Published on 18 Mar 2015
Some industries have a flat supply curve. These are called constant cost industries. Take domain name registration: to increase the supply of domain names, we must only increase the inputs by a negligible amount. That is why even as the Internet expands so rapidly, it still costs only about six or seven dollars to register a new domain name. By showing you how these industries respond to an increase in demand, we can explain why they are constant cost industries.
November 4, 2015
Entry, Exit, and Supply Curves: Constant Costs
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November 3, 2015
Brian Micklethwait explains why libertarians love Uber
At Samizdata, Brian Micklethwait discusses why Uber comes up in conversation with libertarians … constantly:
I and my libertarian friends all love Uber. By that I don’t just mean that we love using Uber, the service, although I am sure that just like many others, we do. I mean that we love talking about Uber, as a libertarian issue, as an issue that nicely illustrates what libertarianism is all about and the sorts of things that libertarians believe in. In particular, we believe in: technological innovation and the freedom to do it, for the benefit of all, except those in the immediate vicinity of it and overtaken by it, because they make a living from the technology that is being overtaken.
[…]
To me, the really interesting thing about Uber as an issue is how it makes a nonsense of the old Public Choice dilemma in pro-free market lobbying and opinion-mongering. I’m talking about the fact, which it does often tend to be, that when there is a lurch, proposed or actual, towards a free market, unleashed either by politics or by technology or by a mixture of the two, the people who suffer or who look like they will soon suffer are highly concentrated and easily organised and know exactly who they are. However, those who will benefit from the new dispensation are dispersed and hard to organise and tend not to know who they are. Consequently you get this imbalance in the political argument, in favour of the status quo, even if, in the longer run, many more people would benefit from the new dispensation than the old, and would like it very much, in the event that that ever discovered that they were benefiting from it.
Uber might have been invented to solve the above problem.
Thought: maybe there is a sense in which it was invented to solve this problem. Discuss.
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October 29, 2015
Entry, Exit, and Supply Curves: Increasing Costs
Published on 18 Mar 2015
We understand cost curves and entry and entry/exit decisions. Now we are going to explore how each firm’s decisions influence the supply curve. Here’s the key question: As industry output increases, what happens to costs? We look at three options: an increasing cost industry, a constant cost industry, and a decreasing cost industry.
First up, we look at oil as an example of an increasing cost industry. Other examples of increasing cost industries include copper, gold, and silver, coffee, and even the profession of nuclear engineers.
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October 24, 2015
Maximizing Profit and the Average Cost Curve
Published on 18 Mar 2015
Being able to predict your company’s profit is a very useful tool. In this video, we introduce the third concept you need to maximize profit — average cost. When looked at in conjunction with the marginal revenue and marginal cost, the average cost curve will show you how to accurately predict how much profit you can make!
The usefulness of these tools does not stop there. Sometimes, you can’t make a profit. You’ll have to take a loss. These tools can also show you how to minimize losses, and make decisions on whether a company should enter or exit an industry.
We also define terms such as zero profits and sunk costs in this video.
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October 23, 2015
October 21, 2015
The “tipping” point
Megan McArdle on the odd and oddly resilient habit of tipping:
Restaurateur Danny Meyer is planning to eliminate tips at his restaurant group’s 13 restaurants by the end of next year. Among other things, the New York Times suggests this will lower the disparity in pay between the back of the house, which makes an average of around $12 an hour, and the servers, who pull in considerably more than that.
Meyer is part of a small but interesting movement among restaurants and bars. A bar without tips just opened near my house in Washington; New York has a few places that no longer support tipping. Prices will naturally have to rise to reflect increased labor costs. Meyer says that servers’ incomes will not fall, but I am skeptical on this point. But it will certainly be interesting to see if Meyer manages to slay tipping — and if so, whether other restaurants will follow suit.
To get a sense of whether this is likely to work, it seems worth asking: Why do we tip? Tipping is, after all, a rather strange custom. We tell ourselves that it exists to ensure good service, but in fact, most people are very reluctant to undertip even when the service has been appalling. They follow the norms of tipping even when they are never going to see that waiter again, and therefore don’t need to worry about retaliation. Meanwhile, all sorts of things seem to affect tipping that have nothing to do with the quality of the service, like the race of the server and whether they put a smiley face on your check (though apparently this only works for female servers).
[…]
So if it’s not about rewarding good service, why do we tip? Notice that we do it in some circumstances, but not others. We tip the bellhop, but not the clerk at reception. The waitress, but not the person behind the Target checkout counter. These disparities offer our first clue to the mystery: We tip people who are providing the services that used to be performed by household servants, but not the people who do the jobs of tradesmen or retail clerks. It’s possible that this grew out of the old tradition of tipping servants when you went to stay at someone’s house.
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The two types of statists
Another post I stashed away, intending to blog and then somehow forgot … Dan Mitchell on the two main varieties of statist supporters:
At the risk of oversimplifying, there are two types of statists.
The first type is generally insincere and simply views bigger government and increased dependency as a strategy to obtain and preserve political power. Most inside-the-beltway leftists in Washington are in this category.
