How much do parents really matter?
Clearly, bad parenting matters a great deal, but how much can those eager parents actually accomplish for their children's sake?
Judith Harris argued that parents are wrong to think they contribute so mightily to their child's personality. She thinks that the topdown influence of parents is overwhelmed by the grassroots effect of peer pressure, the blunt force applied each day by friends and schoolmates.
The black-white income gap is largely a product of a black-white education gap that could have been observed many years earlier.
Some black students have tremendous disincentives to invest in particular behaviors (education, ballet, etc) due to the fact that they may be deemed a person who is trying to act like a white person.
What are the factors that do and do not affect a child's performance in school?
Black children who perform poorly in school do so not because they are black but because they tend to come from low-income, low-education households. A typical black child and white child from the same socioeconomic background have the same abilities in maths and reading upon entering kindergarten.But gap appears soon when they grow up.
Why are the black school bad? Because these school offer an environment that is simply not conductive to learning.
What is related to kids' performance in school?
Matters: The child has highly educated parents. The parents have high socioeconomic status. Mother was thirty or older at the tine of her first child's birth. The child had low birthweight will do poorly in school. Adoptive children do poorer in the school.
Not matters: The child's family is intact. The child's parents recently moved into a better neighbourhood.
12/13/2011
12/12/2011
government functions
The most basic function of government is to provide a framework of law and order. Government can take account of costs and benefits that market can not do.
The costs of corruption are not limited to the bribes collected, since scarce resources have alternative uses, the real costs are the foregone alternatives---delayed or aborted economic activity, the lost opportunity and wealth.
It is not just corruption but also sheer bureaucracy which can stifle economic activity. A survey by the World Bank found that the number of days required to start a new business ranged from less than 10 in Singapore to 155 days in Congo.
One of the major advantages that enabled Britain to become the first industrialized nation was the dependability the laws.
Framework of dependable laws has encouraged both domestic and foreign investment, as well as attracting immigrants with skills lacking locally.
A dependable law should prevent some people from interfering with other people.
The costs if additional security devices inside and outside of stores as well as security guards in some places, all add to the costs of doing business and are reflected in the high prices of goods and services purchased by people in high-crime areas.
In a country without property rights, there is no given individual with sufficient incentives to ensure the quality and maintenance of the goods.
Property rights crate self-monitoring.
The only animals threatened with extinction are those not owned by anybody.
Some costs are called "external costs" because such costs fall outside the parties to the transaction which creates these costs. There are things that government can do more efficiently than individuals because external costs(pollution), external benefits(mud flap, good old building), or indivisibilities(national defense) make individual decisions, based on individual interests, a less effective way of weighting costs and benefits to the whole society.
But sometimes people will spontaneously organize themselves to deal with external costs or external benefits.
Under popularly elected government, the political incentives are to do what is popular, even if the consequences are worse than the consequences of doing nothing, or doing something that is less popular. Political time horizon tends to be much shorter than economic time horizons.
The costs of corruption are not limited to the bribes collected, since scarce resources have alternative uses, the real costs are the foregone alternatives---delayed or aborted economic activity, the lost opportunity and wealth.
It is not just corruption but also sheer bureaucracy which can stifle economic activity. A survey by the World Bank found that the number of days required to start a new business ranged from less than 10 in Singapore to 155 days in Congo.
One of the major advantages that enabled Britain to become the first industrialized nation was the dependability the laws.
Framework of dependable laws has encouraged both domestic and foreign investment, as well as attracting immigrants with skills lacking locally.
A dependable law should prevent some people from interfering with other people.
The costs if additional security devices inside and outside of stores as well as security guards in some places, all add to the costs of doing business and are reflected in the high prices of goods and services purchased by people in high-crime areas.
In a country without property rights, there is no given individual with sufficient incentives to ensure the quality and maintenance of the goods.
Property rights crate self-monitoring.
The only animals threatened with extinction are those not owned by anybody.
Some costs are called "external costs" because such costs fall outside the parties to the transaction which creates these costs. There are things that government can do more efficiently than individuals because external costs(pollution), external benefits(mud flap, good old building), or indivisibilities(national defense) make individual decisions, based on individual interests, a less effective way of weighting costs and benefits to the whole society.
But sometimes people will spontaneously organize themselves to deal with external costs or external benefits.
Under popularly elected government, the political incentives are to do what is popular, even if the consequences are worse than the consequences of doing nothing, or doing something that is less popular. Political time horizon tends to be much shorter than economic time horizons.
12/12/2011 Class 42
Profit= total revenue - total cost
Why do we get wages and pay rents?
What is a wage and why can we get the wage?
Wage is a contractual agreement between worker and employer that specifies precisely what worker will be doing and what employer will be getting and giving.
Contract lays out what a worker should do and how much he can get; employer knows how much he gets and how much cost he bears to hire the worker.
So the whole essence of wage is to eliminate uncertainty.
Rent also functions to reduce the uncertainty.
Lenders know how much he can get as compensation and borrowers know how much he must produce.
What is interest?
It is the price of using money today rather than future.
Price comes from demand and supply.
People want purchasing power that they don't possess now, so interest is the price of obtaining unearned resources, the price to persuade lenders to give their current purchasing power to the borrowers.
So wages are return of working, rent are return of leasing machinery, interest is return of loaning out purchasing power.
What is the distinction between accounting profit and economic profit?
Application:
Suppose Rachel can earn $30000 per year as a secretary. She owns a building that rents for $6000 per year. She also has a savings account $23000, and the interest rate is 10%.
Now Rachel wants to quit her current job and open a pizza shop. She will use her own building, cash out all 23000 bucks and borrow 20000 dollars from the bank. She estimated that she can have revenue of 85000 dollars.
Question: Is it a good choice for Rachel?
Explicit cost: 23000+20000+20000*10% So account profit is 40000
Implicit cost: foregone wages 30000, normal rate of return 23000*10%, foregone rent 6000
So econ profit is revenue-implicit-explicit= $1700, which means that Rachel will be $1700 richer to be an entrepreneur than if she choose second best option.
When there is a profit, new competitors will come in to get profit they will (1)lower price (2)increase quality, but the consequence is that total revenue will be lower and less efficient producers will be rationed out of the market, leaving the most competent ones to compete.
The prosperity of pizza market will increase demand for raw material and thus the total cost will increase.
So in a perfect market, price will be the marginal cost of good.
Econ profit is the return of entrepreneur ability
Question: why does econ profit exist?
(1)people's wants are unlimited (2)licensure and patent
Losses are key to market because it's the signal whether you are good at what you do.
What's the problem of insulating losses?
(1) Losses destroy resources
(2) U lose feedback, having no idea whether you are good at what you do or not.
(3) people will be more audacious.
The incentives between profit and non-profit organizations are different.
Capitalism is full of uncertainty and it's too dynamic for some people.
Why do we get wages and pay rents?
What is a wage and why can we get the wage?
Wage is a contractual agreement between worker and employer that specifies precisely what worker will be doing and what employer will be getting and giving.
Contract lays out what a worker should do and how much he can get; employer knows how much he gets and how much cost he bears to hire the worker.
So the whole essence of wage is to eliminate uncertainty.
Rent also functions to reduce the uncertainty.
Lenders know how much he can get as compensation and borrowers know how much he must produce.
What is interest?
It is the price of using money today rather than future.
Price comes from demand and supply.
People want purchasing power that they don't possess now, so interest is the price of obtaining unearned resources, the price to persuade lenders to give their current purchasing power to the borrowers.
So wages are return of working, rent are return of leasing machinery, interest is return of loaning out purchasing power.
What is the distinction between accounting profit and economic profit?
Application:
Suppose Rachel can earn $30000 per year as a secretary. She owns a building that rents for $6000 per year. She also has a savings account $23000, and the interest rate is 10%.
Now Rachel wants to quit her current job and open a pizza shop. She will use her own building, cash out all 23000 bucks and borrow 20000 dollars from the bank. She estimated that she can have revenue of 85000 dollars.
Question: Is it a good choice for Rachel?
Explicit cost: 23000+20000+20000*10% So account profit is 40000
Implicit cost: foregone wages 30000, normal rate of return 23000*10%, foregone rent 6000
So econ profit is revenue-implicit-explicit= $1700, which means that Rachel will be $1700 richer to be an entrepreneur than if she choose second best option.
When there is a profit, new competitors will come in to get profit they will (1)lower price (2)increase quality, but the consequence is that total revenue will be lower and less efficient producers will be rationed out of the market, leaving the most competent ones to compete.
The prosperity of pizza market will increase demand for raw material and thus the total cost will increase.
