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    Giraffes and Levis

    Mar 8 • Demand, Supply, and Markets, Households, International Trade and Finance, Macroeconomic Measurement, Uncategorized • 654 Views

    French fashion, food, wine and now a French giraffe.

    Most French moms buy Sophie for their newborns. Seven inches tall, with brown spots, black eyes and pink cheeks, she is just a rubber toy giraffe that squeaks. In French supermarkets, her price is $12.

    In the U.S., Sophie is a $25 giraffe with cachet. Exactly the same as her French sisters, her “Made in France” label, her natural rubber body, and her small-scale production differentiate Sophie from mass produced Chinese baby toy imports like Elmo and Big Bird. In the U.S., because Sophie is special, her sales are soaring.

    Sophie reminds me of Levi’s in Communist Russia. Patented in 1873, Levi’s have always been utilitarian. However, in the former Soviet Union approximately 20 years ago, their “made in the U.S.A.” label made them a fashion icon .

    The Economic Lesson

    Looking at the total value of toy, doll and game imports from January to September, 2011 for 25 countries, France is #19 at $6 million. At the top of the list is China, then Japan and Mexico.

    Because numbers from the St.Louis Fed indicate the U.S. imports more from France than we export to France, our trade balance is negative.

    An Economic Question: Discussing trade, economists typically mention David Ricardo and the law of comparative advantage. Might French toy manufacturers have a comparative advantage over China?

     

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    Wait, you actually read the privacy policy?

    Mar 7 • Uncategorized • 670 Views

    By Mira Korber, guest blogger.

    How often do we see “Privacy Policy” at the bottom of a web page? All the time. How often do we read beyond the alliterative title? At least for me, almost never.

    And thankfully so, because those privacy policies would surely be gobbling up a lot of time. According to this entertaining article from The Atlantic, a pair of researchers from Carnegie Mellon University decided to determine all the time we would spend responsibly reading all the privacy policies we encounter in a year.

    Here are the numbers:

    • Median length of a privacy policy: 2,514 words
    • Time required to read: approx. 10 mins
    • Number of sites we visit with unique privacy policies: approx. 1,462
    • Individual time required to read all these policies: 25 days straight or 76 business days
    • Aggregate time required for reading: 53.8 billion hours

     

    Next, those clever researchers decided to calculate the opportunity cost of spending all that time with your nose in a privacy policy. Their answer: $781 billion (which is larger than Florida’s GDP).  Check out their official study here.

    So it’s evident to everyone by now that reading privacy policies keeps us from doing other big important things.

    BUT…

    Curiosity finally overcame my general laziness regarding reading Google’s new “This Stuff Matters” privacy policy. It’s controversial because it tracks your online activities, YouTube searches, and web queries more closely than ever before. Incidentally, users can’t avoid Google’s omnipresent eyeball.

    Here are some creepy consequences of this new privacy policy’s power.

    The Economic Lesson

    Every decision comes with an opportunity cost. It’s what you sacrifice when you choose to do anything at all.

    For example:

    (1) Your opportunity cost of watching a horror movie may be getting a restful night’s sleep. (2) Your opportunity cost of reading a privacy policy may be searching for that suitably scary horror movie online.

    (By the way, Google will probably know if you choose to search for either privacy policies or horror movies, due to the company’s new privacy policy itself.)

    An Economic Question: Have you ever considered the opportunity cost of other mundane daily activities similar to reading privacy policies?

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    Everyone Hates Free Parking

    Mar 6 • Uncategorized • 665 Views

    By Mira Korber, guest blogger.

    Last Friday evening, two unexpected things happened at the highly attended Palm Beach International Equestrian Center (PBIEC) “Nations Cup” event.

    1. I saw Donald Trump in the flesh — he’s very tall — from about two feet away.

    2. I noticed an unusual parking situation. The “free” lot held 12 cars. The $20 parking fee lot housed (from my best guess) between 1,000 and 1,500 vehicles.

    I would have expected the free lot to be full; a shiny complimentary shuttle bus carted me to the event and back while paying customers eked in and out of full “lots” (riding arenas at the showgrounds) at a painfully slow rate.  In fact, my sleek “free parking” shuttle bus followed Donald Trump’s top of the line Mercedes right out of the horseshow.

    Why weren’t more people on that “free” shuttle efficiently following Mr. Trump off the premises?

    “Free parking,” on principle, sounds “worse” than parking you have to pay for. The old maxim, “You get what you pay for” seems to have caused the sparsely-populated free lot. Demand was higher for a more expensive service because the consumer automatically expected it to be better.

