U.S. livestock. 
The trade organization ruled in 2011 that an earlier version of the labels was discriminatory. That ruling was upheld in 2012 after a U.S. appeal.
 Canada filed a compliant with the World Trade Organization (WTO) and they prevailed.

The US can either ignore it and face retaliation in the form of tariffs on US exports to Canada and Mexico or Congress can modifiy the requirement to meet standards.

Advocates for keeping  COOL as it is are a strong group and it is in the interest of the Public to know where their food supply comes from. Lobbying groups for the goods that will face tariffs will put up a fight as well.  Exports and jobs are at stake.

Who will prevail?

Nice map showing the devolution of farm dependency in the US.

This image is via Big Picture Agriculture from a report by the Kansas City Federal Reserve Bank.

It shows how the US economy has devolved from dependency on agriculture. The Blueish Green areas represent, at the county level, that dependency in 1950 and 2000 (that is the latest date).

Observation: In the earlier time period agricultural interests and affects spread to far more people in rural areas.  Lets say it was more democratic in nature. This served as a counter-weight to the shifting power bases to/in urban areas.

Fast-forward to today. The politics of agriculture affect fewer people (nominally) and corporate interests have replaced the democratic nature of rural politics.

Policies of the bygone era had to appeal to tens of thousands of small business owners (farmers) with varied interests.  Today they have to only appeal to a concentrated number of large corporate farms with homogeneous interests.

Image via Big Picture Agriculture from a report by the Kansas City Federal Reserve Bank

Thursday, November 13, 2014

The Lottery--How much does your State payout in Prizes and gain in Revenue for the State Budget?

Over at  Five-Thirty-Eight Mona Chalabi has a blog entry on how much States receive in Lottery money (year 2012 is the latest data availble). She also shows, on a per capita basis, how much of the money goes to prizes, administrative costs, and into the State budgets as general revenue.

I went to the data source and created the simple table below to show, in percentage terms, how much each State pays out in prizes and how much goes into the State budget to be spent on...You take a guess.

How does your State do in terms of using the lottery as a revenue generating acitivity?

One observation: If the Lottery is played, in general, by low(er) income people (I think that is what the research shows) then in States where there are high pay-outs in prizes seem to be just re-distributing money within that subset. The Lottery is promoted as a way to raise money to advance some social policy---usually that is education which presumably benefits everyone rich or poor.

I have not played the Lottery in 20 years. I think I am richer, literally and figuratively, for it.

(Note: Numbers do not round up to 100%.  The balance percentage is from "Administrative Costs" to run the Lottery (Salaries, advertising, etc).

Monday, November 10, 2014

Nice Real Life Example of "The Rental Rate of Capital". An important Micro Econ concept.

One of the more difficult (and frustrating, I think) concepts in the Microeconomics Unit on Firm structure is figuring out what is an implicit (opportunity) cost when calculating economic profit.

One determinant of implicit opportunity cost is "the Rental Rate of Capital". In short, the rental rate of capital is the dollar amount I could receive for a physical input (i.e. tools, machinery, land) if I rented it to someone else to use instead of using it myself.

This is important to economists because it helps to determine if resources are being employed in the most efficient way possible. If a piece of capital could be rented out to someone else for more than what it could produce for you, then this would (could) be considered a mis-allocation of resources.

Assume I can use a barn on my property and it contributes $1,000 to my income.  What if instead I could rent it out for some other purpose for $1,200?  An economist would suggest that is an inefficient allocation of resources to the tune of a net $200.00.

I know, that can be VERY subjective, but let's go with it.

Here is an excerpt from a very short article on an effort to help farmers put a dollar value on some "dead capital" they possess that could be employed in an alternative use.

