I was reading about how the town of Great Barrington, Massachusetts
has decided to print their own form of currency 'BerkShares' as a way to keep
consumers buying locally to help the local economy. http://www.cnn.com/2009/LIVING/wayoflife/04/22/printing.own.currency/
I was wondering how the use of this local currency affects the United States
as a whole and how is printing your own town's currency not illegal?
It doesn't affect the U.S. as a whole at all--the total consumption in the U.S remains unchanged.
It is not illegal because it is not being used as counterfeit currency--it is not illegal to print coupons, gift certificates, or other means of exchange
There are web sites that issue E-currency for items used in trade (ie you offer a used car and you get Edollars that you can use to buy other goods offered in trade). In fact, there are web sites that give fake dollars for fake transactions -- Second Life being an example.
In a few lectures you spoke about stocks and bonds. You gave
aspects of both
of these investments and were very clear on what they did.
My question is which one of these, stocks or bonds, are more reliable? Is one
favored over the other? Bonds may be more valuable over the long term,
however as we have seen recently, can have very harsh effected on people who
depend on them for future profits. Stocks, especially in today's markets, can
be viewed as a quicker way to make a buck, however the possibility of losing
a
lot of money in investments is very real. Aside from what is going on today,
which one could be better depended on when the markets stabilize? Is one safer
than the other?
Stocks are riskier because in case the firm goes bankrupt, stockholders get nothing
A bond is money lent to the firm rather than a share of ownership of the firm. When a firm goes bankrupt, the distribution of the firm's assets must first go to the firm's creditors including bondholders. Bondholders will often get at least some if not all of the money they are owed when the firm goes bankrupt, even if stockholders get nothing.
Because bonds are safer than stocks, the expected return on bonds is lower. However, sticks have a larger variation in return about that expected level. The risk and return trade-off that we discussed in class is precisely the trade-off between stocks (more risk and more expected return) and bonds (les risk and less expected return).
If you want to invest for the long term, stocks would dominate because they almost always outperform bonds over a ten or twenty year period. But if you want to consume within a year, bonds would be more atrtractive because of the lower chance of loss.
On your issue about the name Deadweight Loss? Good luck finding it's origin. It peaked my curiously so I looked around for it; however, came up empty handed. All these articles say pretty much the same thing - as you spoke of in class dealing with price ceiling and price floor.
In opinion, deadweight loss refers to man's excess weight. Our heavier American society can definitely relate. Instead of taking time to work out (in order to reach equilibrium - and/or the average built vs. age, weight, & hight) we have a tendency to set that aside (our opportunity cost) to obtain another goal or objective (such as relaxing in front of the television/computers/etc). Because our body isn't utilizing its resources (our muscles, tendons, tissues, etc) efficiently, we obtain deadweight (and in this case, we can call it fat --> and that is deadweight because it's purpose is to store energy). We then have both consumers and producers...football player, sumo wrestlers, and myself (producers) desire to reach equilibrium by gaining "deadweight" whereas other individuals whom desire reach equilibrium by loosing "deadweight" would be consumers.
Very good observations. The dictionary definition had
/dead weight/ or /deadweight/ ( ) n. The unrelieved weight of a heavy, motionless
mass. An oppressive burden
or difficulty. I think that may be overly dramatic, but it suggests that the
price away from equilibrium slows or burdens the economy as if it were carrying
this weight along. I also could not find where the term originated in economics.
Does an "individual" (company, country, etc) always have a comparative advantage over another "individual?" From my reading and understanding, the book seems to be stating this, but I'm questioning it. Here's an example where I don't see comparative advantage and/or the benefits of trading.
Scenario: Two individuals (Mark & Mary) can produce both shoes and socks. Mark has the absolute advantage in that he can produce either 10 shoes or 10 socks and Mary can produce either 5 shoes or 5 socks. Now the question is, Would these individuals be better off if they specialized and traded? In this case both Mark and Mary's opportunity cost is a ratio of 1:1 - meaning it will cost them 1 unit of shoes to produce 1 unit of sock and vise versa.
Time spent 50/50: Mark can produce 5 units of shoes and 5 units of socks
Mary can produce 2.5 units of shoes and 2.5 units of socks
Together they can produce a total of 7.5 units shoes and 7.5 units socks.
Specializing scenarios: Mark can produce 10 units of shoes and 0 units of
socks
Mary can produce 0 units of shoes and 5 units of socks
No matter how they trade, both are unable to attain more without having less of something else (compared to if they would have spent time 50/50). You will find this to be true no matter how you split their production (partial specialization). I've found that the total units produced will remain at 15 units.
So again, the question remains. Is there always a comparative advantage & is it always beneficial to specialize (partially specialize) and trade?
You are correct that two people with the same relative productivities will have the same opportunity costs and will have no reason to trade. In your case, Mark is twice as productive as Mary in both activities. Mark's opportunity cost of producing a pair of shoes is a pair of socks, exactly the same opportunity cost Mary faces for producing a pair of shoes. With equal opportunity costs, there is no comparative advantage. Your example is exactly that case Very well done
1: i'm a little confused by the concept of opportunity cost, in the example of choosing classes from history of jazz and beginning tennis, in the first case which both of the courses costs 750$ so does that means the 750$ doesn't considered to be the opportunity cost? but the second sentence in paragragh 2 says all costs are opportunity. so in the end i still can't understand what is opportunity cost.
