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    A Tank of Gas

    Apr 27 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Households, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 554 Views

    A tank of gas is not just a tank of gas.

    Isn’t it a spending decision? The national average for a gallon of regular is close to $3.88 and higher in California. July 2008 was the last time we dealt with 4 dollar gas. One economist estimated that 4 dollar gas cuts our discretionary income by 5%. That means less to spend on meals, vacations, clothing, and furniture.

    Also, a tank of gas represents much more than crude oil. If you imagined the price of gas as a pie, then a 68% slice is for the oil. Add in 12% for taxes, 7% for marketing and distribution, 13% for refining and you get the 4 dollar total.

    What else can an expensive tank of gas mean? With higher gas prices, AAA emergency gas deliveries to stranded motorists are soaring. Higher gas prices could lead to .5% less GDP growth. And, President Obama’s popularity is affected by gas prices.

    The U.S. Energy Information Administration website has great stats about any gas fact you need. Also, you might enjoy looking at this Washington Post poll about how high gas prices have to go before we drive less.

    The Economic Lesson

    Gas provides perfect examples for econ vocabulary. With the price of a gallon of regular gas close to $4.00, the opportunity cost of running on empty has diminished. 4.00 gas also affects our discretionary spending. And, of course, it all starts with elasticity. At what price will we buy less gas? Many have said that $5.00 is the point at which our inelastic demand becomes elastic.

     

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    Money and Happiness

    Apr 26 • Behavioral Economics, Developing Economies, Economic Debates, Households, Innovation, Thinking Economically • 364 Views

    It is possible, after all, that money can make us happy.

    A recent Brookings paper from 3 University of Pennsylvania researchers concluded that people experience greater “subjective well-being” or life satisfaction when they are more affluent. Comparing rich and poor individuals in countries, they found that the rich were happier. Looking from one nation to another, they concluded that people in nations with a higher per capita GDP were more satisfied than those in lower per capita GDP countries. And finally, with economic growth their third focus, they observed that people became more satisfied with their lives as the GDP increased.

    You might enjoy this CNBC interview of the researchers who concluded that money does make us feel better.

    How do you measure happiness? You could look at the World Values Survey a recent Gallup World Poll, or Eurobarometer information to see data that researchers have used. For example, they actually found that in richer countries, people smile more. (But they did not experience more love.)

    The Economic Lesson

     Not everyone agrees that money brings happiness.

    For economist Richard Easterlin, measuring the connection between money and happiness takes us to diminishing marginal utility. Easterlin says that as wealth accumulates, it bestows increasingly less extra satisfaction. Believing that that pleasure from wealth is relative, he also expressed the Easterlin Paradox. As long as you have more than your neighbor, you feel good.  Consequently, rich or poor, people just need to have more than someone else to feel good. 

     

     

     

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    “Buy Australian?”

    Apr 25 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 452 Views

    In Australia, concerned about the impact of twin disasters in Queensland this summer, Australia is saying, “Buy Australian.”  But they just faced an unexpected problem.

    The T-shirts they are using to publicize the campaign were made in Bangladesh and the U.S. Buying Australian made T-shirts would have cost up to $10.00 each. The Bangladesh T-shirts were $5.12.

    Is that bad?

    It depends on who you are. Shirts North, a T-shirt seller in Cairns, was unhappy. Consumers and taxpayers, though, should have been pleased.

    Nobel prize winning economist Milton Friedman (1912-2006) would have reminded Australians that buyers were saving money on cheaper imports while sellers would create new jobs in exporting industries. Commenting on publicity received by the local businesses harmed by floods, he would have called them “visible.” By contrast, consumers are “invisible.” Anonymous and invisible, the millions who benefit typically have no newsworthy evidence.

    The Economic Lesson

    David Ricardo (two hundred years ago) stated the classic defense of free trade when he expressed the principle of comparative advantage. Trade, trade, trade, he said because each nation then can do what it does best (where it has the comparative advantage) and the whole world benefits through greater efficiency.

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    Egg Surprises

    Apr 24 • Businesses, Demand, Supply, and Markets, Thinking Economically • 420 Views

    Egg prices are actually down. Averaging $1.73 a dozen during March, egg prices have fallen by 5% from March a year ago. So, yes, the CPI says the increase for food prices is up 2.7% during the past 12 months (March 2010-March 2011). But not for eggs.

    We could say that egg producers are in a squeeze between higher costs and lower demand. The higher costs come from more expensive corn feed and higher transportation costs. Meanwhile people are eating fewer eggs. This year, consumption is projected to be equal to last year at 247.7 eggs per person. (In 1950 it was 389.)

    Usually, egg demand increases during Easter. But even that is predicted to be less than usual. Did you know that Thanksgiving and Christmas are the biggest holidays for eggs? Easter is #3.

    The Economic Lesson

    The egg industry is composed of many small producers. And therein lies the problem from the supply side. We have a competitive environment where producers are price takers.

    Imagine a line representing different competitive market structures. The far left side of the line is labeled perfect competition while the far right side is monopoly. Very similar products such as eggs and unpackaged lettuce tend to be sold in markets that are on the left side of the scale. Their producers have little power over price because their goods look just like someone else’s.

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    Green Elasticity

    Apr 23 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Government, Households, Thinking Economically • 527 Views

    Sales of Nature’s Source Scrubbing Bubbles tub have plunged by 61%. At Stop & Shop, “Eco-friendly” people are switching from Clorox Green Works All-Purpose Cleaner to traditional Fantastic. Why? Because Fantastic is 40 cents cheaper. According to the NY Times, “…if it’s one or two pennies in price higher, they’re not going to buy it.” Only green brands with a more affluent customer are not experiencing a similar decline.

    Food columnist Mark Bittman has a suggestion. Focusing on food, he says the US government should subsidize organic, small farmers who sell directly to customers. The result? “Green” products will be cheaper. Should we take this a step further and propose green subsidies for household cleaners. And maybe, still, a step beyond that and raise the tax on gasoline so that we conserve energy?

    Your opinion?

    The Economic Lesson

    With incomes falling during the recent recession, the green response has been elastic. Called the income elasticity of demand, we tend to buy less of certain products when our purchasing power decreases and more when it rises. For other products, our quantity demanded is inelastic because, as with medication, quantity demanded changes less. 

    With gasoline and price subsidies, an economist would take us to the price elasticity of demand. Here, the principle is the same as with income but instead, the price is the key variable affecting how much we buy. When price changes have a large impact on the quantity we demand, then our demand is elastic. If our response to price change is minimal, then our quantity demanded is inelastic.

    Should government policy use our demand elasticity to influence our buying decisions?

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