So in a perfect market, price will be the marginal cost of good.
Econ profit is the return of entrepreneur ability
Question: why does econ profit exist?
(1)people's wants are unlimited (2)licensure and patent
Losses are key to market because it's the signal whether you are good at what you do.
What's the problem of insulating losses?
(1) Losses destroy resources
(2) U lose feedback, having no idea whether you are good at what you do or not.
(3) people will be more audacious.
The incentives between profit and non-profit organizations are different.
Capitalism is full of uncertainty and it's too dynamic for some people.
12/11/2011
Perfect market and the "World of Truth"
In a free market, people don't buy things that are worth less to them than the asking price. And people don't sell things that are worth more to them than the asking price.
The value of the product to the customer is equal to or higher than the price; and the cost to the producer equal to or lower than the price.
In a perfectly competitive market, the price of coffee would equal the marginal cost of the coffee. If the price were lower, firms would go out of business until it rose. If the price were higher, new firms would enter or old firms would expand their output until it fell.
Interest rates are just another price: the price of spending today instead of future.
In a perfectly competitive market, companies are producing the right things in right way in the right proportion and productions are given to the right people.
In nonmarket system, the truth about values, costs, and benefits has disappeared.
When economists say the economy is inefficient, they mean that there's a way to make somebody better off without harming anybody else.
Taxes are inefficient because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no loner equals value.
All efficient outcomes can be achieved using a competitive market, by adjusting the starting position. Instead of interfering with the markets themselves, the trick is to adjust the starting blocks by making lump-sum payments and levying one-time taxes.
The value of the product to the customer is equal to or higher than the price; and the cost to the producer equal to or lower than the price.
In a perfectly competitive market, the price of coffee would equal the marginal cost of the coffee. If the price were lower, firms would go out of business until it rose. If the price were higher, new firms would enter or old firms would expand their output until it fell.
Interest rates are just another price: the price of spending today instead of future.
In a perfectly competitive market, companies are producing the right things in right way in the right proportion and productions are given to the right people.
In nonmarket system, the truth about values, costs, and benefits has disappeared.
When economists say the economy is inefficient, they mean that there's a way to make somebody better off without harming anybody else.
Taxes are inefficient because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no loner equals value.
All efficient outcomes can be achieved using a competitive market, by adjusting the starting position. Instead of interfering with the markets themselves, the trick is to adjust the starting blocks by making lump-sum payments and levying one-time taxes.
sexual economy and psychology
As an everlasting movie genre, gangster movies have been intriguing audience since the emergence of Progressive Era (1900-1920). In some typical gangster films like Scarface (1983), The Godfather, we are fascinated by Tony Montana’s and Michael Corleone’s masculinity. These specific male characters are physically alive; they totally dominate the screen. But what’s the role of females in these movies? They are obedient and have no status in gangster affairs; they are merely the tools and dolls of male characters. In Godfather, for example, Kay is depicted as a naïve and gullible woman: when Michael deceives her that he doesn’t kill a member of Corleone family, she trusted him without hesitation.
This traditional opinion on the role and characteristics of male and female to some extent influenced Freud when he came up with the idea of gender identity. In Freud’s view, women, who are in a disadvantageous situation, admire men’s power and freedom and thus even may have envy for penis, the symbol of masculinity.
It seems that evolutionary gender theory also back up with this perspective, though indirectly. Having faced various yet similar challenges throughout the history, men and women are alike in many ways, but the difference in reproduction decides the different attitude between men and women towards sex.
Research shows that men are more easily to get sexually aroused than women do. Hardly any women would go to bed with a total stranger while half or even more male would like to try a new face lady. According to sexual economists, this is due to the different trade-offs men and women bear in the process of reproduction.
Men disperse sperm while women have to bear the risk of pregnancy and pain of giving a birth to a child. Men are more likely to boost their sex experience to their friends and receive cheer as heroes, while women may be looked downed upon. Besides, when a man gets bored or afraid of taking responsibility, he may leave but the girl will have to endure other’s tease and may have to raise child herself. So in short, the cost of sex for women is large, leaving women insensitive to the “price” men offer to have sex. So in the past, man usually have to show considerable determination to give commitment so that he can have sex with a girl. That can explain why girls like to marry males who are mature because they don’t want to cost much to get nothing in the end.
But with the legislation of abortion and the invention of contraceptive medicine and condoms, the cost of sex activity for women has dropped significantly, and thus more and more women no longer regard sex as precious resource. (In fact the reality to some extent forces them because men have substitutes, which means that men can hunt another girl more easily even if they are refused by some females)
This big change, in my opinion, greatly challenges evolutionary theory’s explanation of sex activity. Women today actually don’t regard sex merely as means of reproduction. Instead, some very strange and surprising reasons occur.
12/10/2011
Introducing the logic of life
Rational people respond to trade-offs and to incentives. When the costs or benefits of something change, people change their behavior. Rational people think--not always consciously--about the future as well as the present as they try to anticipate likely consequences of their actions in an uncertain world.
So what are the costs, benefits, and likely consequences of a blow job?
Regular sex is more costly than it used to be because of the spread of HIV/AIDS. AIDS is more likely to be spread by regular sex than by oral sex.
Oral sex isn't a symptom of more promiscuous teenagers. In fact, it's a sign that teenagers are behaving more responsibly, in enthusiastically--and rationally--choosing an alternative to riskier sex.
Cost is not just about money. The cost of sex includes the risk of AIDS and the risk of unwanted pregnancy; if that cost rises, you will tend to choose a safer kind of sex. Your total "budget" isn't just the cash in your bank account, it also encompasses your time, energy, talent and attention.
The endowment effect: People suddenly value objects more highly simply because they own them. They won't trade even when logic suggests they should.
The incapacitation effect: When the someone is in prison, he can't rob your house.
Where the adult courts were notably more severe than the juvenile courts, the difference in behavior was sharp: Crime dropped dramatically once kids reached the age of majority. Where the juvenile courts were relatively harsh, the drop didn't happen, because kids were already frightened of contact with the justice system.
So what are the costs, benefits, and likely consequences of a blow job?
Regular sex is more costly than it used to be because of the spread of HIV/AIDS. AIDS is more likely to be spread by regular sex than by oral sex.
Oral sex isn't a symptom of more promiscuous teenagers. In fact, it's a sign that teenagers are behaving more responsibly, in enthusiastically--and rationally--choosing an alternative to riskier sex.
Cost is not just about money. The cost of sex includes the risk of AIDS and the risk of unwanted pregnancy; if that cost rises, you will tend to choose a safer kind of sex. Your total "budget" isn't just the cash in your bank account, it also encompasses your time, energy, talent and attention.
The endowment effect: People suddenly value objects more highly simply because they own them. They won't trade even when logic suggests they should.
The incapacitation effect: When the someone is in prison, he can't rob your house.
Where the adult courts were notably more severe than the juvenile courts, the difference in behavior was sharp: Crime dropped dramatically once kids reached the age of majority. Where the juvenile courts were relatively harsh, the drop didn't happen, because kids were already frightened of contact with the justice system.
12/09/2011
What do schoolteachers and sumo wrestlers have in common?
An incentive is simply a means of urging people to do more of a good thing and less of a bad thing.
A thing worth having is a thing worth cheating for.
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.-------Adam Smith, The Theory of Moral Sentiments
A thing worth having is a thing worth cheating for.
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.-------Adam Smith, The Theory of Moral Sentiments
12/9/2011 Class41
Profits, losses and entrepreneurs
Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Factors of production: Land, labor, capital
Explicit cost: rent wage fixed cost
Implicit cost: opp cost foregone wage normal rate of return
Even when I own the land, I still have to pay the rent because I give up the chance to do other things on the land.
Cost includes explicit and implicit costs
What decides whether you should buy or rent something: The equation of profitability
Profitability= rental rate + appreciation rate - interest rate
Rental rate: annual rental payment / price of good
Appreciation rate: change in asset price / price of good (It's the expectation of how much you wanna sell the next year)
Interest rate
Application: Whether to buy or rent a car?
Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10%
Rental rate= 12000/32000 = 37.5%
Appreciation rate= -8000/32000= -25%
Interest rate: 10%
Profitability= 37.5% + (-25%) - 10% = 2.5%
If the outcome is larger than 0, you should buy the stuff.
What does 2.5% mean?
It shows how much richer you are every year if you own the thing rather than rent the thing.
Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Factors of production: Land, labor, capital
Explicit cost: rent wage fixed cost
Implicit cost: opp cost foregone wage normal rate of return
Even when I own the land, I still have to pay the rent because I give up the chance to do other things on the land.
