Thursday, April 17, 2014

Sriracha Sauces loss is my gain. Nice example to show how a potential change in fixed costs and variable costs affect a firm.

Sriracha sauce maker considers relocation

The makers of the most popular Sriracha sauce (Huy Fong Foods) is facing a dilemma.  A by-product of producing the sauce is an awful smell that permeates the air in the City of Irwindale, California where the manufacturing facility is located.  Area residents don't like it and want something done about it.

The city wants the company to install air-scrubbing technology.  Apparently this is very expensive to do and the company is resisting.

I suppose if the company refuses it can be fined, better yet for our analysis, a "per unit tax" could be levied on each bottle produced.

So, the firm faces the possibility of having to incur a large up front "fixed cost" of installing the equipment or face a small-ish "per unit tax" variable cost on each of the bottles it produces.

Which is better for the firm?

Let's see how this affects the firm in context of how we study it in AP Microeconomics.

I presume Hoy Fung Foods in one of several competitors in the market for Hot Sauce.  As such, I will classify it as operating as a "Monopolistic Competitor".

Here is what the firm graph would look like assuming Hoy Fung Foods is making "Economic Profits" and operating as it has been.

Installing the equipment would be a "fixed cost" for the company.  It is a cost that is incurred regardless of how many bottles of the hot sauce are produced and the cost is spread out over an all the additional bottles produced.  

This affects the AVERAGE TOTAL COST ("ATC*) of producing ONLY and NOT the Marginal Cost ("MC*) of producing each bottle.

This will SHIFT the ATC curve "ATC*" UP to "ATC 1".  The profit maximizing quantity at MR=MC stays the same  at Point "A" (read that again!).   What does change is the firms Economic Profit. 

Where I shifted the "ATC 1" curve, it assumes that it is at "Break Even" (in Economic terms, not Accounting terms) at Point "B".

So, Hoy Fung Foods is breaking even and still producing the same amount of product at Qe and at the same Price consumers are willing and able to pay at "Pe".  Status quo, except for profits!!

What if instead a per unit tax is assessed on each bottle of hot sauce. That would be a small dollar amount for Hoy Fung to absorb, so it MUST be better....right?

A per unit tax affects BOTH the ATC and the Marginal Cost (MC) of producing.  The tax applies to each unit and increases the cost of producing each unit by the amount of the tax. This will shift the ATC curve and the MC curve together.  The MC curve will shift to the LEFT to "MC 1"(or some say "up").

It is kinda hard to see with all the curves, but notice our "Profit Maximizing Quantity" at MR = MC is now at a different spot---Point "A" at "Q1".  Because MC shifted it will intersect Marginal Revenue (MR) at a different spot along the MR curve.  THIS IS KEY!!

Let me clean up the graph above for you.  See below. As a result you can see that the PRICE consumers pay is higher than it was ("P1") and the quantity sold is less too.

BUT is gets worse for the firm.  Notice now that the ATC of producing Q1 bottles of hot sauce is now GREATER than the Price received from consumers (ATC 1 more than P1).  The firm is now incurring Economic LOSSES equal to the area "P1-"C"-"D"- P1".

In this simple analysis holding LOTS of variables constant, we can see that Hoy Fung Foods should probably install the equipment to avoid a per unit tax.  It appears it will be the best outcome for the firm.

While this example might not completely reflect the real time situation, I hope it helps you understand the different way a fixed cost and a variable cost (per unit tax) affects a firm.

This is a must-know concept for the AP Micro test!!

Wednesday, April 16, 2014

Community Colleges get a boost. To state the obvious, enhanced skills are the pathway to the jobs of the present and future.

"The White House on Wednesday will announce $500 million in grants aimed at increasing coordination between community colleges and industry groups and another $100 million to expand access to apprenticeships to boost job training, administration officials said. 
The grants will be unveiled during a visit by President Barack Obama and Vice PresidentJoe Biden at the Community College of Allegheny County in Oakdale, Pa. 
The initiatives are similar to approaches used by some states, which have tried to leverage relationships between community colleges and local businesses to steer workers toward available jobs. But the proposals also show the limits of White House power. While most of the grants will be more targeted, the initiative essentially is a continuation of existing grants already disbursed to community colleges"--Wall Street Journal
Allocating resources (read that money--which is not an economic resource) to help the long term unemployed gain or regain relevant work skills is a necessity right now.  It is a festering issue that will impose costs on society one way or another.  We pay now or pay later in myriad of other social costs, explicit or implicit.

