• Econlife.com Sunday Chart of the Weekl

    The Message From NFL Ticket Prices

    Aug 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Entertainment, Sports, Thinking Economically • 179 Views

    Our Sunday Chart

    Imagine someone tells you a t-shirt is $5.00. During class, my students figured out a seemingly endless list of messages that $5.00 conveys. Some said the price indicated poor quality. Others spoke of affordability. Status came up also.

    The message that a price conveys came to mind when I read about NFL secondary-market ticket prices. In the following graph, I showed the teams with the highest percent increase in secondary-market ticket prices.

    Through the price system, NFL ticket prices convery information about teams.

    Data from: Barron’s

     

    According to Barron’s, a substantial increase in secondary-market NFL ticket prices tells us which team is more likely to have a winning season. Looking at the past 2 seasons, they point out that 4 of the 5 teams with the biggest jumps in secondary-market ticket prices were Super Bowl champs and/or made the playoffs.

    Our bottom line: When consumers’ prices and businesses’ costs fluctuate because of supply and demand, we have the price system. Reflecting what New Yorker financial writer James Surowiecki called The Wisdom of Crowds, the price system is a group phenomenon in which many individuals and businesses make buying and selling decisions for the same good or service. The result? Price conveys a message.

    By contrast, when government establishes a price or prevents price from moving too high (a ceiling) or too low (a floor), then price gives consumers, sellers and producers little if any useful information.

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  • Econlife.com Weekly Roundup

    Our Weekly Roundup: From Milk to Tobacco

    Aug 9 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Innovation, Labor, Lifestyle, Regulation, Tech, Thinking Economically, Uncategorized • 120 Views

    Our Econlife roundup for the week

     

    The spread of refrigeration in China will create positive and negative externalities that relate to productivity, diet, health and the environment.  8.04.14 Why refrigerators do much more for us than keeping food cold…more

     

    Instead of more traditional foreign aid giving programs, cash grants are a valid alternative.  8.05.14 Cash gifts to poor people might help diminish poverty more than you expect…more

     

    Everyday economics A more accurate picture of African Development emerges when we combine statistics and stories.  8.06.14 How stories from Americanah create a picture of economic development…more

     

    8.07.14 Everyday economics  Because market structure shapes a firm's behavior, a supermarket's product placement relates to the monopolistic competition that characterizes its market.The reason you have to go to the back of your supermarket…more

     

    8.08.14 Why cost-benefit analysis sounds logical until you try to do it…moreConsumer surplus is over estimated for cost-benefit analysis of new tobacco regulation

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  • Consumer surplus is over estimated for cost-benefit analysis of new tobacco regulation

    Can We Use Happiness to Evaluate Tobacco Legislation?

    Aug 8 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Environment, Government, Labor, Regulation, Thinking Economically • 160 Views

    When I read in yesterday’s NY Times that the FDA has to decide whether its rules for regulating tobacco pass the “cost-benefit test,” it sounded like a wise procedure. Now though, I have some doubts.

    This is the story:

    In 1981, Ronald Reagan issued an executive order that mandated cost-benefit analysis of government regulation. No rule, he said, should remain on the books unless its potential benefits “exceed the potential costs to society.” Concerned, Democrats said that safety and health rules would be threatened. People also complained about “paralysis by analysis” because of the time and cost required to gather the facts.

    During the past 3 decades, George H.W. and George W. Bush, Bill Clinton and Barack Obama have given their approval to cost-benefit analysis of government regulations. Still though, the approach remains controversial because some costs and benefits are tough to quantify. After all, can we really determine the cost of the hours we spend standing in airport security lines or the benefit of 1000 lives that are saved 20 years from now because of environmental regulation?

    …Or the pleasure of smoking cigarettes?

    In the current cost-benefit analysis of new federal tobacco regulation, the pleasure of smoking has been quantified as a benefit. The problem though, according to a group of economists, is that the FDA miscalculated. The reason? When quantifying benefit through a happiness quotient, the FDA insufficiently recognized that smokers are marginalized and “suffer the disutility of wanting but being unable to quit…” As a result, the happiness quotient they are using for cost-benefit analysis is higher than it should be. Unless it is reduced, federal regulatory attempts to get us to smoke less could be jeopardized.

    Our bottom line: When costs or benefits defy quantification, can government regulators adequately identify the cost-benefit balance that a Presidential executive order mandates?

    A Post Script:

    I wanted to share how the concept of consumer surplus displays the benefits of smoking. Measured by the difference between consumers’ willingness to pay for cigarettes and the actual price they pay, consumer surplus conveys “the ‘pleasure’ that smokers receive from cigarettes.” Consequently, consumer surplus should be smaller in the following green triangle (below).