Cost includes explicit and implicit costs
What decides whether you should buy or rent something: The equation of profitability
Profitability= rental rate + appreciation rate - interest rate
Rental rate: annual rental payment / price of good
Appreciation rate: change in asset price / price of good (It's the expectation of how much you wanna sell the next year)
Interest rate
Application: Whether to buy or rent a car?
Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10%
Rental rate= 12000/32000 = 37.5%
Appreciation rate= -8000/32000= -25%
Interest rate: 10%
Profitability= 37.5% + (-25%) - 10% = 2.5%
If the outcome is larger than 0, you should buy the stuff.
What does 2.5% mean?
It shows how much richer you are every year if you own the thing rather than rent the thing.
12/08/2011
Where have all the criminals gone?
The decline in crime that began in the early 1990s in America was accompanied bu a blistering national economy and a significant drop in unemployment. But though it's true that a stronger job market may make certain crimes relatively less attractive, that is only the case for crimes with a direct financial motivation---burglary, robbery, and auto theft---as opposed to violent crimes like homicide, assault and rape.Data show that an unemployment decline of 1% accounts for a 1% decrease in nonviolent crime. But there is no strong link between strong economy and drop in violent rate.
The evidence linking increased punishment with lower crime rates is very strong. But it is not entirely true.
Reason: A fundamental confusion of correlation and causality. The reason why there are more prisoners in the jail is because more people commit crimes. Besides, jails are not cheap.
The explanation that crime rate drop because of the implement of capital punishment is wrong.
(1) The death execution is rare so that it doesn't deter the crimers too much
(2) Data shows that executing one criminal translate into 7 fewer homicides that the criminal might have committed. Even though the implement can only account for 25% of the drop in homicides in the 1990s.
Does merely increasing the number of police reduce the crime? YES.
Innovative policing strategies: hunt down small crimes because if they are not punished appropriately the criminals will commit larger crimes. But again, this is not the main reason why crime rate dropped so significantly in 1990s.
Reason: the new strategy was implemented in 1994, but the crime rate had already been dropping since 1990; the increase of police offset the contribution of innovative strategy.Also, crime rate went down everywhere, even the place that didn't implement the new strategy.
The most dramatic effect of legalized abortion was its impact on crime. Legalized abortion led to less unwantedness; unwantedness leads to high crimes; legalized abortion, therefore, led to less crime.
The evidence linking increased punishment with lower crime rates is very strong. But it is not entirely true.
Reason: A fundamental confusion of correlation and causality. The reason why there are more prisoners in the jail is because more people commit crimes. Besides, jails are not cheap.
The explanation that crime rate drop because of the implement of capital punishment is wrong.
(1) The death execution is rare so that it doesn't deter the crimers too much
(2) Data shows that executing one criminal translate into 7 fewer homicides that the criminal might have committed. Even though the implement can only account for 25% of the drop in homicides in the 1990s.
Does merely increasing the number of police reduce the crime? YES.
Innovative policing strategies: hunt down small crimes because if they are not punished appropriately the criminals will commit larger crimes. But again, this is not the main reason why crime rate dropped so significantly in 1990s.
Reason: the new strategy was implemented in 1994, but the crime rate had already been dropping since 1990; the increase of police offset the contribution of innovative strategy.Also, crime rate went down everywhere, even the place that didn't implement the new strategy.
The most dramatic effect of legalized abortion was its impact on crime. Legalized abortion led to less unwantedness; unwantedness leads to high crimes; legalized abortion, therefore, led to less crime.
Who pay for you coffee?
Why is coffee price high in certain parts of London?
First: maybe there are not many coffee kiosks around in that place and when people are in such a hurry to work, they won't bother spending a couple more dollar for a cup of coffee(they are price-blinded).
Second, these places are "fertile land" for companies because it can be profitable while the physical land is constant, so the supply exceeds demand and thus coffee kiosk has to bid the highest price to get the land and sell coffee, and thus its cost rises. (rent price speciafically)
Different reasons for high rent:
(1) The best land produces very valuable crops relative to the marginal land.
(2) It's worth paying for good land because the alternatives that should be available are not.
Things are expensive either because of real scarcity (more people want it than it is available) or because of artificial means---legislation, regulation or foul play.
Why would improvement in the quality and price of the commuter train services that bring people into New York's Penn Station from the surrounding suburbs please anyone who rents a property in Manhattan? And why might New York landlords be less enthusiastic about such improvement?
Answer: Improved public transportation increases the alternatives to renting a place in the city.
Rent is the return landlords received from their property; profit is the return company owners earn from their property.
Company profits, like rents, are determined by the alternatives. A company with stiff competition will be less profitable than a company with incompetent rivals.
Because of the similarity between the rents that can be charged on land with few substitutes and the profits enjoyed by a firm with few competitors, economists often call those profits "monopoly rents".
Two reasons why a company has a high profit:
(1) That field lacks truly competitors. Only a few companies can provide high quality goods and services.
(2) New companies are prevented from entering the field. Monopoly happens.
So check whether the marginal new company can enter the area freely or not.
Everyday people all around the world are trying to avoid competition or reap the rewards of others who have succeeded in doing so. Economists call this type of behavior "creating rents" and "rent seeking".
The price of a good is the production cost of its marginal producer. Because if the price is higher than the cost, there will be profit, enticing new producers to come in; if the price is lower than the marginal cost, the lowest efficient producer will be squeezed out.
First: maybe there are not many coffee kiosks around in that place and when people are in such a hurry to work, they won't bother spending a couple more dollar for a cup of coffee(they are price-blinded).
Second, these places are "fertile land" for companies because it can be profitable while the physical land is constant, so the supply exceeds demand and thus coffee kiosk has to bid the highest price to get the land and sell coffee, and thus its cost rises. (rent price speciafically)
Different reasons for high rent:
(1) The best land produces very valuable crops relative to the marginal land.
(2) It's worth paying for good land because the alternatives that should be available are not.
Things are expensive either because of real scarcity (more people want it than it is available) or because of artificial means---legislation, regulation or foul play.
Why would improvement in the quality and price of the commuter train services that bring people into New York's Penn Station from the surrounding suburbs please anyone who rents a property in Manhattan? And why might New York landlords be less enthusiastic about such improvement?
Answer: Improved public transportation increases the alternatives to renting a place in the city.
Rent is the return landlords received from their property; profit is the return company owners earn from their property.
Company profits, like rents, are determined by the alternatives. A company with stiff competition will be less profitable than a company with incompetent rivals.
Because of the similarity between the rents that can be charged on land with few substitutes and the profits enjoyed by a firm with few competitors, economists often call those profits "monopoly rents".
Two reasons why a company has a high profit:
(1) That field lacks truly competitors. Only a few companies can provide high quality goods and services.
(2) New companies are prevented from entering the field. Monopoly happens.
So check whether the marginal new company can enter the area freely or not.
Everyday people all around the world are trying to avoid competition or reap the rewards of others who have succeeded in doing so. Economists call this type of behavior "creating rents" and "rent seeking".
The price of a good is the production cost of its marginal producer. Because if the price is higher than the cost, there will be profit, enticing new producers to come in; if the price is lower than the marginal cost, the lowest efficient producer will be squeezed out.
12/07/2011
Beer, Fries and Globalization
If you would like to be rich, then it is a good idea to forge close links with the rest of the world.
The most visible manifestation of the world's increasing economic interdependence is the availability of foreign products in familiar settings.
Globalization will never homogenize what we have, not while new ideas are always appearing and adding fresh ingredients to the slowly turning blender of economic integration.
Why does Tim Harford write a book about economics when professor Wilson, a much better economists than Tim, could write a better one? The answer is comparative advantage. A person should choose his vocation not with reference to what he does better than another one does, but with reference to what he does best.
Exports pay for imports.
Without minimizing the genuine suffering to those who lost their livelihoods along the way, it's obvious that technological progress and international trade made us far better off.
The solution is to allow progress to continue while help support and retrain those who have been hurt as a result.
Two common complaints about globalization:
(1)Globalization is bad for the planet
(2)Globalization is bad for the world's poor
Foreign investment is widely recognized to be good for economic growth in poor countries: it is an excellent way for them to create jobs, learn cutting-edge（尖端的）knowledge, and do so without having to invest their own scarce money.
The idea that trade is bad for the environment is based on weak thinking and little evidence.
The first worry is that free trade causes environmental problem because goods produced overseas are subject to more lenient environmental standards.
(1) Trade, in most situations, are made between rich countries, which have similar environmental law standards.Besides, environmental regulations are not a major cost, labor is. Companies move abroad seeking for cheap labor rather than pollution haven. Latest manufacturing techniques are often cheaper and less polluting at the same time. Environmental standards are rising in developing countries. Potentially high polluting industries remain in developed countries.