Survey could help determine fair prices for farm-building rentals (HT:Morning AG Clips)

Farmers, producers and landowners who have agricultural buildings on their property they are no longer using can turn the vacant space into extra farm income, according to experts with Ohio State University’s College of Food, Agricultural, and Environmental Sciences. 
Whether it is a farm building or livestock facility, farmers who want to put unused space into service to generate additional farm income first need to know how to go about creating a leasing arrangement and how to determine an appropriate rental price, said David Marrison, an Ohio State University Extension educator. OSU Extension is the outreach arm of the college. 
Many farmers may want to rent out buildings on their properties, but sometimes it’s hard to put a number on that, so it’s good to know what the going rates are on buildings in the region,” Marrison said. “Farmers need to know how to utilize those old buildings, whether it be to rent them out to another farmer or producer for extra hay space or to milk dairy cows.” (emphasis mine)
Here is a link to the PDF that gives prices for a wide variety of physical capital that my be laying dormant down on the farm.

Putting a price of these things can help a farmer make more income but, more importantly for economists, see to it that there is a mechanism for a more optimal allocation of societal resources.

Tuesday, November 4, 2014

The price of oil relative to the cost of producing oil. Nice graphic to help with graphing!

This is a follow up to yesterdays posting on the Break-Even point for oil drillers in different geographic areas of the US.

The point of that post was to use a firms costs curves (AVC + AFC =ATC) to show how low the price would have to go in order for firms to exit the industry.

Today in Business Insider they had this bar graph that helps clarify the point.  I inserted a horizontal RED bar to show the current price drillers are receiving for each barrel of oil produced.

Together they give you an indication of how drillers, at the current price, are faring in terms of profitability.

I think teachers and students alike can use info to plot on a graph of the firm that is a "Price Taker" in the marketplace.  Small drillers are relatively numerous and they must take the given market price (for the most part) for each barrel of oil the bring up.

Monday, November 3, 2014

Ebola Update: Last week was not a good one in this fight.

The data-base for Ebola reporting (found HERE) is updated to Oct 27th.  You can see in the graph below that the week of October 21st to 27th (Circled in black) was not a good one in the fight against this virus.  HERE is the latest World Health Organization(Oct 31) report on the status of Ebola.

This is a record of "Reported,Suspected and Confirmed Cases".

A noticable jump in all three of the afffected courntries, but Liberia and Sierra Leon the most frightening.

PPT on Firm Cost Curves as it relates to the price of oil.

I love it when the media post(s) helpful resources.

The graphic below comes from a Wall Street Journal article:   Energy Boom Can Withstand Steeper Oil-Price Drop
Source: Wall Street Journal
It gives a range of "Break-Even" price points for barrels of oil from different shale formations throughout the US and compares it to the current price of a barrel of oil, $82.20 (Wednesday, Oct 29).

In AP Microeconomics, "Break-Even" is defined when the price the firm receives for a good equals the Average Total Cost (ATC) or producing that good.  ATC is the sum of the firms "Explicit" money costs (dollars paid out in expenses) and its "Implicit" Opportunity Costs.

The article has a couple of relevant quotes that help in the analysis I put together in the form of a PPT to helps students understand this concept.

"U.S. crude closed Wednesday at $82.20 a barrel, and far less in some parts of the country where few pipelines are available to move it to refineries. Lower oil prices mean drillers will have less cash to cover their borrowings, especially if crude prices tumble more."
"Borrowings would be considered "Fixed Costs" as they have to be paid back regardless of production.
 "To be sure, even small price drops could begin to affect production around the margins. “The clear losers in a low-price environment are going to be smaller companies that are overleveraged,” said Daniel Katzenberg, a Baird analyst. The downturn will be particularly toughon companies drilling in areas without much history of oil production. Costs tend to be high in these areas, which include the Tuscaloosa Marine Shale in Louisiana and Mississippi and some relatively unexplored shale formations in Oklahoma.
The current price environment is a bit like a stress test to determine which companies have their financial and operating houses in order. Those that spent too much to lease property to drill, or have high operating costs, are most likely to suffer."
 Keep these things in mind as you view the PPT.  Visual the price of oil you see in the graphic moving to the left (decreasing) and encroaching on the Break-Even points.  Hopefully it will help!  Let me know of anything I might have missed.  Thanks!

Friday, October 31, 2014

Prices of things the day I was born.

Looking though the archives of the New York Times today.  Thought I would see what happened on my birthday (April 6, 1960).

Saw this advertisement for a reconditioned calculator and typewriter.

In today's dollars $199.50 for the calculator would be $1,604.30 and the typewriter would be $956.95.