The second type genuinely cares about the less fortunate but makes the mistake of thinking that good intentions somehow lead to good results. You could call these people the Pope Francis leftists.
As you might imagine, there’s very little hope of persuading the first category of statists. You could show them all the data and evidence in the world, for instance, that a flat tax would boost prosperity, and they’ll simply shrug and tell you to jump in a lake because genuine tax reform would reduce the power and influence of Washington’s political elite.
But the second group of statists should be persuadable. That’s why I share so many comparisons of nations with smaller government and freer markets versus countries with bigger government and more intervention. I want open-minded folks on the other side to see how good policy leads to better economic performance, particularly since the poor will be big beneficiaries. That should be compelling, especially when combined with the data on how the welfare state simply traps poor people in government dependency.
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October 20, 2015
The economics of wind power in the UK
James Delingpole on the sleight-of-hand employed by the media to pretend that wind power is far more economical than it really is:
Wind power now UK’s cheapest source of electricity – but the Government continues to resist onshore turbines.
That was the headline in the Independent this time last week. I’m not suggesting for a moment that you’re an Independent reader but suppose for a moment you were: what do you think your reaction might have been?
Mine, I suspect, would have been not dissimilar to that of the eight thousand readers who decided it was worth sharing – and indeed that of the two or three who used it to needle sceptics on Twitter.
“Take that, evil deniers!” I would have gone in my smug, Independent-reading way. And it would never have occurred to me to question the premise for a number of reasons.
1. It was written by the Environment Editor on a reasonably well-respected national newspaper. And people with responsible jobs like that don’t make shit up, do they?
2. The data came from Bloomberg New Energy Finance – “the world’s leading provider of information on clean energy to investors, energy companies and governments.” Well if they say so it must be true. Bloomberg – they’re kind of a big deal in financial information, right?
3. It wasn’t just the left-leaning Independent that ran with the story. The story also appeared in the Guardian which, though also pretty parti-pris where environmental issues are concerned, does tend to pride itself on its accuracy and integrity (relative, say, to its arch-enemy the Murdoch press) and its willingness to rectify even the slightest mistake in its Corrections section. And more significantly, it ran in the unashamedly free-market City Am which, you might have imagined, would never dream of writing a headline like “Wind power now the cheapest electricity to produce in the UK as the price of renewable energy continues to drop” without first checking to see whether the press release was accurate.
Well, since the story ran, Paul Homewood has been doing a bit of homework. And guess what? Yes, that’s right. Wind power isn’t the cheapest source of electricity in the UK or anywhere else in the world. Not by a long chalk. It’s at least twice the price, for example, of electricity generated from that hated but remarkably cost-effective fossil fuel, gas.
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October 19, 2015
Maximizing Profit under Competition
Published on 18 Mar 2015
A company in a competitive environment does not control prices. So the key to maximizing profit is choosing how much to produce. To do that, we need to factor in the costs involved in production. So what exactly are the costs? How do these costs influence how you maximize profit? And, remember, if you want to think like an economist, you must factor in opportunity cost!
In this video, we define profit, including how to calculate total revenue and total cost. We also go over fixed costs, variable costs, marginal revenue, and marginal cost.
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October 16, 2015
Fair Trade: Does It Help Poor Workers? (Everyday Economics 7/7)
Published on 8 Jul 2015
Elizabeth, an Everyday Economics viewer, asks: “How does the purchase of fair-trade goods affect wages in developing countries?”
Great question! The “fair trade” movement has become popular as a proposed way to increase living standards in developing countries. In this video, we look at whether fair trade does just that.
For a good to be considered “fair trade” it must meet various requirements developed by a handful of fair trade organizations. In the developing world, who is better positioned to meet these fair trade requirements — large producers in wealthier countries or small producers in poorer countries? To answer this question, we take a look at the the example of fair trade coffee produced in both Costa Rica and Ethiopia. How does fair trade affect wages and overall quality of life in those countries?
And, if fair trade isn’t the best way to improve living standards in developing countries, how else can we maximize employment options and well-being for poor workers? This question is at the core of an entire branch of economics — Development Economics. To learn more, check out MRU’s Development Economics course.
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October 14, 2015
Introduction to the Competitive Firm
Published on 18 Mar 2015
How does a company really behave? We tend to assume profit — the bottom line — is the main motivation for a firm’s actions. For most firms most of the time, this is a good assumption, especially in a competitive market. With this video, you will explore how a company maximizes profit in a competitive environment where there are many buyers and sellers.
This idea comes with a few surprises. Does a company really control what price it sets? Or does the market determine the price? Here’s a clue. If you owned an oil well, even your mother wouldn’t buy your oil if she could get the same oil somewhere else for less money. Watch and find out why.
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October 9, 2015
Are We Better Off if We Buy Local? (Everyday Economics 6/7)
Published on 24 Jun 2015
In this Everyday Economics video, Don Boudreaux addresses one of your viewer-submitted questions: “Is everyone better off if we buy local?”