This is a great initiative, in theory AND practice (see HERE and HERE), and COULD BE money well spent.  However, as is the case quite often, it is not targeted towards the greatest need but towards the best grant writers.  And the best grant writers are often employed by the better served areas that need money, but less than communities severely stricken by the recession.

I am not a pessimist but a realist.  Please, Federal Government, target the skills gap not the political favoritism gap.  Thank you.

Supply and Demand Lesson: Fruit and Vegetable Edition. Salad bars are about to become more expensive.

This graphic, from the Wall Street Journal, shows how the prices of various fruits and vegetables are expected to rise in the near future due to drought conditions in California.  The salad bar at your favorite restaurant is likely to be more expensive very soon.
Source: Wall Street Journal
While not a good turn of events for the marketplace, it does provide this economics teacher the opportunity to illustrate supply and demand with graphs.  So, for your learning pleasure I created a set of slides that tell the above story.
"California is the largest domestic producer of each of the products Mr. Richards identified, ranging from grapes to peppers. And in the case of avocados, it’s the only state with a significant crop.The drought has wiped out between 10% and 20% of California crops for the eight items, but the size of the expected price increases varies widely. Lettuce prices could jump as much as 34% and avocado prices could rise 28%, the largest projected increases. 
“People are the least price-sensitive when it comes to those items, and they’re willing to pay what it takes to get them,” Mr. Richards said. “It’s hard to make a salad without lettuce.”In basic economic terms, the drought reduces supply, which puts upward pressure on prices. But how high the price can rise is determined by consumers’ willingness to pay more against their ability to find a substitute".-(Wall Street Journal)

Monday, April 14, 2014

Income vs Substitution Effect. Both explain the downward sloping nature of a Market Demand Curve.

My PPT slides to explain the two main reasons a Market Demand Curve is DOWNWARD sloping.

Hope it helps someone out there who is confused about this topic.  It is tested on the AP Microeconomics test so it is in your interest to learn it here OR somewhere!! :)

Friday, April 4, 2014

Nice GIF showing how Chicago neighborhoods have changed over time in terms of income inequality.

Here is a GIF (CBSChicago) showing the change in the Greater Chicago area in terms of median income. De-industrialization as we moved from goods production to service production? Globalization? "White Flight"? Federal tax /housing policy? Local governance? Drugs and/or Crime?  Short answer is probably yes to all of the above.

According to the key on the graphic the colors represent areas where incomes are either above or below the "median income".  For instance GRAY represents areas where the income is from 75% to 125% of the median. Example: If median income in an area was $50,000 then half the residents of the area earned at least $37,500 but not more than $62,500.

As you see the GIF move through time more Green AND Pink/Red-ish areas emerge and crowd out the Gray.

The Green areas are where incomes are significantly greater than the median (getting richer--pulling away from the median upward) and the Pinkish to Red areas are where incomes are significantly less than the median (getting poorer---pulling away from the median downward).


Here are still shots I took of the GIF is you need to look at it at a more leisurely pace.

Thursday, April 3, 2014

If the Ukraine falls food insecurity will rise in many parts of the world...

From the USDA:
Over the last 15 years, Ukraine has emerged as a major supplier to world markets for several agricultural commodities, including wheat, corn, sunflower oil, and rapeseed.  Wheat is a traditional export, with annual shipments varying with crop size. For 2013/14 (July/June marketing year), Ukraine’s wheat exports are forecast at 10 million tons, or about 6 percent of world wheat trade.  During the last decade, Ukraine’s corn production and exports have expanded, with 2013/14 (October/September) exports forecast at 18.5 million tons, making Ukraine the world’s third-largest corn exporter.  Robust production growth is also behind Ukraine’s emergence as the world’s dominant supplier of sunflowerseed oil, with 2013/14 (September/August) exports forecast at nearly 4.1 million tons, or about 57 percent of global trade.  Ukraine has also become a significant exporter of rapeseed, with 2013/14 (July/June) exports forecast at about 2.2 million tons, or 16 percent of world trade. Despite recent political developments in Ukraine, so far there is no evidence of significant shipping disruptions that might alter the 2013/14 Ukraine export forecasts. 