(2)International transportation pollutes more.
In fact, domestic transportation pollution may be more severe. Think about average pollution of a laptop from international trade and one from domestic trade.
(3)Trade makes people richer, and this will damage the environment.
The most deadly and certain environmental problems of today are also those that afflict the very poorest people in the world, such as wood-burning stoves and unsafe drinking water.
Pollutants like airborne particulates emitted from cars, do get worse as people get richer--for a while. At one point people are rich enough to afford improved environmental standards, and they will demand them.
People go to sweatshops voluntarily, which means that whatever their alternatives are, they are worse.
Sweatshops are good news in two ways: they are a step up from the immediate alternatives, and they are also a rung on the ladder to something better.
In most countries, rich and poor, special interest groups with disproportionate influence have reasons to oppose free trade.
The policy of isolation was not designed for the good of the Chinese people but good for its rulers.
The most visible manifestation of the world's increasing economic interdependence is the availability of foreign products in familiar settings.
Globalization will never homogenize what we have, not while new ideas are always appearing and adding fresh ingredients to the slowly turning blender of economic integration.
Why does Tim Harford write a book about economics when professor Wilson, a much better economists than Tim, could write a better one? The answer is comparative advantage. A person should choose his vocation not with reference to what he does better than another one does, but with reference to what he does best.
Exports pay for imports.
Without minimizing the genuine suffering to those who lost their livelihoods along the way, it's obvious that technological progress and international trade made us far better off.
The solution is to allow progress to continue while help support and retrain those who have been hurt as a result.
Two common complaints about globalization:
(1)Globalization is bad for the planet
(2)Globalization is bad for the world's poor
Foreign investment is widely recognized to be good for economic growth in poor countries: it is an excellent way for them to create jobs, learn cutting-edge（尖端的）knowledge, and do so without having to invest their own scarce money.
The idea that trade is bad for the environment is based on weak thinking and little evidence.
The first worry is that free trade causes environmental problem because goods produced overseas are subject to more lenient environmental standards.
(1) Trade, in most situations, are made between rich countries, which have similar environmental law standards.Besides, environmental regulations are not a major cost, labor is. Companies move abroad seeking for cheap labor rather than pollution haven. Latest manufacturing techniques are often cheaper and less polluting at the same time. Environmental standards are rising in developing countries. Potentially high polluting industries remain in developed countries.
(2)International transportation pollutes more.
In fact, domestic transportation pollution may be more severe. Think about average pollution of a laptop from international trade and one from domestic trade.
(3)Trade makes people richer, and this will damage the environment.
The most deadly and certain environmental problems of today are also those that afflict the very poorest people in the world, such as wood-burning stoves and unsafe drinking water.
Pollutants like airborne particulates emitted from cars, do get worse as people get richer--for a while. At one point people are rich enough to afford improved environmental standards, and they will demand them.
People go to sweatshops voluntarily, which means that whatever their alternatives are, they are worse.
Sweatshops are good news in two ways: they are a step up from the immediate alternatives, and they are also a rung on the ladder to something better.
In most countries, rich and poor, special interest groups with disproportionate influence have reasons to oppose free trade.
The policy of isolation was not designed for the good of the Chinese people but good for its rulers.
12/7/2011 Class40
The additional cost of tax (that is, it cannot be seen on the graph)
(1)You need to hire bureaucrats to implement the tax, but these bureaucrats do not produce anything. And the population of such people and the size of bureau is too big.
(2)The time and effort spent doing and preparing the tax is too big, about 400 billion dollars per year. That's a great waste.
(3)Tax can be misused.
Sales tax: the legal liability of tax is upon the consumers.
The effect of sales tax and excise tax is identical.
The government can decide who they wanna tax on, but they cannot decide who burden the tax to what extent.It depends on the relative elasticity of demand curve and supply curve: the more inelastic the curve is, the more burden it has to bear.
So the more elastic the market of certain good is, the more destructive the tax is to the market transactions. Because people are so sensitive to the change of price that they will quit the market more easily.
Would you support that we should put all the tax only on things that the firms take the whole burden?
Answer: NO. Firms consist of share holders and workers. We shift between the identities of consumers and producers, so the argument doesn't make any sense.
Subsidy can benefit both producers and buyers, and the more inelastic the curve is, the more benefit it can get.
But the subsidy doesn't mean the market will be better off.
Reason: Think about how people respond to incentive and opportunity cost of resources.
When there is a subsidy, the cost of the good is artificially lower, so producers shift resources, which have alternative uses, to make this product. But the low cost is merely an artificial phenomenon, so resources(whether land, workers, capital or time) that could have been used more efficiently are now used to make the product with the subsidy. That's a waste.
Besides, a subsidy may lead producers to overproduce (price now lose the role of signal) and deadweight loss will occur.
So subsidy, like tax, is still an intervention of market, which makes the price no longer the truth teller of market transactions.
Subsidy is mere another way of economic fallacy. What's seen is the prosperity of one field, what's not seen is its damage to fields that could have made the resources more efficiently.
(1)You need to hire bureaucrats to implement the tax, but these bureaucrats do not produce anything. And the population of such people and the size of bureau is too big.
(2)The time and effort spent doing and preparing the tax is too big, about 400 billion dollars per year. That's a great waste.
(3)Tax can be misused.
Sales tax: the legal liability of tax is upon the consumers.
The effect of sales tax and excise tax is identical.
The government can decide who they wanna tax on, but they cannot decide who burden the tax to what extent.It depends on the relative elasticity of demand curve and supply curve: the more inelastic the curve is, the more burden it has to bear.
So the more elastic the market of certain good is, the more destructive the tax is to the market transactions. Because people are so sensitive to the change of price that they will quit the market more easily.
Would you support that we should put all the tax only on things that the firms take the whole burden?
Answer: NO. Firms consist of share holders and workers. We shift between the identities of consumers and producers, so the argument doesn't make any sense.
Subsidy can benefit both producers and buyers, and the more inelastic the curve is, the more benefit it can get.
But the subsidy doesn't mean the market will be better off.
Reason: Think about how people respond to incentive and opportunity cost of resources.
When there is a subsidy, the cost of the good is artificially lower, so producers shift resources, which have alternative uses, to make this product. But the low cost is merely an artificial phenomenon, so resources(whether land, workers, capital or time) that could have been used more efficiently are now used to make the product with the subsidy. That's a waste.
Besides, a subsidy may lead producers to overproduce (price now lose the role of signal) and deadweight loss will occur.
So subsidy, like tax, is still an intervention of market, which makes the price no longer the truth teller of market transactions.
Subsidy is mere another way of economic fallacy. What's seen is the prosperity of one field, what's not seen is its damage to fields that could have made the resources more efficiently.
12/06/2011
Why poor countries are poor
The poorer country should catch up quickly because in a country, which has very little in the way of infrastructure or education, new investment have the biggest reward. (The law of diminishing returns)
In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education.
Government in rich countries usually perform basic bureaucratic tasks---- good law enforcement, protection of private property---quickly and cheaply,whereas governments in poor countries draw out the process in hopes of pocketing some extra cash themselves.
Government banditry, widespread waste and oppressive regulations all are elements of the reasons why poor countries are poor.
If a society cannot provide the right kind of incentives to behave productively, no amount of technical infrastructure can save it from poverty.
Example: Nepal has more efficient irrigation system with high tech dam and canal, but it doesn't make the country better; instead, the efficiency drops.
Reasons:
(1)Things are not designed, built and maintained by the native, who have incentives to keep it.
(2)Farmers don't cooperate. In the past, farmers living near the dam help maintain the quality of dam while farmers living near the canal help maintain the quality of canal, but with the new tech, dam is more durable, so the former trade breaks up.
The reasons why poor countries are poor
(1)Corruption
(2)Lack of incentive or perverse incentive
(3)Twisted rules and bad institutions.
In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education.
Government in rich countries usually perform basic bureaucratic tasks---- good law enforcement, protection of private property---quickly and cheaply,whereas governments in poor countries draw out the process in hopes of pocketing some extra cash themselves.
Government banditry, widespread waste and oppressive regulations all are elements of the reasons why poor countries are poor.
If a society cannot provide the right kind of incentives to behave productively, no amount of technical infrastructure can save it from poverty.
Example: Nepal has more efficient irrigation system with high tech dam and canal, but it doesn't make the country better; instead, the efficiency drops.
Reasons:
(1)Things are not designed, built and maintained by the native, who have incentives to keep it.
