Published on 27 Jan 2015
Elasticity of demand is equal to the percentage change of quantity demanded divided by percentage change in price. In this video, we go over specific terminology and notation, including how to use the midpoint formula. We apply elasticity of demand to the war on drugs, and more broadly to the prohibition of a good when it has an elastic demand.
April 27, 2015
Calculating the Elasticity of Demand
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April 25, 2015
There’s a reason SF writers tend to invent ways to travel interstellar distances quickly
At Real Clear Science, Ross Pomeroy sings the praises of an early publication by the pre-Nobel academic Paul Krugman:
Paul Krugman is a Nobel Prize-winning economist, a respected professor at Princeton University, and an outspoken liberal columnist for the New York Times. But first and foremost, he is a huge nerd, and proud of it.
Back in the sweltering summer of 1978, Krugman’s geekiness prompted him to tackle a matter of galactic importance: the economics of interstellar trade. Then a 25-year-old “oppressed” assistant professor at Yale “caught up in the academic rat race,” Krugman crafted his “Theory of Interstellar Trade” to cheer himself up. Krugman’s jocularity is evident throughout the paper, which was published online in 2010, thirty-two years after he stamped it out on a typewriter. Early on in the article, he even pokes fun at his chosen profession:
“While the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics”
The key problem with interstellar trade, Krugman writes, is time dilation. When objects travel at velocities approaching the speed of light — roughly 300,000 kilometers per second — time moves more slowly for them compared to objects at rest. (For a great explainer of this effect, which is tied to Einstein’s theory of special relativity, check out this video.) So the crew of a space-faring cargo ship might experience only ten years while thirty years or more might pass for the denizens of the planets they’re traveling between. How then, does one calculate interest rates on the cost of goods sold? Trading partners will undoubtedly be many light-years apart and trips will last decades, so this is a vital issue to resolve.
Since the speeds of vessels will undoubtedly vary, but both planets should be moving through space at close enough velocities where time dilation wouldn’t be a factor, Krugman contends that the interest costs should be tabulated based on the time shared by the two planets. But what about those interest rates? Won’t they differ? Not necessarily, Krugman argues. Competition should lead them to equalize amongst interplanetary trading partners.
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Elasticity of Demand
Published on 27 Jan 2015
How much does quantity demanded change when price changes? By a lot or by a little? Elasticity can help us understand this question. This video covers determinants of elasticity such as availability of substitutes, time horizon, classification of goods, nature of goods (is it a necessity or a luxury?), and the size of the purchase relative to the consumer’s budget.
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April 24, 2015
Relative and absolute poverty
We in the west are so rich, in historical terms, that we are losing our grasp on what poverty really has been for the majority of humankind for the majority of our recorded history:
People generally just don’t get what poverty actually means. This is a charge often enough aimed at me and people like me, well off white guys who pontificate upon economics. But those making that charge often enough don’t actually understand what real poverty means. So, here’s a nice example of it. There’s a campaign in New York to insist that SNAP (ie, food stamps) should not be cut. Views on that can vary either way: I’m generally in favour of a larger welfare state than the one the US has at present so I’m probably against such a cut. But that’s a political point and not the one I’m interested in here. Rather, I want to point out just quite how rich someone getting food stamps is on any global or historical basis.
Yes, you did read that right: how rich someone getting food stamps is. As one example, the food stamp allocation in New York State appears to be $29 per person per week in a family receiving the full possible allocation. That, on its own, is a yearly income of $1,508 and that’s an amount that puts you, on its own, in the top 50% of all income recipients in the world. No, really, you can look that up with this little calculator. More than half of humanity is poorer than someone who only gets the New York food stamp allocation.
All of which gives us an interesting little look into the difference between absolute poverty and relative poverty. For, obviously, the people who are receiving food stamps in New York are those we consider to be poor in our own society. And in our own society, they are indeed poor, as Adam Smith pointed out with his linen shirt example. It’s not necessary for a working man to have a linen shirt, he’s not poor because he cannot afford one. But if you live in a society where you are considered to be poor if you cannot afford a linen shirt, and you cannot afford one, then in that society you are of course poor. This is relative poverty, more usefully known not as a measure of poverty but of inequality.