I think I will take today's technology, thank you.

This was a fun excercise, by the way.  The site has all the issues prior to 1980---no charge!

Do Danish Fast Food Workers REALLY earn $20 per hour? It depends on how you define $20

A popular article making the rounds in the Econ and Politics blogoshere is this one:

Living Wages, Rarity for U.S. Fast-Food Workers, Served Up in Denmark

COPENHAGEN — On a recent afternoon, Hampus Elofsson ended his 40-hour workweek at a Burger King and prepared for a movie and beer with friends. He had paid his rent and all his bills, stashed away some savings, yet still had money for nights out. is because he earns the equivalent of $20 an hour — the base wage for fast-food workers throughout Denmark and two and a half times what many fast-food workers earn in the United States. can make a decent living here working in fast food,” said Mr. Elofsson, 24. “You don’t have to struggle to get by.”With an eye to workers like Mr. Elofsson, some American labor activists and liberal scholars are posing a provocative question: If Danish chains can pay $20 an hour, why can’t those in the United States pay the $15 an hour that many fast-food workers have been clamoring for?
The quoted dollar amount of $20 is in current market exchange rates between the Danish Kroner and the US dollar.  However, people don't buy exchange rates with their earnings they buy "stuff" in their local economies.

Saying a Danish worker earns the equivalent of $20 US dollars per hour says nothing about the purchasing power of their earnings.

At this link you will find Comparable Price Levels among developed countries as measured by the OECD for August 2014.  If you locate Denmark and the US you will find an index of "149".  This means that comparable goods and services are 49% more expensive in Denmark than they are in the US.

I found some examples of minimum wages in the Restaurant and Hospitality sector that were negotiated between the unions and industry in Demark.

See graphic below.  Along with those minimum wages in Kroners I converted them to US dollars at the current exchange rate (middle column) AND deflated them by 49% to equalize purchasing power between Danish workers and US workers in US dollars (Yellow highlights).

Example.  An unskilled chef in Denmark earn an minimum of  114.47 Kroner per hour. When exchanged at the current exchange rate that comes to $19.23. Sounds like a lot, but remember we don't buy exchange rates we buy "stuff".

When we control for the price level difference of 49% that Danish workers wage has the same purchasing power as an unskilled chef in the US earning $12.91.

I am not judging this.  Just providing some perspective on the wage differential.

That is all...

Tuesday, October 28, 2014

Supply and Demand: Ebola Protective Gear edition.

The tragedy of Ebola has created issues in the supply chain for the protective gear we have come to know so well from watching the news.

This article from Bloomberg has two components to it that provide an opportunity to look at this situation from a basic supply and demand perspective. The portions in bold and underlined are my emphasis as this is what I would like to analyze in the graphs below:

The International Association of Fire Fighters said some local fire units are being forced to wait until next year to get the personal-protective gear that shields workers from being exposed to bodily fluids, the only way to contract Ebola. Dupont Co. and Medline Industries Inc., makers of the products, say demand has surged as health departments and hospitals respond to the threat. 
“The administration should put pressure on manufacturers to increase production to meet the growing demand,” Harold Schaitberger, president of the 300,000-member union, said in a letter to Obama. The group met in recent days with officials about the response to the deadly virus, and said supplemental funding from the federal government is needed to help local governments pay for the gear and training.
 This sudden increase in demand has ramifications for both the buyers and producers of this highly specialized protective gear.

In these graphs I created I want to illustrate both of the highlighted points---how the increase in demand affects producers and ultimately the price for the gear, and how the request for government funding might impact the market as well.

Monday, October 20, 2014

Ebola Update: Graphs of Cases and Deaths. Not a good trend.

Here is a graph of the Number of Cases of Ebola that have been identified in each of the 4 countries where there has been a significant outbreak.  You can see Nigeria has it under-control, but the other 3 are still on an upward trend. The data was last updated on Oct 14-17.

Here is the Data Set.  It is being compiled from data/reports provided by the affected countries.

Using the same data source, here is a graph of the Number of Deaths thus far in the most affected countries.

The trend is still upward.  Until we see a plateauing this will only get worse.