    This fascinating paper from Wharton School of Business (“When Do Higher Prices Increase Demand? The Dual Role of Price in Consumers’ Value Judgments”) explains the idea with case studies and experiments. Though the paper states that “an unequivocal positive relationship between price and perceived quality is yet to emerge,” it cites some situations that reflect the scenario where high price leads to high demand.

    A parallel to my parking story emerges with the following case study (pg. 3): a $79 piece of technology called the Minivac 601 gained a strong customer base in schools and home users. Large corporations, however, dissed the product. But when Minivac 601 became Minivac 6010, and its price went up to $479, suddenly the product had purchasing appeal to large companies. The new, expensive Minivac was simply a different color and slightly modified design, but nothing more.

    For some people, free parking costs too much.

    The Economic Lesson

    Demand reflects decision-making. In the case of parking at PBIEC, I witnessed a greater demand for paid parking than free parking. Attendees determined that paid parking had a greater utility because it validated their status as wealthy spectators.

    While one might expect the demand curve for free parking to be horizontal and almost infinitely long, it turned out to be shorter than the paid parking curve because it offered lower utility (status) to consumers.

    While this doesn’t really make a lot of sense, it turns out our human behavior doesn’t follow rational economic theories. Daniel Kahneman, 2002 winner of the Nobel Prize, explains our irrationality, quite rationally.

    An Economic Question: Have you ever dismissed something as “too cheap” to be any good?

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    A Gas Price That Might Matter

    Mar 5 • Demand, Supply, and Markets, Developing Economies, Economic History, Environment, Households, International Trade and Finance, Macroeconomic Measurement, Thinking Economically, Uncategorized • 874 Views

    Is it $4.11?

    Although gasoline prices are rising, consumers have not altered their driving habits. Economist James Hamilton suggests that the tipping point tends to be when prices exceed the highest point during the past 3 years. That number is $4.11 or $4.27 if we account for inflation.

    Currently, the average price per gallon of regular in the U.S. is $3.72 while Wyoming has the cheapest gas at $3.16 and California has the most expensive at $4.33.

    Looking beyond our borders, though, $4.33 can seem pretty low.  For these countries, fuel taxes elevated prices. (March 2011 data)

    • U.S.: $3.59
    • Istanbul, Turkey: $9.63
    • Oslo, Norway: $9.27
    • Athens, Greece: $8.50
    • Amsterdam, Netherlands: $8.01

     

    On the other hand, subsidies can make the price per gallon of gasoline pretty low:

    • Caracas, Venezuela: $.06
    • Riyadh, Saudi Arabia: $.45
    • Doha, Qatar, $.88

    For 170 countries, these graphs are ideal except that the data is for 2010.

    Finally, where are we historically? Going way back to 1919 when the price of gas was close to 25 cents–the equivalent today of $3.35–this graph provides a fascinating picture of where gas prices have been. At all time highs now, real prices were slightly lower when they peaked during 1981 and 2008.

    The Economic Lesson

    Observing the impact of gasoline price swings on consumer purchases, economists cite our elasticity. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price changes have a big impact on buying, then our response is elastic.

    An Economic Question: If, at $4.11 per gallon, we start to buy a lot less gasoline, then how might you use elasticity to describe the change in our buying decisions?

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    Superstar Pay

    Mar 4 • Demand, Supply, and Markets, Households, Labor, Macroeconomic Measurement, Uncategorized • 740 Views

    With Kobe Bryant earning $25 million and the average NBA annual salary at $5 million, still, the NBA pay scale does not seem to trouble us. And, even though our 2009 average household income was $52,229, Jeremy Linn’s $800,000 sounds low.

    By contrast, mention the top 1%,  financial “superstars” and Fortune 500 CEOs, and the reaction is not so positive.

    Harvard economist Kenneth Rogoff asks why we approve of astronomical salaries for NBA superstars but not for top Wall Street earners or CEOs. Because athletes are role models? But not all are. Global fame? Wall Street names can be known beyond national borders.

    Our bottom line: The economics of wages involve demand, supply and very different labor markets.

    The Economic Lesson

    Taking us to the huge audience that technology facilitates and the aggregate spending power of an affluent society, The Price of Everything explains high salaries. Focusing, on similar ideas, a University of Chicago economist discusses the rationale and math behind superstar salaries. He even compares Luciano Pavarotti to Mrs. Billington, an 1801 superstar Italian opera diva.

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

     

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