(2)Farmers don't cooperate. In the past, farmers living near the dam help maintain the quality of dam while farmers living near the canal help maintain the quality of canal, but with the new tech, dam is more durable, so the former trade breaks up.
The reasons why poor countries are poor
(1)Corruption
(2)Lack of incentive or perverse incentive
(3)Twisted rules and bad institutions.
Can philosophy major students get jobs?
Ask what undergraduate student major in and I bet most of them will not say philosophy. Once one of my friend asked me what I major in, and I answered, "Well, maths, economics and maybe philosophy..." "What?" He was confused, "I know why you choose maths, because you are smart and I understand your interest in economics, but why philosophy, that's boring and useless."
Well, there are many advantages for a philosophy guy, like a better aptitude in reading, writing, logic thinking and maybe they can get higher GRE and GMAT scores, but in this blog I will try to argue that philosophy students also have advantages in job applications.
It's apparent that employers would like to hire smart, diligent workers but can't tell from an interview who is smart and diligent. Neither can they know who is most capable simply by looking at where they graduate because in my opinion, on average a half of the students even in elite schools are trash. So in short, employers don't have enough information and knowledge to make right decisions.
It's also apparent that everyone has to work hard to obtain a philosophy degree, but lazy and dumb people find it troublesome.
So, smart and diligent people can prove that they are smart and diligent by going to the trouble of getting a philosophy degree. Lazy and dumb people would not enter that field. So the degree of philosophy can be a signal of intelligence and diligence, which can bridge the information gap.
But, I have to admit that the best path for a philosophy major student is graduate school and professor. So in my opinion, philosophy can be a great option for second major or minor.
Well, there are many advantages for a philosophy guy, like a better aptitude in reading, writing, logic thinking and maybe they can get higher GRE and GMAT scores, but in this blog I will try to argue that philosophy students also have advantages in job applications.
It's apparent that employers would like to hire smart, diligent workers but can't tell from an interview who is smart and diligent. Neither can they know who is most capable simply by looking at where they graduate because in my opinion, on average a half of the students even in elite schools are trash. So in short, employers don't have enough information and knowledge to make right decisions.
It's also apparent that everyone has to work hard to obtain a philosophy degree, but lazy and dumb people find it troublesome.
So, smart and diligent people can prove that they are smart and diligent by going to the trouble of getting a philosophy degree. Lazy and dumb people would not enter that field. So the degree of philosophy can be a signal of intelligence and diligence, which can bridge the information gap.
But, I have to admit that the best path for a philosophy major student is graduate school and professor. So in my opinion, philosophy can be a great option for second major or minor.
The inside story
Economists have known for a while that if one party to a deal has inside information and the other does not, then markets may not work as well as we would hope.
Adverse selection: If some people know more than others about the quality of a product, then some high-quality products may not be traded at all, or not be traded very much.
When there is inside information, market doesn't work well because the buyers will not buy without proof and the sellers cannot offer the proof.
Insurance policy depends on mutual ignorance. An insurance company can only insure me against an event like a burglary, a fire, or a medical bill if neither of us has any idea whether it will happen. If we could predict the future, insurance would be meaningless.
One way to bridge the information gap in markets previously hindered by inside information is for trustworthy vendors to find ways to signal their reliability. The other way for insurance company is to reduce the premium（参加保险的入险费） and increase the deductible（免赔额，即投保人自行承担的费用）. They can also make customer have health examinations.
Moral hazard: If you compensate people when bad things happen to them, they may get careless. Paying people to be unemployed encourages unemployment. Yet if a government scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is something that every civilized society should do.
To bridge the information gap, a real signal of quality should be one that sellers with bad quality good cannot make or cannot afford to make.
They can build impressive buildings, which represent the companies are stable and have promise.
Expensive advertisement, great sunk cost (like the magnificent buildings) are all signals of quality and stability.
Two consequences of imperfect information:
(1)Adverse selection
(2)Moral hazard
Adverse selection: If some people know more than others about the quality of a product, then some high-quality products may not be traded at all, or not be traded very much.
When there is inside information, market doesn't work well because the buyers will not buy without proof and the sellers cannot offer the proof.
Insurance policy depends on mutual ignorance. An insurance company can only insure me against an event like a burglary, a fire, or a medical bill if neither of us has any idea whether it will happen. If we could predict the future, insurance would be meaningless.
One way to bridge the information gap in markets previously hindered by inside information is for trustworthy vendors to find ways to signal their reliability. The other way for insurance company is to reduce the premium（参加保险的入险费） and increase the deductible（免赔额，即投保人自行承担的费用）. They can also make customer have health examinations.
Moral hazard: If you compensate people when bad things happen to them, they may get careless. Paying people to be unemployed encourages unemployment. Yet if a government scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is something that every civilized society should do.
To bridge the information gap, a real signal of quality should be one that sellers with bad quality good cannot make or cannot afford to make.
They can build impressive buildings, which represent the companies are stable and have promise.
Expensive advertisement, great sunk cost (like the magnificent buildings) are all signals of quality and stability.
Two consequences of imperfect information:
(1)Adverse selection
(2)Moral hazard
Market failures
Three kinds of market failure
(1) market power--- supplier can set the price
(2) lack of information
(3) externality
The idea of externality charge is not to discourage everyone from doing anything that might inconvenience anybody else; it is to get them take into consideration the effect they cause to others.
Congestion charging not only improves efficiency, it redistribute the money from the rich. Externality charge makes other alternatives more attractive.
Individually, constantly make decisions that put a value on environment, on time and even on our own life. If you pay more for a department that is in a peaceful and quiet neighbourhood, you have already put the value on quiet and peace.
Revealed preference: people's preference is revealed when they make choices as consumers.
The use of externality charges do rely in the shaky knowledge about how much it is really worth to us to reduce externalities like pollution, noise, etc. We also do not know the cheapest way to reduce the externalities.
Nobody knows the cheapest way of solving our traffic problems--yet. But externality pricing brings pollution, congestion, and the rest inside the world of truth, which market creates for us.
The attractive thing about externality pricing is that it attacks the problem but makes no assumption about the solution. The congestion charge gives drivers a signal: by bringing your car into town in rush hour, you are imposing a cost on everyone else. The drivers then have a choice: pay compensation, or find a way to avoid imposing the cost. There are many, many ways to avoid that cost, and the market can produce the ingenuity needed to uncover them. When no externalities are present, markets automatically take account of costs and provide incentives for producers to reduce them. When externalities are present, those costs are invisible to the market, but systems such as externality charging provide the missing signal that the cost exists.
Although externality charge and subsidy seem a great fix for externalities, there may be an unexpected hiccup.
Externalities simply are not externalitoes if people can easily get together and negotiate. Remember that they were called "externalities" because they stood outside market transactions.
With the existence of pseudoexternalities, which can in fact be dealt with very well by the private sector, if the government also steps in with an externality charge, we may find ourselves "solving" the externality twice.
(1) market power--- supplier can set the price
(2) lack of information
(3) externality
The idea of externality charge is not to discourage everyone from doing anything that might inconvenience anybody else; it is to get them take into consideration the effect they cause to others.
Congestion charging not only improves efficiency, it redistribute the money from the rich. Externality charge makes other alternatives more attractive.
Individually, constantly make decisions that put a value on environment, on time and even on our own life. If you pay more for a department that is in a peaceful and quiet neighbourhood, you have already put the value on quiet and peace.
Revealed preference: people's preference is revealed when they make choices as consumers.
The use of externality charges do rely in the shaky knowledge about how much it is really worth to us to reduce externalities like pollution, noise, etc. We also do not know the cheapest way to reduce the externalities.
Nobody knows the cheapest way of solving our traffic problems--yet. But externality pricing brings pollution, congestion, and the rest inside the world of truth, which market creates for us.
The attractive thing about externality pricing is that it attacks the problem but makes no assumption about the solution. The congestion charge gives drivers a signal: by bringing your car into town in rush hour, you are imposing a cost on everyone else. The drivers then have a choice: pay compensation, or find a way to avoid imposing the cost. There are many, many ways to avoid that cost, and the market can produce the ingenuity needed to uncover them. When no externalities are present, markets automatically take account of costs and provide incentives for producers to reduce them. When externalities are present, those costs are invisible to the market, but systems such as externality charging provide the missing signal that the cost exists.
Although externality charge and subsidy seem a great fix for externalities, there may be an unexpected hiccup.
Externalities simply are not externalitoes if people can easily get together and negotiate. Remember that they were called "externalities" because they stood outside market transactions.