The opportunity cost is the value of what you give up in order to undertake a particular decision. If you pay $750 to take tennis, your opportunity cost is what you could have done with the $750 plus what you could have done with your time (ie take the jazz class). Even if both classes were free, the opportunity cost of taking tennis is the lost opportunity to take the jazz class that is offered at the same time.
2:when should we consider to make a marginal decisions in real world business situations? are there any sighs indicate people that they should make margin decisions, for example if i run a company and i need to employ a lot of staffs, so when should i consider the margin decision or when should i slow the pace of recruiting new staffs.
Every hiring or firing decision is a marginal decision. You are deciding whether to hire one more person or whether to lay off one more person. Suppose a firm has a staff of 100 and is making the decision on whether to expand its employment. It does not reevaluate the hiring decision on the 100 already employed in deciding whether to hire the 101st worker
3:what kind of role do positive and normative analysis play in the economy field. why we need to learn that and you said most economists agree on positive statement disagreement on normative so i want to know why most of them agree on positive analysis i think both of them have their own value.
Positive statements can be contradicted by data, and so there is agreement on positive statements if there is agreement on data. Economists agree on facts, ie what is
Normative statements involve prescriptions. What ought to be done, and there is more disagreement on that.
Example: economists agree that the economy is in recession, that the unemployment rate is rising and that the mortgage default rate is harming the economy. All of those statements are positive statements dealing with facts. Economists disagree on what to do to correct the problem of recession--the normative or prescriptive solutions.
Professor Orazem,
I was reading Chapter 1 tonight in the text, and came across the "For Inquiring Minds" section titled "Got a Penny?" and I was wondering, in the current economic condition, a recession/depression (I hear many people classifying it differently, probably trying to "ease their pain" in some way shape or form), could we see the penny end up gaining some of the purchasing power it once had? Or it becoming "useful" again as opposed to a "nuisance?" Or will it still remain a nuisance because inflation has made it so?
Also, somewhat related, I have always been a little confused with inflation. Obviously it is called inflation for a reason; prices, the opportunity cost of a resource, the value of certain things increases. But how easy or difficult is it for prices, resources, etc. to "deflate?" Could we see this happening, or is it already occuring?
This is a macro question, but I can address it
The government tries to avoid deflation because it means that people will be paying back dollars on borrowing that are worth more in purchasing power than the dollars they borrowed. Think of an interest rate (i) as including two parts:
i = r + pi
r is the reward to the lender for giving up current use of money. This is the increase is purchasing power the lender gets for giving up current consumption. The second part (pi) is the change in the value of the dollar or price inflation when positive or price deflation when negative. The problem with deflation is that the interest rate could turn negative if (pi<0) and (r + pi <0). Lenders stop lending when interest rates turn negative. We have had deflation recently because of large reductions in housing and fuel prices -- and that is a matter of great concern for the Federal Reserve, the U.S. Central Bank responsible for monitoring the money supply and the value of the dollar.
If we had sufficient deflation, pennies might indeed become more valuable, but let's hope that does not happen. If the value of a penny doubled, that would be equivalent to the value of people's homes being cut in half. If you borrowed $150K to buy a house, you will not be happy to have the value of the house drop to $75K.
Hello Professor Orazem,
In todays lecture you mentioned returns to scale in passing with regard to
international trade. I did some research on the idea, but am still slightly
unclear. The articles I read related it to Economies of Scale in terms of
production. I understand the definiton of the 3 types of returns to scale, but
I only see it in terms of individual firms. Could you elaborate in some
analysis as to how returns to scale is important to international trade, and
how an industry can change from increasing to decreasing returns to scale?
Returns to scale are firm
specific.
The formal definition would be doubling all inputs and getting more than double
the level of output.
A firm can use international trade to allow them to expand their market beyond
just domestic consumers. For example, if
Hello Dr. Orazem,
I have two questions.
1. How are the barter sites taxed as far as sales tax? They aren't using
American dollars but if the transaction occurs on American soil (and if I'm not
mistaken, the transaction is defined as occuring in the state where the
transaction is initiated - ie if I'm in NE and I buy via mail order, I pay NE
sales tax.) is there any taxation on these sites?
I had wondered about the tax issue, as I had presumed
that might be a significant factor in preferring the barter exchange. I
did not see mention of taxes on the 2-3 sites I checked. My guess is that
there are state laws that treat internet purchases differently from on-site
purchases (I know this holds for my amazon.com purchases for example which are
not taxed). I would presume the same holds for Internet barter.
The tax issue for barter is doubly complicated because if the transaction were taxed,
both parties would have an incentive to understate the value of the good to
lower the tax. I state my 50 2x4s are worth $10 and you state the 2000sq
ft of shingles are worth the same.
