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    A Top Selling Artist

    Mar 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Entertainment, Households, Innovation, Labor, Uncategorized • 685 Views

    At a Christie’s auction, a painting of a candle by German artist Gerhard Richter sold for $16.5 million.

    A recent documentary on this 80-year-old artist shows him painting in his studio and attending gallery and museum exhibitions of his work. Neither the film maker nor Mr. Richter say very much. We observe him as he very humanly and humbly assesses 2 paintings as he creates them. At exhibitions, sometimes his discomfort is evident.

    While the movie is rather quiet, the art world has had an electric response to his presence. At exhibitions, photographers and adulation surround him. As the top selling living artist last year, his paintings sold at auction for a total of $200 million.

    Why?

    According to WSJ.com, the supply and demand sides of the market for Gerhard Richter paintings convey a typical success story. On the supply side is a prolific and talented painter whom art galleries and auction houses are “eager…to canonize.” With “a steady volume…but not a glut,” and a retrospective exhibit drawing massive crowds in Europe, the supply side appears to be ideally situated for high prices. Meanwhile, on the demand side, when an artist becomes a sensation, “tastemakers,” dealers, “status seekers” and collectors enter the market with considerable money to spend. Put the supply and demand sides together and you get astronomical prices. At the gallery that represents him in NYC, there is a waiting list for his multi-million dollar paintings.

    The Economic Lesson

    The Price of Everything, a very good book, explains high salaries. With limited supply, sufficiently affluent demand and a huge (adulatory) audience that technology can facilitate, 21st century markets for superstar painters or golfers or rappers can involve huge salaries. Here, a University of Chicago economist discusses the rationale and math behind superstar salaries.

    In some ways, all pricey markets share the same characteristics, even with pigeons.

    An Economic Question: Through a demand and supply graph for an artist superstar, how might you illustrate a high salary?

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    Greek Red Tape

    Mar 23 • Businesses, Government, International Trade and Finance, Macroeconomic Measurement, Regulation, Uncategorized • 681 Views

    Our story begins with 3 Greek entrepreneurs who want to create an e-commerce business selling olive products. It ends as Oliveshop.com begins to flourish with orders from the U.S., Australia, Japan, Mongolia and beyond.

    The middle of the story, though, is the problem.

    Occupying 10 months, these entrepreneurs filled out an avalanche of forms, satisfied tomes of regulations, stood for hours on lines, and endured multiple inspections. The pension office needed proof that that their pension contributions were up-to-date. The Health Department required lung x-rays and stool samples. Greek banks would only process payments if they switched the language of the website from their clients’ languages to Greek. And, there was much more.

    Our bottom line: Procedures ranging from forms to lines to inspections are called transaction costs. The higher the transaction cost, the less likely the activity.

    The Economic Lesson

    During 2011, the Greek GDP contracted by 6.9% while its debt climbed to 165% of GDP. Meanwhile, its unemployment rate is close to 20%. Greek statistics provide tangible evidence of how excessively high transaction costs can retard economic activity.

    In a Teaching Company Course, “America and the New Global Economy,” economist Timothy Taylor tells us the nations with considerable regulation tend to have more corruption. Correspondingly, Transparency.org’s Corruption Perception Index 2011 gives Greece a low grade for 2011.

    In the World Bank’s Doing Business Index 2012, for the “starting a business” category, Greece ranks 135 out of 183 countries. (The U.S. was #13 and New Zealand, #1.)

    This 2012 McKinsey Report looks at Greece’s problems and its potential.

    An Economic Question: How does one new business affect the 4 GDP components (business, consumer, government purchases and exports minus imports)?

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  • Cashing out?

    Mar 22 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Money and Monetary Policy • 770 Views

    By Mira Korber, guest blogger.

    They say “cash is king.” But these days, perhaps cash was king.

    Sweden is becoming a “cashless society.” Commuters pay bus fees via credit card and text message. Religious institutions take electronically transmitted donations.

