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    Pricey Pigeons

    Feb 3 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 602 Views

    At the Paradise Pigeon auction in Belgium, a Dutch breeder sold a female pigeon to a Chinese shipbuilder for $328,000. Purchased to breed rather than race, Dolce Vita (the bird) will enable Hu Zhen Yu, also the owner of a pigeon racing group, to elevate China in a sport that had been dominated by Germany, Holland, Great Britain and Belgium.

    With the capacity to fly more than 60 miles an hour and to cover 500 miles in one day, carrier pigeons are faster than any horse and rider. As a result, sort of like FedEx, they were used to fly stock prices between cities during the mid-19th century before the telegraph replaced them.

    Our bottom line? Prices created by markets convey valuable information.

    The Economic Lesson

    A market is a process that determines the price and quantity of a good or a service. The demand schedule records the different amounts of a commodity, at different prices, that people are willing and able to buy. Correspondingly, the decisions of those who are willing and able to sell different quantities of the item at different prices are the supply side. When they interact, a market results.

    The price of Dolce Vita was more than a number. It represented a wealth of facts about the carrier pigeon market. Because a market created the price, it was meaningful.

    An Economic Question: Think of a $20 sweater and a $100 sweater. What information does each price convey?

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    Super Bowl Economics

    Feb 2 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement, Thinking Economically • 668 Views

    The least expensive Super Bowl weekend in Indianapolis might cost close to $6248. That means you purchased a “nosebleed” seat for $2100 from StubHub, your coach airfare from NY or Boston was $1379 instead of the usual $400, and you are paying $1840 for a 2 night stay in an airport hotel that typically charges $47 a room. For your car, Hertz shifted its normal weekend rate from $102.42 to $429.89 and a parking spot near the game might cost $499.

    $2100 (tickets)+$1379 (airfare)+$1840 (hotel)+$430 (car) +$499 (parking)=$6248

    Other Super Bowl economics? The National Chicken Council reported that on Super Bowl Sunday last year, we consumed more than 1.24 billion chicken wings. Likewise, according to The Big Three (Pizza Hut, Papa John’s and Dominos), we doubled our pizza orders.

    Do Super Bowl cities benefit from a surge in spending? Maybe. It all depends on several questions.

    1. Leakage: Does the money go elsewhere? Does the money spent at Pizza Hut and elsewhere go to a local owner or to the national firm?
    2. Crowding out: If locals stay home, will certain retailers experience less business?
    3. Money transferred: Would some of the money spent for Super Bowl goods and services have been spent elsewhere anyhow?
    4. Investment: How much money did the city spend to prepare for the event?

    The Economic Lesson

    The blip in prices is perfectly illustrated on demand and supply graphs. Perhaps all you need for the supply side is a shift in the curve’s position and also a change in its shape. The shift is upward and the curve becomes horizontal at the new, high price. Meanwhile, you have a demand curve reflecting individuals and businesses that are willing and able to spend astronomical dollars. Combine the two, equilibrium soars, and as a result, a parking space can cost $499.

    An Economic Question: How would you draw a supply and demand graph illustrating skyrocketing Super Bowl prices?

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    Marginal Children

    Feb 1 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Humor, Households, Money and Monetary Policy, Thinking Economically • 2343 Views

    By Mira Korber, guest blogger.

    American births are on the decline; the number per year has fallen from 4.3 million (2007) to 4 million (2010), perhaps due to a shaky economic situation.

    However…

    Why is raising more kids less expensive (in some ways, anyway) than having the infamous “only?”

    Diminishing marginal costs are the answer.

    To begin, here’s the cost of raising one child before adding in the marginal family members.

    Now, after this marginal child is born (and then another!), the cost of raising each consecutive sibling decreases substantially. For example, the figures cited in this TIME Moneyland article run thus: an “only” 11 year old might cost $15,830 per year, but add in a 16 year old sibling and you only spend $10,660 more, and finally, add a third kid and you are spending merely an additional $4,580.

    A lot of necessary child raising equipment and expenses — from high chairs to cribs to clothes — can be passed from one child to the next as the time comes. And, with many family and parent-child health insurance plans, the monthly cost remains the same regardless of how many kids you have. Simple math shows the price per person then goes down. Who isn’t looking to run the house as an economy of scale?

    A final point:

    Although college tuitions are more expensive than ever, (and it’s not exactly possible to get an “enroll one, enroll another one free” financial aid package) many schools offer increased economic support for families with more than one child. And this fascinating article shows  freshman year for ten kids at universities abroad could cost less than freshman year for one kid in the US.

