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    Demand, Supply, and College Admissions

    Nov 19 • Demand, Supply, and Markets, Households, Thinking Economically • 357 Views

    You might pay $1.50 to get a cup of coffee or $30 for a blouse. But what do students “pay” to get admitted to a college? And, at what “prices” will colleges accept people?  Several researchers developed a supply and demand model of the college admissions process. I found their approach fascinating. 

    First we should identify the different components of their demand and supply graph. They defined price, their y-axis, as “admissions standards.”  You know what they meant. Grades, extracurricular activities, and test scores. Quantity, the x-axis, was the spaces in the freshman class. As for the curves, the applicants were on the demand side. Observing the law of demand, as “price” rose, applications decreased. Meanwhile, the college was on the supply side because those who could “pay” higher “prices” would have more available freshman class slots.

    The researchers’ model assumed there were only 2 colleges. With one known as “better” than the other, the colleges should have attracted students with different credentials. But it did not quite work out that way.

    The Yale Economic Review summarized the 42 page academic paper. Referring to the “noise” of the college admissions process, they said that misinformation, uncertainty, and the “hype of the marketplace” resulted in certain better students selecting the lower quality school. Furthermore, “…higher admissions standards might not correspond to the better college, as long as the worse college is either comparatively good enough or small enough, or if the application process is noisy enough.”

    I do recommend looking at the paper to see the variables that determine who applies where and why.

    The Economic Lesson

    All of this returns us to the function of a market. Through a price mechanism that conveys information, markets allocate goods and services. Perhaps like oil and cotton and bananas, for the college admissions process a rather complicated market determines allocation.

     

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    Yuan Opinions

    Nov 18 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 283 Views

    Can you imagine 43 million pairs of socks a year, 5,000 an hour, some saying Dora the Explorer, being produced by one Chinese manufacturer? When you pay $2.99 for a pair of those socks at Wal-Mart, they probably cost that Chinese manufacturer, Shuangjin Knitting and Textile, 25 cents to make. The Chinese firm then sells its socks to U.S. distributors like PS Brands, the largest importer of Chinese socks. Finally, retailers like Wal-Mart, Disney and Adidas buy the socks from PS Brands.

    Moving in the opposite direction, complex electronic components are sent from the U.S. to China. Staco Systems, a small California firm, exports its aerospace components to Chinese factories. On the retail side, Apple considers China a market for its iPods and iPads as do General Motors and Ford for their cars.

    The Economic Lesson

    This takes us to the pressure the U.S. is placing on China to stop undervaluing its currency. Whether looking at Wal-Mart and Apple or you and me, China’s response will have very real consequences. But the consequences vary.

    A more expensive yuan in relation to the dollar could narrow PS Brands’ profit margins and make retail sock prices rise. But also, it could increase business for Staco Systems and other U.S. exporters. We might find manufacturers transferring businesses from China to other, more cost effective developing nations. Large firms could locate in China to avoid foreign exchange. And all of that is only the beginning of a worldwide ripple responding to the yuan’s ascending value. 

    To what extent is the yuan undervalued? You can look at the Big Mac Index.

     

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    Well-Being Yardsticks

    Nov 17 • Developing Economies, Economic Debates, Gender Issues, Macroeconomic Measurement • 221 Views

    Having just looked at the “Human Development Report 2010” from the UN, I thought of a former mayor of NYC, Ed Koch. Mayor Koch used to ask, “How am I doing?” Let’s assume that an economy can ask the same question. What yardstick would you use for an answer?

    The GDP is a possibility. It tells us the value of goods and services that we produce. If we make more cars and grow more wheat and examine more teeth, then our economy has grown. Can we say that we are doing well if the U.S. is #1 in the world?

    The “Human Development Report” (HDR) has per capita income as one variable but also looks at education, and life expectancy. Using the HDR yardstick, Norway is #1. Separately, the authors of the report look at other variables including sustainability, gender inequality, security, and “decent work.”

    Yet another possibility takes us to the “Index of Economic Freedom.” Using variables that assess the extent that government influences an economy such as trade freedom and property rights, the “Index of Economic Freedom” places Hong Kong at the top.

    The Economic Lesson

    Yardsticks influence economic policy.  Just because we measure something, we tend to want to influence it. So, if we focus on GDP (and whatever components that includes), then we will try to improve it. If employment numbers stand out, then they become most important. Correspondingly, if decide that HDR is our key yardstick, most likely, we will keep a spotlight on its variables.

    Sometimes, the Federal Reserve has a dilemma because it has to decide which yardstick it values most: the inflation yardstick or the one that looks at unemployment.

    Which yardstick do you believe we should use to answer, “How are we doing?”

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    Deficit Denial

    Nov 16 • Economic Debates, Government, Macroeconomic Measurement, Thinking Economically • 265 Views

    According to 96% of the participants in a CBS News poll on the deficit, “We really don’t care.” Jobs were #1 and health care #2 with the deficit far behind.

    According to Washington Post reporter Ezra Klein, that is why “the elite” and policy wonks are talking about the deficit commission’s initial report but politicians are sidestepping it. He suggests that even tax talk is not about the budget but instead about “class resentments.” He does comment that voters would like to see the deficit decrease “But at the expense of other people, not themselves.”

    The Economic Lesson

    If you are a “policy wonk” you will enjoy this NY Times interactive budget exercise. Try it and see if you can reduce the deficit enough by 2015

     

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    Demand, Supply, and Knee Replacement

    Nov 15 • Demand, Supply, and Markets, Government, Households, Innovation, Macroeconomic Measurement, Thinking Economically • 322 Views

    Hearing about knee replacement surgery from a friend, I soon realized it is about much more than an operation. It involves demand, supply, innovation, and the quality and cost of national medical care.

    First the facts: For knee replacement surgery, patients can select a traditional approach or one that is minimally invasive. The vast majority of surgeons have been trained to perform traditional knee replacement surgery. The minimally invasive approach is newer and requires relatively extensive training. A recent study indicated that with the newer approach, not only do patients heal faster but also there were cost-savings “to the health care provider and the health care system.” 

    The question: If current evidence indicates that patients heal faster and the health care system has lower costs, why do most surgeons recommend traditional total knee replacement surgery?

    The Economic Lesson

    Thinking economically about total knee replacement surgery, our goals are well-being, efficiency, and innovation. For the demand side, well-being comes from more success and less dollar cost. On the supply side also, well-being and cost effectiveness are important. Here, though, we have a divergence. It is more (opportunity) cost effective for most surgeons to perform the traditional approach that they already know. Learning a new procedure is time consuming and upsets an established practice.

    What does all of this mean? What might be best for the demand side, for controlling government spending, and for perpetuating the innovation that spurs economic growth is not best for the supply side.

    If we figure out how to change supply side incentives, perhaps we can slow down escalating health care expenses.

     

     

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