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April 22, 2015
“Victorian style poverty” in the UK
In a recent Forbes column, Tim Worstall pours scorn on the recent claim that some British children are living in “Victorian conditions”:
There’s a very large difference between arguing that we have Victorian style (for those unacquainted with British practise, this means late 19th century style) poverty in the UK and that we have Victorian style inequality in the UK. That second is at least arguably possible, although untrue, while the first is simply a flat out untruth. There is nothing even remotely akin to 19th century poverty in the UK today. Nor is there, of course, in any of the industrialised nations. The problem stems from people simply not understanding how poor the past was.
The claim is made this morning in The Guardian:
Many children are living in Victorian conditions – it’s an inequality timebomb
That second assertion could be true but is a matter for another day. That first is just wrong.
I was reminded of this by the teaching union NASUWT’s warning this week that there are children in this country living in “Victorian conditions”, turning to charity for regular meals and going without a winter coat.
“Going without a winter coat” might be something we’d like to remedy (and yes, I think we would like to do so) but it’s not a reminder of Victorian levels of poverty, it’s nothing like it at all. It’s necessary to actually understand what Victorian poverty was. Late 19th century Britain had some 25% of the population living at or below the subsistence level. This subsistence level is not a measure of inequality, nor of the lack of winter clothes. It is a measure of gaining enough calories each day in order to prolong life. This is the sort of subsistence level that Malthus and Ricardo were talking about. The sort of level of poverty that the World Bank currently uses as a measure of “absolute poverty”.
This absolute poverty is set at $1.25 per person per day. No, this is not the number that can be spent upon food per person per day. This is the amount that can be spent upon everything per person per day. This covers shelter, clothing, heating, cooking, food, education, pensions, health care, absolutely everything. This number is also inflation adjusted, so we are not talking about $1.25 a day when bread was one cent a gallon loaf. This number is also Purchasing Power Parity adjusted: so we are not talking about lentils costing two cents a tonne in India and £3 a kg in Tesco. We are adjusting for those price differences across geography and time.
Just to note, by these PPP and inflation adjusted numbers, being on the minimum wage in the UK puts you in the top 10% of all income earners in the current world. Being on nothing at all but benefits would put you into the top 20%.
Up to 25% of the population of Britain were that badly off in the late Victorian era: “Actual real starvation to death as a result of poverty was not unknown, even that late, as late as 1890.”
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April 21, 2015
Lee Kuan Yew and Singapore’s amazing economic success
Earlier this month, Alvaro Vargas Llosa examined the economic success of Singapore under the authoritarian rule of Lee Kuan Yew:
Lee Kuan Yew, Singapore’s legendary statesman, who died last month at the age of 91, posed a challenge to those of us who believe in political and economic freedom (and all other freedoms). His combination of authoritarianism and economic freedom, of social engineering and self-reliance, worked. The result was a society that is more prosperous than most others, but free only in some respects.
For years, the best examples one could come up with to show that the marriage of economic and political liberty could work were the liberal democracies of the developed world, whose achievements originated in centuries past and different circumstances.
Lee Kuan Yew’s credentials became strong as many countries that also gained independence in the 1950s or 1960s opted for a mix of nativism and collectivism that kept them poor while tiny Singapore, with no natural resources, emerged as an economic powerhouse. While Mao, Ho Chi Minh, and Castro — not to cite Mobutu, Idi Amin Dada, and others — destroyed the chances of a decent life for many generations, Lee Kuan Yew created the conditions for a 124-fold increase in Singapore’s per capita income in half a century.
[…]
Singapore’s case is exceptional, which makes it a tough challenge for those of us who think freedom is best served by not carving it up. My belief is that Singapore has been able to preserve its curious mix because of the absence of prosperous liberal democracies around it. But its model is based on globalization, and it’s therefore porous to good ideas.