    The positives?  Certain crime statistics have decreased. In 2008, Sweden experienced 110 bank robberies. In 2011, that number had shrunk to 16.

    The negatives? Cybercrime has increased. In 2000, computerized fraud cases totaled 3,304. In 2011: almost 20,000.

    Being cash-free would certainly lead to a lighter pocketbook. Or might it lead to no pocketbook at all? What would happen to wallet sales? Money clips? Restaurant tips? Jewelry purchases (as in Italy, for example)?

    Read here to learn the implications of a cash-free America.

    The Economic Lesson

    Paying with cash or credit/debit represents a tradeoff. While a cashless society would remedy tax evasion and counterfeiting, it would diminish cash-dependent transactions.

    An Economic Question: When do you use cash and when do you use a credit/debit card? Why?

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    Burger Wars

    Mar 21 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Regulation • 1207 Views

    By Mira Korber, guest blogger.

    Times have changed. Wendy’s is now the second largest fast food chain restaurant in the US.

    This interesting Atlantic article describes how Wendy’s savvy marketing pushed BK from second place to third. By focusing on quality food instead of comic advertising, Wendy’s successfully finished 2011 with higher revenue than Burger King, though it claims 1,300 fewer restaurants.

    Wendy’s marketed their product as the freshest on the market, while BK attempted to lure in young men to their restaurants by using the “king” image in advertisements. It backfired.

    The numbers? BK end of year sales: $8.4 billion; Wendy’s end of year sales: $8.5 billion. Oh wait…McDonald’s devoured both BK and Wendy’s with total sales of $34 billion. That’s a lot of burgers.

    Read this Econlife post from 2011, before Wendy’s officially overtook BK in the final numbers.

    The Economic Lesson

    Wendy’s has differentiated itself by touting its healthy ingredients. Demand for Wendy’s burgers increased because healthy food also increased the utility of the product. With higher utility, more people purchased Wendy’s burgers, and it moved to the #2 spot.

    An Economic Question: How do advertisements affect your demand curve for fast food?

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    Health Care and Commerce

    Mar 20 • Demand, Supply, and Markets, Economic History, Government, Households, Macroeconomic Measurement, Regulation, Uncategorized • 619 Views

    How to define commerce?

    In 1824, the U.S. Supreme Court was asked to decide if New York State could give a monopoly to a steamboat operator. In his decision, Chief Justice John Marshall rejected the narrow “buying and selling” definition of commerce. Instead, he said that commerce included all economic intercourse. Consequently, New York could not confer an exclusive right to travel on interstate waterways because Congress had the power to regulate interstate transport.

    That 1824 decision, Gibbons v. Ogden, was only the beginning. Used to strike down New Deal legislation and to support Civil Rights law, the interpretation of the Commerce Clause has been varied. Now, starting on March 26 with 5 1/2 hours of oral arguments, again the Supreme Court will probably tell us what commerce means.

    The Commerce Clause directly relates to 1 of the 2 major sections of Obama health care legislation that the Court is considering. Called the individual mandate, beginning in 2014, most of us will be required to obtain health insurance coverage or pay a penalty. Does Congress have the authority to mandate coverage? The Commerce Clause will provide an answer.

    Interesting: Reflecting the importance of the issues, the Supreme Court has allocated an unusually long 5 1/2 hours to oral arguments. Also, they will make audio recordings available within hours of their presentation.

    Here, econlife describes the other Affordable Care Act issues that the Supreme Court will ponder.

    The Economic Lesson

    Hoping to promote a single national economy, the framers of the Constitution included a “Commerce Clause” that gave the Congress the power to, “regulate Commerce with foreign nations and among the several states, and with the Indian Tribes.” In Marshall’s Gibbons v. Ogden decision, he specifically says “commerce” includes trade and transportation.

    Here, in an econlife post, you can see historic definitions of the “commerce clause.”

    An Economic Question: How can opponents and supporters of the Patient Protection and Affordable Care Act each use the “commerce clause” to support their position?

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