    The Economic Lesson

    Everything revolves around the margin. If a family has one child, its second is the marginal child. If a family already has two, the third is the marginal child.

    The bottom line: Having more kids demonstrates a diminishing marginal cost of production.

    Check out these graphs, which show how marginal cost at first decreases, but will eventually increase again due to the law of diminishing returns. For a different take on studying the margin, look at this recent Econlife post.

    An Economic Question: What decisions do you make at the margin in your everyday life?

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    Amazonian eWarfare

    Jan 31 • Businesses, Demand, Supply, and Markets, Economic History, Innovation, Thinking Economically • 591 Views

    By Mira Korber, guest blogger.

    The Amazon rainforest may be shrinking, but Amazon.com certainly isn’t.

    The superpower “e-tailer” has all but taken over, and it’s selling just about anything, but Amazon.com threatens one industry just as much as climate change threatens its arboreal counterpart.

    The publishing industry is in danger. By cutting out publishers — essentially the middlemen — in book sales, Amazon can pay authors a higher percentage of profits, and charge consumers lower prices to acquire books.

    Barnes and Noble is faced with potential extinction. Even with Borders gone, it’s still struggling to survive. This NY Times article discusses the complex conundrum B&N must confront. It also cites that in the past 8 years, about one in five independent bookstores have disappeared from the market. 

    The question is largely whether Barnes and Noble will be able to sell enough of its eReaders, “The Nook,” to keep the company (and by extension its dependent publishers) alive. Therefore, in some kind of plot twist, the very publishers threatened by the Amazon Kindle’s explosive growth are clinging to a different eReader’s future success just to stay in business.

    Interestingly, this past December, small-bookstores called for an Amazon.com shopping boycott based on the company’s practices to divert their business.

    Now, where does Apple fit in? With the ever-developing iBooks store, the iPad is another competitor at odds with the Kindle and the Nook. Committing to the new iBooks store prohibits publishers from selling rights to any other companies, thereby barring  content from Amazon and the Nook. But then again, it is unlikely that large publishers will want to transfer exclusive selling rights to Apple.

    We’re all reading within a changing market for books. And soon, it seems that we all may be flicking touch screens instead of flipping pages. 

    The Economic Lesson

    Again, the rise of Amazon.com attests to economist Joseph Schumpeter’s theory of creative destruction. As new industries emerge, old ones die off as part of an ever-changing marketplace.

    Side note: A monopoly exists when one firm dominates in a market and is a “price maker;” with no competition, the monopoly is free to set any price for its goods and services…

    …A related economic question: Do you see a monopolistic power developing a.k.a. Amazon.com? And if you buy from Amazon, do you see yourself as a participant in this emergence?

     

     

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    Everest Economics

    Jan 30 • Demand, Supply, and Markets, Developing Economies, Environment, Thinking Economically • 591 Views

    Having no inclination to climb Mount Everest, I have always been fascinated by its economic connection. Now, hearing that Prince Harry was considering the ascent as a part of his “Walking for the Wounded,” it reminded me that Everest is all about cost, benefit and decisions at the margin.

    The money: Sherpas are your biggest expense. Costing as much as $100,000, they guide, carry and cook. With $500 a typical tip, one Time journalist added 2 yaks. In addition, gear could run close to $10,000 ($1,000 for a down suit and $300 for gloves are just the beginning). Add the permits ($10,000 minimum and more, depending on how many people), cell phone expense, airfare to Nepal ($1500 coach).

    The Time: A daily workout regime is long and demanding. From squats to stairs to extreme procedures, getting in shape for Everest will cost many hours. For the climb itself, the acclimation process is gradual. Instead of a steady upward trek to the peak at 29,029 feet, climbers go up and down and up through a series of base camps that gradually accustom their lungs to the sparser air. I have read that it takes 6 weeks for the acclimation process and then 5 days to the summit.

    Our bottom line? Defined as sacrifice, cost refers to more than money.

    Into Thin Air by Jon Krakauer is a fascinating account of a disastrous expedition.

    The Economic Lesson

    Whenever climbers make health and weather decisions, they are weighing cost and benefit at the margin. Beset by lightheadedness, raging headaches, nausea, frostbite, and other maladies, they have to decide whether to proceed with the next stage. With questionable weather, to abort or not becomes the key issue.

    Each decision either expands or contracts climbers’ margin of safety. Too large a margin and they don’t reach the peak. Too small and the danger is life-threatening.

    An Economic Question: Defining cost as sacrifice, describe the “expense” of a recent decision.

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