Wednesday, April 2, 2014

An "eggs-elent" article to teach various components of Demand.

A very short article in Quartz regarding the decline in the consumption of eggs in the US and how it can help teach the basics of Demand.

If teaching and/or learning about the "Demand" it identifies several key concepts relating to the difference between a change in quantity demanded vs a change in demand.  This is the bane of existence for every student and teacher of economics! :) There is also a bonus example of the difference between and Normal Good and an Inferior Good.  Good times ahead!! Read on.  :)
Americans once ate nearly twice as many eggs as they do today
1. They’re more eggspensive…
“Egg consumption is affected not only by the price of eggs, which has been rising, but also the price of competing protein products, like meat, which have been falling."
When the price of eggs INCREASES the Quantity Demanded for Eggs DECREASES.  This conforms to the Law of Demand, which suggests that the price of a good and the quantity demanded are INVERSELY related to each other.  A price change results in a movement ALONG the market demand curve (up and to the LEFT or Down and the RIGHT).  If the income you spend on a good is fixed and the price increases your money has less purchasing power and your quantity demanded for a good DECREASES.  If price decreases, your money has more purchasing power and your quantity demanded for a good INCREASES. This is known as the "income effect" and helps explain why a demand curve is downward sloping.

The second part of the quote suggests a "substitution effect" in the market for eggs where the prices of related/substitute goods have an affect on the market for eggs.  As the price of eggs increases the quantity demanded for eggs decreases (movement ALONG the demand curve) because there are viable substitutes available, other proteins in a variety of meats.  DO NOT confuse the difference between the two (Substitution Effect vs Presence of Substitutes)!!
2. …they got caught up in health scares… 
“The major factors behind egg consumption trends are consumer preference factors, in particular, concerns over the cholesterol content of eggs and the risk of coronary heart disease and stroke,” the US International Trade Commission noted in a 1999 report
One of the determinants of demand OTHER THAN PRICE that will SHIFT a market demand curve is "a Change in Consumer Preferences". The change could be positive which would cause consumers to, at every given price, INCREASE their quantity demanded relative to before the change in preference.  This would shift the market demand curve to the RIGHT indicating an INCREASE in demand.

However, the change noted above is negative, suggesting the quantity demanded is LESS than it was before at that price.  This would shift the market demand curve to the LEFT, indicating a DECREASE in demand.

Lastly, there is an example for a lesson on the difference between "Normal" and "Inferior" goods.
3… and people make more money. 
When people get richer, they tend to consume fewer eggs, according to the US International Trade CommissionAmericans are a good deal richer than they were in decades past—the median US household makes roughly 19% more than it did back in 1967, according to US Census data.
With a "Normal Good" an increase in income will increase the quantity demanded for a good. It becomes more desirable as you make more money.  Give me MORE of this good at a given price!

This suggests you might be substituting AWAY from another good that becomes less desirable as you make more money---that would be an "Inferior Good". Give me LESS of this good at a given price!

I hope this helps you understand some of the more difficult concepts surrounding Demand Curve analysis.

Let me know if it works for you! :)

Tuesday, April 1, 2014

What is the price of a Lime in your neck of the woods? Photos welcome if you happen to be out shopping!

Lot's in the news about the current lime shortage in the US.  Most limes we consume come from Mexico. Due to weather AND gang activity, the price of limes has shot up in a very short period of time.  HERE and HERE you will find excellent reviews of what is happening.

According to the US Dept of Agriculture, the price of limes last week (Friday, March 28th) was $.37 cents each (a "weighted average price") and the week before that they were $.53 cents each.
Cobbled together from USDA data HERE
I just went to a Krogers in my neighborhood (northern burbs of Columbus, Ohio) and here is what a lime was selling for (4/1/2014):

Displaying photo.JPG

How about where you live?  If you are out shopping take a picture and I will add it to this posting and we can see how it plays out in different areas of the country.


Friday, March 28, 2014

Nice short video about the progress the world has made in the past 50 years (20 for that matter). Louie Armstrong was right...