With the existence of pseudoexternalities, which can in fact be dealt with very well by the private sector, if the government also steps in with an externality charge, we may find ourselves "solving" the externality twice.
12/05/2011
12/5/2011 Class 39
When you make something illegal, you don't eliminate the want; instead, you raise the opportunity cost of the supply and make the curve steeper.
Additional cost unseen on the graph:
a.Law enforcement
(1) the government have to raise tax to hire bureaucrats, police, courts, prisons to enforce the law
(2) these bureaucrats could have done other things more productive
b. When you make a certain profession illegal, the job participants don't have to pay payroll tax, insurance money. They can get more pure profit, even exceeding the increasing cost.
The fact of making drug illegal:
(1) the price of drugs fall in the long run (technology reason)
(2) the big profit entices more people to join and compete
(3) the crime rate increases in other fields
If we punish severely on some small sins, like smoking in the bathroom, we actually lower the marginal cost for people to commit the severe crimes.
Some people say that one of the benefits when prostitution is legalized is that government can get tax revenue. But this opinion is odd.
(1) Tax is neutral; it is just a transfer of money, so no one gets benefit or hurt
(2) Why is government tax revenue benefit? The signal of wealth is not how much money the government has but how many goods and services people produce
The economic incidence of supply and demand curve
Application: Taxation
1. Excise tax: legal liability for tax is upon suppliers
the result of a tax
(1) customers and suppliers share the burden of tax and the more inelastic, the more loss the group has to suffer
(2) if the tax is $1, price doesn't go up by $1. Reason: both demand curve and supply curve usually have a slope.
(3) the government can not get as much tax revenue as it intended to get because of the second reason.
(4) The market is affected. Deadweight loss occurs.
(5) We have to hire bureaucrats to enforce the law, but they don't produce anything new.
(6) People can cheat on tax
<a> they have to waste resources to avoid the tax
<b> others have to pay for your tax
The economic incidence of supply and demand curve
A way for a free market to get efficiency and equity at the same time
Head Start Theorem (Kenneth Arrow)
An appropriate program of lump-sum taxes or subsidies that puts everyone on equal footing.
Additional cost unseen on the graph:
a.Law enforcement
(1) the government have to raise tax to hire bureaucrats, police, courts, prisons to enforce the law
(2) these bureaucrats could have done other things more productive
b. When you make a certain profession illegal, the job participants don't have to pay payroll tax, insurance money. They can get more pure profit, even exceeding the increasing cost.
The fact of making drug illegal:
(1) the price of drugs fall in the long run (technology reason)
(2) the big profit entices more people to join and compete
(3) the crime rate increases in other fields
If we punish severely on some small sins, like smoking in the bathroom, we actually lower the marginal cost for people to commit the severe crimes.
Some people say that one of the benefits when prostitution is legalized is that government can get tax revenue. But this opinion is odd.
(1) Tax is neutral; it is just a transfer of money, so no one gets benefit or hurt
(2) Why is government tax revenue benefit? The signal of wealth is not how much money the government has but how many goods and services people produce
The economic incidence of supply and demand curve
Application: Taxation
1. Excise tax: legal liability for tax is upon suppliers
the result of a tax
(1) customers and suppliers share the burden of tax and the more inelastic, the more loss the group has to suffer
(2) if the tax is $1, price doesn't go up by $1. Reason: both demand curve and supply curve usually have a slope.
(3) the government can not get as much tax revenue as it intended to get because of the second reason.
(4) The market is affected. Deadweight loss occurs.
(5) We have to hire bureaucrats to enforce the law, but they don't produce anything new.
(6) People can cheat on tax
<a> they have to waste resources to avoid the tax
<b> others have to pay for your tax
The economic incidence of supply and demand curve
A way for a free market to get efficiency and equity at the same time
Head Start Theorem (Kenneth Arrow)
An appropriate program of lump-sum taxes or subsidies that puts everyone on equal footing.
12/04/2011
Social economic organization Frank H.Knight
Many definitions of economics found in text books fall into this error of including virtually all intelligent behavior.
Not only are the objectives of action in fact a practical problem, as well as the means of achievement, but intelligent discussion of the means cannot be separated from the discussion of the ends.
Economics deal with the social organization of economic activity.It's the structure and working of the system of free enterprise which constitutes the principal topic of discussion in a treatise on economics.
The problems of organization arise only when different things are being done, in the furtherance of a common end, and in definite relations to each other, i.e, in coordination.
Organization is more than cooperation; organization means that various "organs" not only perform different functions, they also all act in a substantially continuous manner and in proper adjustment to each other.
Five main function of an economic system
(1) The function of fixing standards; the notion of efficiency
In a social system, people have to decide what to produce. Society finds it necessary or advisable to regulate the individual's regulation of his own want-satisfaction, to enforce a community standard of living. So the question is whose wants and which wants are to be given in preference.
The problem of standards or values occupies a key position in economics. The practical objective of economics is that of improving the social organization and increasing its efficiency. The correct definition of efficiency is the ratio between useful output and total output or input. (The extent to which the society produce what people want at the lowest cost.)
(2) The function of organizing production
The second step is that of actually putting them to use in accordance with the scale of values established. There are 2 processes:
<a> allocate resources to produce
<b> cooperation to reduce the ratio of effort and result.
(3) The function of distribution
When production is socialized, the separate productive contribution of one participant in the process cannot be directly identified or separated. The decision as to what to produce is closely bound up with the decision for whom to produce. Besides, distribution is the chief agency relied upon to control production and stimulate efficiency. (people respond to incentives)
Remuneration matters
(4) Economic maintenance and progress
progress refers to any persistent cumulative change, whether good or bad
<a> growth of population and cumulative change in its composition or education
<b> the accumulation of capitals
<c> technology improvement
Economic organization creates progress at a cost and progress in turn affects and changes the whole economic system.
(5) To adjust consumption to production within very short periods
Over short periods consumption has to be controlled and distributed with references to an existing supply or current rate of production, at the same time that adjustment of production to consumption requirements is being made as rapidly as practicable.
The reasons for organizing activity
Organized effort enables a social group to produce more of the means of want-satisfaction than it could by working as individuals.
The gain from specialization
One of the most interesting facts in regard to human society is the absence of definite structual specialization of individuals. Human organization is an artificial thing. Natural differences exist among human beings, and are taken advantage of in fitting individuals to specialized functions.
So one social problem is to discover such differences and utilize them as far as possible.
No man is omniscient, and every one possesses tacit knowledge, so specialization is a complement of knowledge.
The saving of time and effort in changing from one operation to another is the third gain from specialization.
Also, specialization means that we can undermine the disadvantage brought by the natural "unfair" allocation of natural resources. Territorial specialization.
Perhaps the very largest singe source of gain from the specialization of labor is that it makes possible the development and use of machinery.
The possibility of new jobs and technology and art improvement.
Social cost of specialization
It gives us more products, but in its effects on human beings it means a narrowing of the personality; impersonality.
The technical cost of assembly and distribution
The resulting interdependence of persons and groups.
Types of organization
(1) caste:Such a rigid society cannot get huge progress
(2) militaristic: loss of liberty and knowledge problem
(3) anarchy: externality and public goods and resources problem
(4) the exchange system (Capitalism)
The system of competition, private property, and free exchange. IT is automatic and unconscious; no one plans or ever planned it out, no one assigns the participants their roles or directs their functions. Each person in such a system seeks his own satisfaction without thought of the structure of society or its interests
Modern free enterprise is not like handicraft in medieval time. Nowadays workers produce nothing and own nothing, they can exchange nothing.The individual in fact gets his living, not by selling and buying or exchanging goods, but by selling productive services for money and buying with the money the goods which he uses.
Not only are the objectives of action in fact a practical problem, as well as the means of achievement, but intelligent discussion of the means cannot be separated from the discussion of the ends.
Economics deal with the social organization of economic activity.It's the structure and working of the system of free enterprise which constitutes the principal topic of discussion in a treatise on economics.
The problems of organization arise only when different things are being done, in the furtherance of a common end, and in definite relations to each other, i.e, in coordination.
Organization is more than cooperation; organization means that various "organs" not only perform different functions, they also all act in a substantially continuous manner and in proper adjustment to each other.
Five main function of an economic system
(1) The function of fixing standards; the notion of efficiency
In a social system, people have to decide what to produce. Society finds it necessary or advisable to regulate the individual's regulation of his own want-satisfaction, to enforce a community standard of living. So the question is whose wants and which wants are to be given in preference.
The problem of standards or values occupies a key position in economics. The practical objective of economics is that of improving the social organization and increasing its efficiency. The correct definition of efficiency is the ratio between useful output and total output or input. (The extent to which the society produce what people want at the lowest cost.)
