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    Coupon Economics

    Apr 16 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Thinking Economically • 434 Views

    When Starbucks raised its prices during the beginning of 2010, it lowered the price of a tall regular to $1.70. But, if you wanted a splash of foam, a shot of espresso, or a touch of flavor, the addition could be expensive. For a triple grande soy vanilla latte, you would have paid a whopping $6.25.

    Their goal, I suspect was to attract coffee lovers who would spend a little and those who would spend a lot. For a basic cup of coffee, the price would be low. However, those who were willing and able to pay more would also be satisfied. In that way, Starbucks could retain a dual clientele.

    NPR’s Planet Money explains how Groupon takes advantage of the same idea. People willing to expend the time and energy looking for coupons pay less. But businesses still can take advantage of the group who, ignoring the coupons, are willing to pay more. Again, the business owner can benefit. She does not have to offer lower prices to everyone.

    The Economic Lesson

    Starbucks and Groupon are engaging in what economists call price discrimination. The perfect example is airlines. An airline knows, for example, that a business traveler might be willing and able to pay more than a vacationing student. Their task is figuring out how to charge the businessperson more. The answer? Give discounts to people who stay over a Saturday night. The price discrimination is not explicit and yet, business fliers are charged a higher price. 

    In economics textbooks, price discrimination is typically discussed in chapters on monopoly. A monopoly and a smaller firm with a unique good or service have pricing power that have enables them to target different customers with their prices and coupons. Movie theaters discriminate by charging senior citizens less.

    Do you think that colleges engage in price discrimination through financial aid?

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    Geography Matters

    Apr 15 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Households, Innovation, Macroeconomic Measurement • 367 Views

    According to Harvard economist Ed Glaeser, big US cities deserve our attention. Rather like a ripple, first, as ports, they attracted commerce. Commerce led to more affluence. The affluence brought more people. The people wanted better education. Better education generated more innovation. Combine people, income and education and they attract more people, income and education.

    Statistical proof? Los Angeles, New York, and Chicago represent almost 20 percent of the US GDP. The 2000 and 2010 Census Reports also tell us that the trend continues. People are gravitating toward the US West and East Coast.

    Such a wealth of data has immense significance for the budget debate. Among the many issues cited by Dr. Glaeser, he asks “whether attempts to bolster depressed areas are actually stopping people from migrating to areas where they might lead more productive, happier lives.” Your opinion?

    The Economic Lesson

    In a wonderful Teaching Company lecture, Macalester’s Dr. Timothy Taylor, explains why sub-Saharan African geography hindered their economic growth. Lacking port cities for international trade and rivers that connected to the interior, trade and development were constrained.

    Apply the same variables to the US and you can see how geography matters.


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    Baseball Salaries and Taxes

    Apr 14 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Labor • 364 Views

    There is a connection between baseball and President Obama’s budget proposals.

    Let’s start with USA Today’s baseball salary database. For 2011, at $32 million, NY Yankees’ 3rd baseman Alex Rodriguez earns the most; #2 is LA Angels’ outfielder Vernon Wells at $26,187,500 and #25 is Boston Red Sox pitcher John Lackey at $15,950,000. Much lower but still astronomical, the median salary for the NY Yankees is $2,100,000 and for the Boston Red Sox, $5,500,000.

    Historically, the numbers reflect a huge increase. In 1990, at the top were Milwaukee Brewers’ outfielder Robin Yount, and Minnesota Twins outfielder Kirby Puckett who were earning, respectively, $3,200,000 and $2,816,667.

    Comparing top baseball salaries, can we say that the rich are getting richer?

    This takes us to a University of Michigan blog from Professor Mark Perry. Disagreeing with UC Berkeley Professor Robert Reich that the rich are getting richer, Dr. Perry points out that today’s rich are different people from those with massive net worth 20 years ago. (You could look here for Dr. Reich’s position.)

    Because of “considerable” income mobility and rising incomes, there were meaningful shifts in the actual people in the different income brackets. Many households in lower income quintiles moved up while those in top groups fell. The “…share of income of the top 1 percent is higher than in prior years…” but it is a different group of households.

    So yes, the rich are richer. But, it is not the same people.

    How does this relate to the President Obama’s budget proposals? It relates to tax policy. Believing that incentives fuel economic growth, those who care most about income mobility tend to support tax cuts for the affluent.

    Your opinion?

    The Economic Lesson

    A very real issue that concerns economists is income distribution.  In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated. To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz.

    *Original content has been minimally edited.

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    The Price of Rice

    Apr 13 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 386 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 • 338 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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