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    The Price of Rice

    Apr 13 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 369 Views

    What would make you switch what you eat every day?

    The Indonesian government is using an ad campaign to try to get people to change their daily diet. Their slogan is, “One Day No Rice.”

    With per person consumption at 275 pounds of rice a year, Indonesians are huge rice eaters. McDonald’s serves a side of rice for 35 cents. A typical Indonesian meal could be rice with a side of meat and vegetables.

    Now, with the price of rice having risen (although the UN said the price did not go up during March and that supply was considerable), the Indonesian government hopes to reverse the price trend by decreasing demand. Less rice, though, means more of something else. They are suggesting cassava. But I wonder whether that can work. You might want to look here to see how China is affecting the price of cassava.

    The Economic Lesson

    Indonesian rice policy seems to be fighting the law of demand. According to the law of demand, price and quantity demanded are inversely related. Higher price and we want less; lower price, we are willing and able to buy more.

    Let’s assume that people do eat less rice. Then, demand shifts to the left and price descends. You can predict what happens next. And, the story gets even more complicated when we look at US rice subsidies.

    Maybe the only true solution is to let price rise. Your opinion?

     

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    Your Budget Proposal

    Apr 12 • Government, Innovation • 320 Views

    Several months ago, the NY Times published an interactive budget exercise. The goal was for each of us to decide how we would deal with a skyrocketing deficit. Now, with President Obama scheduled to present a major speech on his budget proposals, you might enjoy going here, to decide how you would handle the same challenge.

    As for an update, the WSJ yesterday had more news about last Friday’s budget deal. Rather brief, they said it reflected, “What’s Known So Far.”

    What we do know is that the government did not partially shut down at midnight last Friday because of a short-term spending bill that was passed. That will take us to this Thursday at midnight when again, further action will be necessary.

    “What is known so far” relates to Friday’s agreement on $39 billion in cuts for the 2011 budget that never was approved by the Congress.

    • Defense spending: less of an increase in spending
    • Departments of Labor, Education and Health and Human Services: cuts
    • State Department and foreign aid programs: cuts
    • “Earmarks”: cuts
    • Future nonprofit health insurance cooperatives: cuts

    You might also want to look at the report from the fiscal commission that President Obama appointed. Called “The Moment of Truth,” you can see it here.

    The Economic Lesson

    Specifically defined, federal fiscal policy refers to taxing, spending, and borrowing. It involves the federal deficit which is the shortfall between annual spending and revenue. The federal debt is the total amount that the U.S. government owes.

     

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    Food or Energy?

    Apr 11 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 404 Views

    Biofuels create dilemmas. Whenever nations mandate converting corn or sugar into biofuel, their prices soar. People whose diets depend on these commodities are the first to suffer.

    What to do? Lower food prices or increase energy conservation?

    China’s answer was to ban using grains for its biofuel. Sort of like patching a leaky boat, the problem just shifted.  Now, the NY Times tells us that instead of grains, China is using cassava chips. A major Thai export, cassava chips have soared in price. Predictably, the millions in Africa for whom cassava is a dietary basic, face higher prices and shortages.

    The Economic Lesson

    Demand, supply and opportunity cost tell part of the story. Whenever demand shifts to the right for a commodity, the price increases. Then though, the supply side rethinks its planting decisions. The opportunity cost of remaining with a cheaper commodity becomes too high. As a result, growers have the incentive to switch their crops. Then, supply increases and price drops.

    The other part of the story involves the role of government. Do you agree with government mandating energy sources?

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    Restaurant Economics

    Apr 10 • Behavioral Economics, Demand, Supply, and Markets, Labor, Thinking Economically • 352 Views

    For a new restaurant in Chicago, Next, no one is sitting at the phone taking reservations. Instead, online, you can buy a ticket for a table seating 2 or 4 (not 3 or 5). According to Chicago Magazine, the tickets are nonrefundable, include the tip and tax, and extras such as wine.

    Benefits?

    • No “underutilized” seats (capital) because a table for 4 has 4 paid for instead of the 3 people who might be dining.
    • No telephone reservationists (a labor saving approach).
    • Variable pricing, based on demand and costs. The owners plan to use peak pricing by charging more for the 7 pm Saturday reservation that everyone wants and less for 9:30 on Tuesday evening. Then, like airlines, prices can change as demand changes.
    • And finally, through the new software designed for this approach, they are changing the market structure for online booking; OpenTable, where most people book online, will have new competition.

    With a waiting list of thousands, Next restaurant tickets are being resold on Craigslist and eBay.

    The Economic Lesson

    Proving again that economics need not be the dismal science, a restaurant can provide examples of capacity utilization, demand and supply, variable pricing, technological innovation, and competition.

    Chef Achatz referred to diminishing returns in a recent interview when he said that he believed in small portions (and a 23 course meal).

     

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    Comparing Central Banks

    Apr 9 • Developing Economies, Economic Debates, Financial Markets, Money and Monetary Policy • 435 Views

    Perhaps we can divide the world between inflation fighters and recession fighters.

    Right now, most of the inflation fighters are in the developing world. In Brazil, Russia, India and China (the BRICs), more expensive food and energy and growing demand are fueling price increases. In Peru and Mexico, the story is the same although the numbers differ. As a result, monetary authorities are raising borrowing rates.

    On the other hand, the U.S. Federal Reserve, the Bank of England and the Bank of Japan, are targeting economic growth by keeping rates close to zero

    Finally, we do have a third group, including the European Central Bank (ECB) and Australia that is reversing easy money policy with rate hikes

    The Economic Lesson

    Central banks are the bankers’ banks that oversee a country’s supply of money and credit. For economic growth, you need the right balance between money and production. If the balance is wrong, then the result is recession or inflation or both.

    A recession is characterized by a declining GDP and increasing unemployment. To fight it, central banks target lower interest rates that will stimulate economic activity.

    By contrast, inflation involves rising prices that can spiral out of control. To stop their ascent, central banks try to use a diminished money supply or slowly growing money supply and higher interest rates to reign in economic activity. With less demand throughout the economy, they hope that prices will stop rising.

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