(2) The function of organizing production
The second step is that of actually putting them to use in accordance with the scale of values established. There are 2 processes:
<a> allocate resources to produce
<b> cooperation to reduce the ratio of effort and result.
(3) The function of distribution
When production is socialized, the separate productive contribution of one participant in the process cannot be directly identified or separated. The decision as to what to produce is closely bound up with the decision for whom to produce. Besides, distribution is the chief agency relied upon to control production and stimulate efficiency. (people respond to incentives)
Remuneration matters
(4) Economic maintenance and progress
progress refers to any persistent cumulative change, whether good or bad
<a> growth of population and cumulative change in its composition or education
<b> the accumulation of capitals
<c> technology improvement
Economic organization creates progress at a cost and progress in turn affects and changes the whole economic system.
(5) To adjust consumption to production within very short periods
Over short periods consumption has to be controlled and distributed with references to an existing supply or current rate of production, at the same time that adjustment of production to consumption requirements is being made as rapidly as practicable.
The reasons for organizing activity
Organized effort enables a social group to produce more of the means of want-satisfaction than it could by working as individuals.
The gain from specialization
One of the most interesting facts in regard to human society is the absence of definite structual specialization of individuals. Human organization is an artificial thing. Natural differences exist among human beings, and are taken advantage of in fitting individuals to specialized functions.
So one social problem is to discover such differences and utilize them as far as possible.
No man is omniscient, and every one possesses tacit knowledge, so specialization is a complement of knowledge.
The saving of time and effort in changing from one operation to another is the third gain from specialization.
Also, specialization means that we can undermine the disadvantage brought by the natural "unfair" allocation of natural resources. Territorial specialization.
Perhaps the very largest singe source of gain from the specialization of labor is that it makes possible the development and use of machinery.
The possibility of new jobs and technology and art improvement.
Social cost of specialization
It gives us more products, but in its effects on human beings it means a narrowing of the personality; impersonality.
The technical cost of assembly and distribution
The resulting interdependence of persons and groups.
Types of organization
(1) caste:Such a rigid society cannot get huge progress
(2) militaristic: loss of liberty and knowledge problem
(3) anarchy: externality and public goods and resources problem
(4) the exchange system (Capitalism)
The system of competition, private property, and free exchange. IT is automatic and unconscious; no one plans or ever planned it out, no one assigns the participants their roles or directs their functions. Each person in such a system seeks his own satisfaction without thought of the structure of society or its interests
Modern free enterprise is not like handicraft in medieval time. Nowadays workers produce nothing and own nothing, they can exchange nothing.The individual in fact gets his living, not by selling and buying or exchanging goods, but by selling productive services for money and buying with the money the goods which he uses.
12/03/2011
The division of labor is limited by the extent of the market George J. Stigler
A dilemma of the theorem that the division of labor is limited by the extent of the market: either the division of labor is limited by the extent of the market, and , characteristically, industries are monopolized; or industries are characteristically competitive, and the theorem is false or of little significance.
Why does the firm not in the process become a monopoly? Because the average cost is a U-shape function. The marginal cost of a product in the short will be lower but after a certain point it will increase and so is average cost. So when the company becomes too big, it will turn from economics of scales into diseconomics of scales: that is, the problem of coordination and management of a gigantic company offset the profit of mass production.
Why does the firm not in the process become a monopoly? Because the average cost is a U-shape function. The marginal cost of a product in the short will be lower but after a certain point it will increase and so is average cost. So when the company becomes too big, it will turn from economics of scales into diseconomics of scales: that is, the problem of coordination and management of a gigantic company offset the profit of mass production.
Different kinds of demand
A. Functional
B. Nonfunctional
1. External effects on utility
(a) Bandwagon effect
(b) Snob effect
(c) Veblen effect
2. Speculative
3. Irrational
Functional demand: the demand for a commodity is due to the qualities inherent in the commodity itself.
Nonfunctional demand: the demand for a consumers' good is due to the factors other than the quality inherent in the commodity. May be due to external effects of utility, that is, the utility derived from the commodity is enhanced or decreased owing to the fact that others are purchasing and consuming the same commodity, or owing to the fact that the commodity bears a higher rather than lower tag.
Bandwagon effect: (从众效果)
The extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity.
It represents the desire of people to purchase something to conform with the people they wish to be associated with, in order to be fashionable or stylish.
Snob effect: （逆反效果）
The extent to which the demand for a consumers' good is decreased owing to the fact that others are also consuming the same commodity (or that others are increasing their consumption of that commodity). This represents the desire of people to be exclusive.
Veblen effect: （装逼效果）
The phenomenon of conspicuous consumption; to the extent to which the demand for a consumers' good is increased because it bears a higher rather than a lower price.
Difference of snob and veblen effect: the former is a function of the consumption of other buyers; the latter is a function of the price.
Speculative effect refers to the fact that people will often "lay in" / hoard a supply of a commodity because they expect its price to rise.
Irrational effect refers to purchases that are neither planned not calculated but are due to sudden urges, whims, etc, and that serve no rational purpose but that of satisfying sudden whims and desires.
B. Nonfunctional
1. External effects on utility
(a) Bandwagon effect
(b) Snob effect
(c) Veblen effect
2. Speculative
3. Irrational
Functional demand: the demand for a commodity is due to the qualities inherent in the commodity itself.
Nonfunctional demand: the demand for a consumers' good is due to the factors other than the quality inherent in the commodity. May be due to external effects of utility, that is, the utility derived from the commodity is enhanced or decreased owing to the fact that others are purchasing and consuming the same commodity, or owing to the fact that the commodity bears a higher rather than lower tag.
Bandwagon effect: (从众效果)
The extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity.
It represents the desire of people to purchase something to conform with the people they wish to be associated with, in order to be fashionable or stylish.
Snob effect: （逆反效果）
The extent to which the demand for a consumers' good is decreased owing to the fact that others are also consuming the same commodity (or that others are increasing their consumption of that commodity). This represents the desire of people to be exclusive.
Veblen effect: （装逼效果）
The phenomenon of conspicuous consumption; to the extent to which the demand for a consumers' good is increased because it bears a higher rather than a lower price.
Difference of snob and veblen effect: the former is a function of the consumption of other buyers; the latter is a function of the price.
Speculative effect refers to the fact that people will often "lay in" / hoard a supply of a commodity because they expect its price to rise.
Irrational effect refers to purchases that are neither planned not calculated but are due to sudden urges, whims, etc, and that serve no rational purpose but that of satisfying sudden whims and desires.
The sumptuary manifesto
The article tends to manifest the idea of peerless leader's argument that: "Freedom is not much concerned with tail fins or even with automobiles. Those who argue that it is identified with the greatest possible range of consumers' goods are only exceedingly confessing their simple-minded and mechanical view of man and his liberties."
First he claims that a sumptuary society is different from Puritanism, which stifle people's psychological and physical desires. Sumptuary society is about social responsibility. With the government intervention, we can live a happier and more altruistic life.
Second, the author claims that some consumption like education, environment protection is innocuous. We shouldn't adopt automobiles or factories, which will bring about negative externalities.
Besides, the author advocates parity price (a kind of price floor), tariff, price ceiling, domestic implicit taxes.
There is no doubt that this is an article full of ignorance and bullshit. The reason why we are about to analyze this article is to use what we have learnt in the class to rebuff the economic fallacy and understand that still there are a bunch of people hating free market notion and thus we have to get prepared to keep economic way of thinking off class and school.
The author claims in the article that a sumptuary society is about social justice and responsibility, which bring people serenity and altruism. This kind of manifesto reminds me of socialism and communism. But as I has written before, the Marxisms like to compare a utopia world non-exist with the free market in a imperfect world. The world is full of scarcity, and the reason of scarcity is that people's want is unlimited compared with the physical limit of any resources.
It's safe to say that no one should consume any resources at any amount as he wishes, but the free market actually does that constraint, with the tool of "price". Because of the law of diminishing utility and the constraint of budget, any buyer cannot consume infinite amount of capital and thus he has to think about what he values most. The combination of willingness and capacity to pay enables him to get maximum utility. But within a sumptuary society, you are not allowed to get things even if you are willing and capable to get just because you have "overconsumed". As a result, the producers and buyers both have to bear considerable deadweight loss. For me, this kind of prohibition is actually a burden of freedom to arrive at a voluntary agreement.