In a modern economy, it’s hard to say that anything is truly “local.” Even an apple grown at a nearby farm isn’t a “local” good — everything from the fertilizer used to feed the trees to the wooden crates that carry the apples to market are likely made elsewhere. And, the profits the farmer makes from selling his apples are likely not spent locally — for instance, he may buy a tractor or supplies manufactured far away.
This video also takes a look at what would happen if you could direct your money locally. Would it benefit the local economy? How many businesses could survive solely on local business? What happens to specialization and productivity when we shrink markets? What about prices and variety of goods? Let’s take a look.
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October 7, 2015
The enigma of the Trans-Pacific Partnership
We don’t know what’s in it, so it could be a multi-national version of “we have to pass it to find out what’s in it”. Megan McArdle manages to raise one cheer for the agreement:
I’ve spent the morning reading about the Trans-Pacific Partnership. I went in prepared to deliver a column full of details, winners and losers, strong opinions about the good provisions and the bad. But what really comes to mind is a dismal thought: “Is this the best we can do?”
Oh, yes, I know the statistics. Forty percent of the world’s economy. Thousands of tariffs falling. I know the opposition points too, about giveaways to business, intellectual property rules, outsourcing jobs. No one is talking about the larger story, though, which is that the biggest trade news in a decade involves a regional deal of relatively limited impact.
It was not always thus. When I was a fledgling journalist, a wee slip of a thing, we economics writers looked to major global trade negotiations to advance the cause of freer markets, and not incidentally, the material progress of mankind. We looked down on regional side-deals because they were such weak tea compared with the robust brew of a global agreement. Regional deals distorted the flow of trade, encouraging people not to exploit comparative advantage and production capabilities, but rather to seek the best combination of tariff rules from among competing regional frameworks. I have heard arguments that such deals, by distorting trade and weakening the pressure to make global deals, were actually worse than doing nothing. Indeed, I may have made such arguments.
You don’t hear those arguments any more, and that’s because we free-traders have largely given up on global trade agreements. The Doha round of World Trade Organization talks collapsed in the face of European agricultural protectionism and intransigence among countries with large numbers of subsistence farmers. Nativism, protectionism, nationalism seem to be rising as a political force in many countries. Global trade volumes are looking anemic. In this climate, regional agreements seem attractive, in much the same way that the remaining bar patrons assume a winsome glow around closing time.
How have things come to such an unpretty pass?
A Deeper Look at Tradeable Allowances
Published on 18 Mar 2015
Since the passage of the Clean Air Act, SO2 emissions have decreased by 35%. Part of this is due to tradable allowances, which created a market solution to the external costs of SO2 emissions. In this video, we look at the lessons of tradable allowances for SO2 and see if a similar market-based solution could work to decrease other pollutants, such as CO2.
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October 6, 2015
Puerto Rico’s minimum wage experiment
J.R. Ireland describes what happened to Puerto Rico’s economy when the minimum wage was raised to the mainland level by congress in 1974:
Prior to 1974, Puerto Rico had its own minimum wage and was not tethered to the general American wage. Then, in their infinite wisdom, the US Congress decided to normalize the minimum wage across all US territories and passed legislation making Puerto Rico’s minimum wage the same as the American wage had always been.
Well what happened next, you might ask? The economy imploded. Puerto Rico had an unemployment rate around 12% and an employment to population ratio of approximately 78% pretty much continuously between 1960 and 1974. The numbers had gone up a bit — they had come down a bit — but overall, year in and year out, you could look at Puerto Rico and be sure that the unemployment rate would be between 10 and 14 percent and the employment to population ration would be between 75 and 80 percent. You could set your watch by this kind of consistency.
Then Puerto Rico’s minimum wage was raised substantially beginning in 1974. The Puerto Rican unemployment rate then proceeded to increase for four consecutive years until it peaked at 20%. It roughly plateaued for half a decade or so, and then it went up again until Puerto Rico had an unemployment rate of 25% by 1984. Meanwhile, the employment to population ratio fell from 78% to 60% and has never recovered.
It is not just me pointing out the absolutely catastrophic consequences of the minimum wage increase in Puerto Rico — the National Bureau on Economic Research agrees. According to them:
Imposing the U.S.-level minimum reduced total island employment by 8-10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States. In addition, it reallocated labor across industries, greatly reducing jobs in low-wage sectors that had to raise minima substantially to reach federal levels. (3) Migrants from Puerto Rico to the United States are drawn largely from persons jobless on the island, with characteristics that make them liable to have been disemployed by the minimum wage. As the Puerto Rican minimum rose toward U.S. levels, the education of migrants fell below that of nonmigrants. (4) Migration was critical in allowing Puerto Rico to institute U.S.-level minimum wages and played a major role in the long term growth of real earnings in Puerto Rico by reducing the labor supply and raising the average qualifications of workers on the island.
In other words, the minimum wage increase caused massive unemployment, forced hundreds of thousands of unemployed Puerto Ricans to flee the island because there were no jobs, and the only reason the entire territory wasn’t rendered destitute is because the poorest Puerto Ricans all moved to Chicago or New York rather than choosing to remain unemployed on the island itself.
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