    Specifically, the green consumer surplus triangle (below) is formed by identifying the segment of the demand line that is above the equilibrium price where demand and supply meet. The part of the demand line above equilibrium is composed of all consumers willing and able to pay a higher price than what the market determined. As a result, they are “happy” that the price is lower.

    The second graph (below), shows the impact of tobacco regulation. By diminishing the number of smokers, cigarette package warning labels decrease demand and it shifts to the left. That shift results in a smaller green triangle, less happiness from smoking and less consumer surplus.

    Consumer surplus is over estimated for cost benefit analysis of new tobacco regulation

    From: “An Evaluation of FDA’a Analysis of the Costs and Benefits of the Graphic Warning Label”

     

     

     

     

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  • Everyday economics Because market structure shapes a firm's behavior, a supermarket's product placement relates to the monopolistic competition that characterizes its market.

    Why is the Milk at the Back of the Store?

    Aug 7 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Labor, Lifestyle • 151 Views

    Chips and soda sales seem to depend on where you place them at the supermarket. Arrange them on shelves closer to each other and sales of both items increase. In fact, I just read about one study that identified an average 0.7 percent increase in sales each time one of the two moved an aisle closer to the other. But, for the real bonanza, to get a whopping 9.2 percent bump in sales, the store just needs to place them across from each other on the same aisle.

    Where are we heading? To see how supermarkets maximize profits.

    The placement of milk might relate to sales also. According to one theory, the milk is in the rear of the store because we have to walk past many other items and temptations before getting there. Others, though, point out that it makes sense to move the milk from the truck to the cooler directly through the back drop-off storage area. Otherwise heavy cases would have to be transported across the store, diminishing shelf time because of the lack of refrigeration and increasing labor expense.

    Thinking about how supermarkets maximize profits, my mind also goes to the items that are placed at eye level like sugary cereals. Here again, there is a bit of a debate. Some, like Michael Pollan, say supermarkets are manipulative because their cereal placement encourages us to buy it. Econtalk’s Russ Roberts, though, suggests that the store is just making it easy for people who want sugary cereal to access it.

    Our bottom line: Called monopolistic competition, the market structure in which supermarkets compete shapes how they maximize profits. With monopolistic competition they have the freedom of monopoly power and the constraints of perfect competition. A supermarket could have monopoly power that lets it price and place products however it wants because its unique identity generates consumer loyalty. On the other hand, you have the competition part through which, for example, all markets have the same chips and soda and milk. Consequently, unhappy consumers can just go somewhere else if they feel the supermarket has mistreated them.

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  • Everyday economics A more accurate picture of African Development emerges when we combine statistics and stories.

    Understanding African Development Through Stories and Stats

    Aug 6 • Businesses, Developing Economies, Economic Growth, Government, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement • 177 Views

    With more than 40 African leaders in Washington D.C. for a conference that President Obama is attending, I wanted to return to our post on Americanah.

    Where are we going? To a picture of African development.

    In Chimamanda Adichie’s Americanah, we meet Ifemelu and Obinze. Representative of Nigeria’s upper class, they are a part of a story that takes the reader to Princeton, Yale, Philadelphia, Baltimore and London but always with a home base in Nigeria. Comments from the book’s protagonists about upwardly mobile Nigerians provide what I suspect is a glimpse of reality.

    “We are just one step from this life in a slum, all of us who live air-conditioned middle-class lives.”

    “Had  it always been like this or had it changed so much in her absence? When she left home, only the wealthy had cell phones, all the numbers started with 090, and girls wanted to date 090 men. Now, her hair braider had a cell phone, the plantain seller tending a blackened grill had a cell phone.”

    Ifemelu climbed out of the car and into the loud, discordant drone of generators, too many generators;…no light for the past week…can you imagine?”

    “When I came back, I was shocked at how quickly my friends had all become fat, with big beer bellies. I thought: What is happening? Then I realized that they were the new middle class…They had jobs and they could afford to drink a lot more beer and to eat out…”

    The Economist Intelligence Unit (EIU) tells us that the African middle class is growing:

    African Development and Middle Class Growth

     

    And the African middle class is young:

    From: The Economist Intelligence Unit

    Further confirming the potential for growth, African GDP stats were impressive this year (although we did do an econlife post on how they might all be inaccurate).

    African Development and GDP

     

    But then, checking the World Bank’s “Doing Business” Index, the low ranking of most African nations revealed the most challenging business environments. Looking at Nigeria, for getting electricity, enforcing contracts, and guaranteeing property rights—all basic to a thriving market—they were ranked among the lowest.

    For example, when a business needs to establish an electrical power connection, the difference between Nigeria and Singapore is striking:

    Nigeria: 260 days

    African Development Ease of Doing Business

     

    Singapore: 36 Days

    African Development Ease of Doing Business Singapore Comparison

     

    Our bottom line: A more accurate picture of African Development emerges when we combine statistics and stories.

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