Besides, the author's simultaneous claim that education is innocuous is weird. My question is: since you have already inhibited the production and consumption, how can this lack of division of labor and incentive draw more good teachers? In addition, if we care so much about the pollution that we eliminated cars and railways, how can we take children to a better school far from hometown? The notion "innocuous" suggests that we will bear any cost to get good education, but since now you leader has prohibited the more efficient way of transportation, people are not discouraged to send children to out-of-hometown schools. Isn't it an irony?
Third, this quack advocates price ceiling and floor, tariff, unnecessary taxes. Is not he a scum? These kind of acts prevent people from arriving at a voluntary agreement that could have been reached within a free market, and if this intervention has nothing to do with self freedom and liberty, I wonder how the author defines freedom and liberty.
First he claims that a sumptuary society is different from Puritanism, which stifle people's psychological and physical desires. Sumptuary society is about social responsibility. With the government intervention, we can live a happier and more altruistic life.
Second, the author claims that some consumption like education, environment protection is innocuous. We shouldn't adopt automobiles or factories, which will bring about negative externalities.
Besides, the author advocates parity price (a kind of price floor), tariff, price ceiling, domestic implicit taxes.
There is no doubt that this is an article full of ignorance and bullshit. The reason why we are about to analyze this article is to use what we have learnt in the class to rebuff the economic fallacy and understand that still there are a bunch of people hating free market notion and thus we have to get prepared to keep economic way of thinking off class and school.
The author claims in the article that a sumptuary society is about social justice and responsibility, which bring people serenity and altruism. This kind of manifesto reminds me of socialism and communism. But as I has written before, the Marxisms like to compare a utopia world non-exist with the free market in a imperfect world. The world is full of scarcity, and the reason of scarcity is that people's want is unlimited compared with the physical limit of any resources.
It's safe to say that no one should consume any resources at any amount as he wishes, but the free market actually does that constraint, with the tool of "price". Because of the law of diminishing utility and the constraint of budget, any buyer cannot consume infinite amount of capital and thus he has to think about what he values most. The combination of willingness and capacity to pay enables him to get maximum utility. But within a sumptuary society, you are not allowed to get things even if you are willing and capable to get just because you have "overconsumed". As a result, the producers and buyers both have to bear considerable deadweight loss. For me, this kind of prohibition is actually a burden of freedom to arrive at a voluntary agreement.
Besides, the author's simultaneous claim that education is innocuous is weird. My question is: since you have already inhibited the production and consumption, how can this lack of division of labor and incentive draw more good teachers? In addition, if we care so much about the pollution that we eliminated cars and railways, how can we take children to a better school far from hometown? The notion "innocuous" suggests that we will bear any cost to get good education, but since now you leader has prohibited the more efficient way of transportation, people are not discouraged to send children to out-of-hometown schools. Isn't it an irony?
Third, this quack advocates price ceiling and floor, tariff, unnecessary taxes. Is not he a scum? These kind of acts prevent people from arriving at a voluntary agreement that could have been reached within a free market, and if this intervention has nothing to do with self freedom and liberty, I wonder how the author defines freedom and liberty.
12/02/2011
12/2/2011 Class 38
Recall the rent control.
Since there are now 4000 more demanders, there are gonna be other ways to ration the houses.
If the supply curve is flatter, it will cause more shortage of houses because landlords are so sensitive to the change of price that they are not incentivized to provide houses when the rent is regulated at a lower price. This will also make demanders harder to get the houses, they have to bear more real trade-offs to get the houses.
If the demand curve is flatter (demanders are sensitive to the price so they will want to buy more when the rent fee is artificially lower.) There will be more shortage of houses and worse still, people are not willing to bear a larger trade-off to get the houses.
There is a better to help the poor: give them wage subsidy.
This will not impair the market and people are free to use the money: not all of them will spend all the money in the houses, they may value other things more. So the clothes factories, for instance, may get profit and since now the house demand is really higher in a free market, it gives incentive to landlords to provide more houses with high quality.
Price floor:
What determines wage? Worker's own productivity and the market's value on his work
When there is a binding price floor, like minimum wage law, the quantity demanded (firm employment) will decrease and the quantity supplied (people who want a job) will increase, and thus a surplus is created.
Consequences, facts
(1) The law makes fewer people get the job (besides, the labor market demand is elastic, about 3, which means that a 1% increase of wage rate can result in 3% decrease in the number of workers hired) and make the existing workers harder to keep the job (because of the abundant existence of substitutes)
(2) Some workers just don't worth the new wage, it's a waste of cost.
(3) The cost has to come from somewhere. So may be the health care is gone, the vacations are gone, and the since the cost of productions are now higher, the price of the product can be higher. If you take the whole economy into consideration, a minimum wage law doesn't make any sense.
(4) The impact of minimum wage law is small.
(5) There's a better way other than the law. Give subsidy to producers. They will have freedom to hire workers, do researches or invest.
(6) Only a small portion of people live by minimum wage. So a law intended to benefit only a small amount of people isn't good.
Rarity doesn't mean scarcity.
Scarcity means that people want it more than it is available so the term is a relative notion. People put strong value on oil, which is always abundant, so now oil is scarce despite its physical abundance. Things that are rate may not be scarce because people don't value it so much.
Surplus doesn't mean abundance and free.
Surplus is a price phenomenon. You still have to bear trade-off to get the stuff though the price is wrong.When something is free, it means that you don't have to bear any trade-offs to get it.
Supply curve represents how much opportunity cost the producers bear when they produce marginal good.
When the drugs are made illegal,
(1)the supply curve will become steeper because the cost of production is now higher, including vigilance, risk, force and bribe.
(2) The composition of drug dealers will change because dealers that don't want to break the law quit and those who have a comparative advantage in drug business will step in and keep.
(3) The profit will be considerable. Since the suppliers are fewer with the same (or increasing) number of demanders, drug dealers can earn more, offsetting the increasing cost.
(4) Drug dealers may make more powerful drugs since the probability of getting caught is the same.
Since there are now 4000 more demanders, there are gonna be other ways to ration the houses.
If the supply curve is flatter, it will cause more shortage of houses because landlords are so sensitive to the change of price that they are not incentivized to provide houses when the rent is regulated at a lower price. This will also make demanders harder to get the houses, they have to bear more real trade-offs to get the houses.
If the demand curve is flatter (demanders are sensitive to the price so they will want to buy more when the rent fee is artificially lower.) There will be more shortage of houses and worse still, people are not willing to bear a larger trade-off to get the houses.
There is a better to help the poor: give them wage subsidy.
This will not impair the market and people are free to use the money: not all of them will spend all the money in the houses, they may value other things more. So the clothes factories, for instance, may get profit and since now the house demand is really higher in a free market, it gives incentive to landlords to provide more houses with high quality.
Price floor:
What determines wage? Worker's own productivity and the market's value on his work
When there is a binding price floor, like minimum wage law, the quantity demanded (firm employment) will decrease and the quantity supplied (people who want a job) will increase, and thus a surplus is created.
Consequences, facts
(1) The law makes fewer people get the job (besides, the labor market demand is elastic, about 3, which means that a 1% increase of wage rate can result in 3% decrease in the number of workers hired) and make the existing workers harder to keep the job (because of the abundant existence of substitutes)
(2) Some workers just don't worth the new wage, it's a waste of cost.
(3) The cost has to come from somewhere. So may be the health care is gone, the vacations are gone, and the since the cost of productions are now higher, the price of the product can be higher. If you take the whole economy into consideration, a minimum wage law doesn't make any sense.
(4) The impact of minimum wage law is small.
(5) There's a better way other than the law. Give subsidy to producers. They will have freedom to hire workers, do researches or invest.
(6) Only a small portion of people live by minimum wage. So a law intended to benefit only a small amount of people isn't good.
Rarity doesn't mean scarcity.
Scarcity means that people want it more than it is available so the term is a relative notion. People put strong value on oil, which is always abundant, so now oil is scarce despite its physical abundance. Things that are rate may not be scarce because people don't value it so much.
Surplus doesn't mean abundance and free.
Surplus is a price phenomenon. You still have to bear trade-off to get the stuff though the price is wrong.When something is free, it means that you don't have to bear any trade-offs to get it.
Supply curve represents how much opportunity cost the producers bear when they produce marginal good.
When the drugs are made illegal,
(1)the supply curve will become steeper because the cost of production is now higher, including vigilance, risk, force and bribe.
(2) The composition of drug dealers will change because dealers that don't want to break the law quit and those who have a comparative advantage in drug business will step in and keep.
(3) The profit will be considerable. Since the suppliers are fewer with the same (or increasing) number of demanders, drug dealers can earn more, offsetting the increasing cost.
(4) Drug dealers may make more powerful drugs since the probability of getting caught is the same.
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