2. When you switched the military goods to casino goods you made me wonder about PPF. Are they strictly two dimensional or can they become n-dimensional (ie can I graph casino goods vs military goods vs consumer goods?) and above 3 dimensions can it be mathematically modeled? (seeing as we can't graph above 3 dimensions) I could see potential applications of this, perhaps in studying how the
The economy is n dimensional--we deal with only 2 to make the concepts
tractable. In n dimensions, it is convenient to list opportunity costs in
terms of a single commodity (money) rather than in a good. Other than
that, the concepts go through
3. Assuming that all individuals
perform equally, when a business increases its
workers by one and marginal revenue increases as well, is this all attributed
to
specialization? Like our example in class with the kitchen, one person
alone
produce say 80 units of one good. We then add a
second and he/she increases
total marginal revenue to 200. That would be a 40 unit increase all due
to
specialization? Or can there be other factors that play into this
increase as
well? To me it seems that in a sense it must all be contributed to
specialization which can be very broad, but this
seems somewhat limiting? So,
could there be a scenario with individual performances set as equal where
marginal revenue increases without specialization? Maybe where increased
production as a whole leads to more efficient production without
specialization
There could be complementarities
between workers that are not due to specialization per se
Often people working in pairs are more productive than they are working
individually because the interaction raises morale, both people are awake, and
neither is tempted to shirk because there is someone else there.
None of those sources of increased productivity are due to specialization
There may be other scenarios as well--the capital
equipment is set up for four workers and three inefficiently spend time turning
on and off equipment that would ideally be run continuously,
You may want to think of other ideas as well
4. When we talked earlier today in class about a firm
pricing products based on the individual's ability to pay it got me thinking
about a product I recently looked at.
For eclipse navigational
systems for vehicles they cell a CD that they update every year. This
gives the consumer a chance to purchase and receive all current road map
information. This disk from eclipse directly cost over $300.00.
When I looked for the product on Ebay they sold it for around $80.00. More then $200.00 cheaper. Yet it was the exact same
disk all in original packaging. My question is, obviously a substantial
amount of effort went into the creation of this disc so it warrants the $300
price tag, but with the publics ability to copy a CD or DVD unlawfully cause eclipse
to release a certain amount of CD's to be sold substantially cheaper, therefore
detering some of the illegal copyrighting? Are they trying to capture
both ends of the market? Or are these CD's obtained ilegally? I
know ebay itself is a separate entity but is this a
market strategy, or unauthorized distribution of software?
The item(s) on EBAY are likely
offered by an individual and not the original firm
the source of the item(s) on EBAY could be someone who bought it and decided he
did not want it, someone who received it as a present and did not want it, or a
firm that purchased several of the products at the wholesale price from the
company, found ity was not selling, and used EBAY to make back whatever they
could
Of course the item could be contraband, but again, the seller is not the
original producer
Prices on EBAY are determined by auction and not fixed in advance, save a
minimum price. It would be logical that the auction price would be no higher
than the price charged by the firm for a new product, and there will typically
be a discount because the firm will not back the EBAY product in case it is
faulty and buyers will be suspicious of a new product even if "in the
original wrapper".
5. My parents have a small chain of convenience stores in XXXXXXXX and they
have a issue with price discrimination. here is an
example. If they want to buy a case of pepsi 24 oz bottles it costs around
30.00 when they sign a
contract. if
they don sign a contract it costs even more. However, when Pepsi is on sale at
HyVee or Fareway it is about 10.00 a case. this is
because pepsi sells pop cheaper to grocery stores than it sells it to
convenience stores. it doesnt matter how big the store
is it just matters what kind of store it is. for
example
sells 3 cases of pop a week gets
the same prices as hy vee. but the largest convenience store in
To get
aroud this problem my parents sent people to other places to buy pop. For
example i will go to hy vee and buy all of the pop they have on the shelf and
go sell to the stores for 20.00 a case. Pepsi is trying to stop this. They tell
hy vee that if they sell pop to us that the will cut them off and make them pay
more for their pop. for a while we were buying 24 oz
bottles at sams club by the pallet. when pepsi found
out we were doing that they pulled 24 oz bottles out of all the Sams clubs in
I dont know how this can be legal. and if it isnt, how can a person stand up to pepsi to make them stop? Any information you have for me can help. and if you dont than at least you have something new to think about.
It is legal for Pepsi to sell at
volume discounts. HyVee is buying for
many stores at once. They may also be
doing the deliveries to their stores from a distribution center, lowering
Pepsi's delivery costs.
If your parents were part of a
Casey's chain, they might be able to get the Pepsi cheaper through a Casey's
volume purchase, but even there, Casey's incurs costs because they have to
break the volume purchase into smaller deliveries. If your parents are a stand-alone operation,
they do not have the capacity to purchase in volume.
Of course your parents will be
engaged in the same sort of price discrimination. The cost of one bottle of pepsi by itself is
less than the cost of the bottle as one of a sixpack.
Please note that price
discrimination is not illegal--a company has the right to charge different
prices to different customers as long as there is a legitimate business reason
to do so. If the price differential is due to the race, sex, ethnicity,
religion or national origin of the customer, it would violate anti
discrimination laws.