In a world in which more countries, including Asian ones, end up successfully embracing democracy under the rule of law as well as free trade, it will be impossible for the city-state to avoid the comparison and the contagion. It is one thing to preserve an authoritarian model because your neighbors espouse a less successful one, and quite another to perpetuate it in the face of equally or even more successful societies that espouse a freer model.
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April 20, 2015
Supply and Demand Terminology
Published on 2 Jan 2015
What is the difference between a change in demand and a change in the quantity demanded? The terminology can be confusing — but we’ll provide some clarity in this video. In short, a change in demand refers to a shift in the demand curve — caused by a number of factors such as income, population, etc. A change in quantity demanded refers to a movement along a fixed demand curve — caused by a change in price.
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April 19, 2015
Does the Equilibrium Model Work
Published on 2 Jan 2015
Does the equilibrium model work? Nobel Prize winner Vernon Smith conducted experiments testing this model and found that time and time again, the model did indeed work. This video takes a look at Smith’s evidence and analyzes other instances where market conditions shift either the demand or supply curve, and the equilibrium model comes into play.
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April 16, 2015
Exploring Equilibrium
Published on 2 Jan 2015
In this video, we’ll review equilibrium in the adjustment process, showing that the equilibrium price is the only stable price. Then we’ll take a look at equilibrium quantity, where quantity demanded is equal to quantity supplied, and how this plays out in a free market economy that seeks to maximize gains from trade.
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Measuring productivity in the modern economy
Tim Worstall on how our traditional economic measurements are less and less accurate for the modern economic picture:
… in the developed countries there’s a problem which seems to me obvious (and Brad Delong has even said that I’m right here which is nice). Which is that we’re just not measuring the output of the digital economy correctly. For much of that output is not in fact priced: what Delong has called Andreessenian goods (and Marc Andreessen himself calls Mokyrian). For example, we take Google’s addition to the economy to be the value of advertising that Google sells, not the value in use of the Google search engine. Similarly, Facebook is valued at its advertising sales, not whatever value people gain from being part of a social network of 1.3 billion people. In the traditional economy that consumer surplus can be roughly taken to be twice the sales value of the goods. For these Andreessenian goods the consumer surplus could be 20 times (Delong) or even 100 times (my own, very controversial and back of envelope calculations) that sales value.
We are therefore, in my view, grossly underestimating output. And since we measure productivity as the residual of output and resources used to create it we’re therefore also grossly underestimating productivity growth. We’re in error by using measurements of the older, physical, economy as our metric for the newer, digital, one.
In short, I simply don’t agree that growth is as slow as we are measuring it to be. Thus any predictions that rely upon taking our current “low” rate of growth as being a starting point must, logically, be wrong. And that also means that all the policy prescriptions that flow from such an analysis, that we must spend more on infrastructure, education, government support for innovation, must also be wrong.
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April 14, 2015
The Supply Curve Shifts
Published on 2 Jan 2015
This video explores factors that shift the supply curve. How do technological innovations, input prices, taxes and subsidies, and other factors affect a firm’s costs and the price at which the firm is willing to sell a good? By answering these questions we have a better idea of how the supply curve will shift. This video walks you through examples and scenarios that illustrate this concept.
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April 13, 2015
A Deeper Look at the Demand Curve
Published on 2 Jan 2015
This video looks at both the horizontal and vertical methods for reading the demand curve, how demand curves shift, and consumer surplus.
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April 10, 2015
A Deeper Look at the Supply Curve
Published on 2 Jan 2015
What does the supply curve show us? This video takes a look at what we can tell from the supply curve about the behavior of sellers and quantities supplied at different prices. We’ll talk about producer surplus as well as factors that lead to an increase in supply and a decrease in supply — and we’ll provide a list of these important supply shifters.
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QotD: Zoning hurts the poor
One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.
Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.
Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.
Sandy Ikeda, “Shut Out: How Land-Use Regulations Hurt the Poor”, The Freeman, 2015-02-05.
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