It's a wonderful world....Feeling down about the state of the planet and its inhabitants?  Here is a little pick me up that will put things in context.

The world is a far more wonderful place than in any time in history.  I believe that is true if you really think about it.

Explain-er with real life example: The difference between accounting costs and "economic" costs. This is why every one hates economists but love their accountant.

Here is a graph (HT: Big Picture Agriculture) that shows the relationship over time (1972-2012) between the Average Total Cost ("ATC") of producing a bushel of corn  (RED line) and its Market Price (BLUE line).

You can see at various times the ATC exceeds the price and vice versa.  Sometimes they make a profit, sometimes they lose money...So goes the agricultural commodities market and the roller coaster that is farming.

Look at the year 2006.  I inserted a dotted line to show in 2006 the price of a bushel of corn equaled the Average Total Cost of Producing a bushel of corn  The lines intersect at $2.50.  So, the farmer is "breaking even"...right?

Not so fast.  I believe I am making a correct assumption in assuming the creator of this chart included cost data that is ONLY comprised of "Accounting Costs" or "Money Costs".  This simply means explicit costs that are paid for with cash (or credit).  Accountants care only about accounting costs when they tally up the numbers and then subtract them from Revenue to obtain "Accounting Profits".

Economists, on the other hand, care about explicit accounting costs and IMPLICIT opportunity costs---are you surprised? Probably not...

Economists believe that the farmers accountant UNDERESTIMATES the cost of being a farmer because opportunity costs are not added to the the total cost of farming.

Simple example.  Lets say I make $50,000 per year as a teacher but decide to quit teaching and become a farmer.  In the first year I make enough in farming to pay myself $40,000.

This $40,000 is an accounting cost (real money paid to me!). However, economists take it one step further and suggest that I have to account for that lost $10,000 income I experience when I choose to farm.  

My total cost to farm is not $40,000, but $50,000.  Economists add in that $10,000 in foregone income as an implicit cost for me and my farming operation.

Once I add in the additional implicit cost of $10,000 that accountants do not, then my ATC of producing is going to be HIGHER than what you see at ANY POINT in the above graph.

The RED line will shift UP at every given price. 

So, for the most part, profits will be LESS in economic terms as opposed to accounting terms because of the inclusion of implicit opportunity costs.

Go back to 2006 on the graph. If we add in the opportunity cost then the ATC of producing corn will be something MORE than $2.50 and instead of breaking even as accounts would figure. The farmer will experience "economic losses".

My labor is not the only implicit cost economists like to account for.  Go here for a more comprehensive look at the topic.

There has to be an accountant vs economist joke in here somewhere. Because I teach economics I don't have much of a sense of humor, so you tell me a good one.  :)

A short lesson on the difference between a "Constant Cost" and "Increasing Cost" Production Possibilities Frontier. A must know for AP Econ!!

Understanding the difference between a "Constant Cost (Straight Line)" and an "Increasing Cost (Concave)" Production Possibilities Frontier (PPF) is not necessarily a difficult concept, but it one that does seem to be-devil the student in an introductory economics class.

I put together a series of slides that takes you through the differences step by step.

The main purpose for the PPF is to illustrate the principle of Opportunity Cost when it comes to resource allocation. If an economy is at Full-employment to get more of one thing then something has to be given up.

Sometimes that trade-off may be "constant"--the resources taken away from the production of one good are "perfectly adaptable" to produce more of another good.  A simple example is a farmer who has land where he can grow Corn and/or Soybeans. The land suitable for growing corn is the same as the land for growing soybeans (I live in Central Ohio--I see this just down the street). One the same acre of land, the farmer can get a maximum yield in corn or soybeans. Switching from one to the other entails virtually no cost in resource allocation for the farmer.  How it affects society is another question.

However, if the crop mix is different and the resources used are NOT easily adaptable for a different use, then the opportunity costs are not constant but "increasing".

I use Corn and Rice as an example below.  The land use for either is not identical.  If I want to grow Corn where I once grew Rice then it may take 2 acres of rice field acreage in order to get corn yield equivalent to what I would get out of land perfectly suitable for corn production.  My opportunity cost for more rice is not just one acre or rice production (Constant Cost) but two acres (Increasing Cost).

If the farmer persists in converting more of the rice field into corn production, then it may take 3 acres to get the equivalent in Corn. So on and so forth.

TINSTAAFL!   Corn and Rice---now I am hungry.  My opportunity cost of doing this blog entry is a delayed breakfast. You gave up eating lunch to read it.   I hope it was worth it to you.  Was for me.  :)

Saturday, March 22, 2014

Full-employment, Progressive Era style. Nice photo of bowling pin setters in 1910.

This photo accompanies a nice article on "The Rise and Fall of Professional Bowling". 

It was taken in 1910.   From Wikipedia, here is the description of it:
1:00 A.M. Pin boys working in Subway Bowling Alleys, 65 South St., B'klyn, N.Y. every night. 3 smaller boys were kept out of the photo by Boss. Location: New York--Brooklyn, New York (State) Hine, Lewis Wickes, 1874-1940, photographer. April, 1910
Child Labor in action.  Nice illustration for a history class.

I am 53 years old and I remember watching bowling on TV in the late 60's.  I was a big deal! But I missed its real heyday long prior to that (pre and post WWII).

If you are interested in the subject or just like reading about historical cultural niches that people have mostly forgot, then this may be for you.

Source: Priceonomics

See how the price and quantity sold of the simple i-Pod as changed over time since its introduction in 2003. The i-Pod is Dead, Long Live the i-Pod...

Ok, it is not really dead, but it is on its way to becoming an impulse buy in line at the grocery store.

The iPod will go down in history as a breakthrough technology that lead to the "i"-everything revolution in consumer electronics.

When it debuted in 2003 (yes a short 11 years ago) its introductory nominal price was $400.00 (see left scale, blue line. Using the BLS inflation calculator for overall changes in prices, in today's dollars that would be equivalent to $510.30.

Following the BLUE line you can see the price dropped rapidly as more units were sold (GOLD line using the Right Hand scale).

In 2006 the price stabilized at its longer term price floor of just over $150.00 regardless of the number of units sold (with some seasonal fluctuations). Those seem to coincide with the very high peaks that center on the Christmas shopping season. Pretty consistent, eh?

For an additional reference point, I put the price of an i-Pod today (estimated at $155.00) in 2003 dollars: $121.47.  That is a 70% reduction in price using 2003 prices ($121.47-$400.00 = -$278.53/$400.00). Or you could use 2014 prices.

During that time, the general level of all prices, as measured by the Consumer Price Index, increased 28%.

Wish we could innovate with the cost of gas and or electricity to this extent so our heating bills would be lower by 70%.  :)
Source: Twitter Tweet via Quartz

Wednesday, March 19, 2014

A survey suggests businesses won't reduce staff, maybe slow hiring of new workers BUT raise prices if the minimum wage goes to $10.10. Let me show you how this is possible.

The Wall Street Journal had this graphic based on a recent survey regarding business sentiment towards a potential increase in the Federal minimum wage to $10.10 per hour.

Sixty-one percent of businesses won't cut their existing workforce (Red means NO, Blue means YES), which is good. About 52% say they won't reduce hiring in the future. Not a ringing endorsement going forward, but we will take it. About 63% say they would raise prices.  THAT doesn't sound good.

So, good for low wage workers who have a job. This is easy to quantify. Not so good for low skilled workers not in the labor force now but may/will be in the future. Not so easy (impossible?) to quantify.  Not good for people who purchase goods/services produced from low wage/low skilled labor. This is VERY easy to quantify.

Source: Wall Street Journal
In AP Microeconomics we have a unit called "Factor Markets" in which we use a very simplified model to graphically illustrate the "Profit Maximizing Number of Workers" a firm will hire given the changing market conditions, such as it described in the graphic.  

According to what you will learn below (all the relevant info is embedded in the slides) the ONLY way the conditions above can be met (no cut in workforce and possible reduced hiring) is if PRICES INCREASE.

The highly competitive industries that employ lots of low wage/low skilled workers AND is dealing with a relatively slow economy, this seems very difficult.  

But I am going to go with it and show you how it is possible for everything to work out just as the graphic suggests.  

Let me know if you spot any mistakes in content. Constructive criticism always welcome.