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    High and Low Energy Markets

    Feb 6 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Government, Households, Innovation, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 562 Views

    Let’s rewind to 2008 for a moment. At $13 per thousand cubic feet, the price of natural gas was soaring. Close to $91 a barrel, the price of oil was exceeding recent highs. Selling for more than $200 per kilogram, even the price of the silicon used to manufacture solar panels was very expensive.

    At the U.S. Department of Energy, people were saying that we had better figure out some better alternatives. Soon, primarily for solar projects, billions dollars of loan guarantees and subsidies poured from federal coffers to support new clean tech energy production.

    And then, everything changed. New technology emerged for natural gas production and its price declined from $13 to less than $3 per thousand cubic feet. The recession diminished the demand for oil and its price plummeted. Meanwhile, the solar panel world was radically changing. Attracting new producers, high silicon prices soon plunged when the supply side of the market was deluged.

    Our bottom line: The power of the market.

    This Wired article tells the whole story.

    The Economic Lesson

    During the 18th century and part of the 19th century, energy and illumination were all about whale oil. Comparable perhaps to Exxon Supreme or Gulf Premium, oil from the sperm whale was considered the best.  Originating in the large cavity of the sperm whale’s head, the spermaceti produced the highest quality whale oil to light the home and use in the factory.

    Always, though, the march of creative destruction continued as new resources emerged. Oil wells in Pennsylvania, Thomas Edison and electricity, new uses for coal…wind, solar, coal, nuclear, petroleum, natural gas. And consistently, the market has selected the “winner.”

    An Economic Question: Knowing “the power of the market,” how much through subsidies, taxes, and grants should government encourage the trajectory of our energy usage?

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    Chinese Oreos

    Feb 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Households, Innovation, International Trade and Finance • 1080 Views

    Everybody in the U.S. knows that eating an Oreo is an experience. You split open the cookie, slowly swallow the filling, and then submerge its chocolate remains in your milk. At Kraft they call it, “Twist. Lick. Dunk.”

    When the Oreo team brought their cookie to China in 1996, they expected that familiar enthusiastic response. Instead, sales were tepid. Consumers said the taste was too sweet and no one knew to “twist, lick and dunk.”

    Taking a second look at the Chinese cookie eater, Kraft decided to redefine the Oreo experience. They made the cookie less sweet, created a cylindrical/straw-like Oreo that dipped but did not divide, and developed nonwhite fillings. With the new product, they marketed a cheaper package that more people could afford and an ad campaign that introduced the dunk in the milk concept. The result? Kraft is now #1 in China.

    Here is an Oreo Wafer Stix ad.

    The Economic Lesson

    Being a trading nation is about more than shipping products abroad. At first it was the 18th century New England merchants who facilitated trade from home. During the 19th century, businesses like I. M. Singer & Co. (sewing machines) secured foreign patents, sold exclusive selling rights to representatives abroad and established foreign manufacturing facilities. Then, the next step was the foreign subsidiary through which the multinational firm increasingly took on the identity of its home away from home.

    And that returns us to the Chinese Oreo.

    An Economic Question: Which multinationals produced your Adidas sneakers, your Bic pens and your Ben & Jerry’s Ice Cream?

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    Jobs Questions

    Feb 4 • Businesses, Demand, Supply, and Markets, Labor, Macroeconomic Measurement • 552 Views

    Hearing that the U.S. economy gained 243,000 jobs last month, wouldn’t you think that there were 243,000 more jobs?

    NY Times financial journalist Floyd Norris explains that actually, the economy LOST 2,689,000 jobs. But, it would be misleading for the Bureau of Labor Statistics (BLS) news release to report the real number because of seasonal fluctuations in the jobs market. Holiday hiring during every December inflates the numbers and then they quickly deflate during January. To compensate for data that would have obscured our true economic trajectory, the numbers were seasonally adjusted…from -2,689,000 to +243,000.

    However, not everyone agrees on the appropriate approach to seasonal adjustment. And that returns us to the problem with statistics. Seemingly objective, a close look (as with college ranking) reveals much more.

    The Economic Lesson

    If you saw more job creation during December 2008, you could have concluded that the economy had entered the road to recovery. However, knowing the holidays were the reason, and that it happened every December, you might have changed your mind. Called seasonal variation, adjusting monthly data to let us see where the economy is going is perfectly explained by the Dallas Fed here. The graph that they include with a seasonally adjusted and a seasonally unadjusted line ideally displays the difference between the two.

    An Economic Question: Before looking at the Dallas Fed’s graph, draw an unemployment graph with unadjusted data for an economy experiencing a worsening recession during one year. Then, eliminating the temporary economic impact of summers and holidays, draw a second unemployment graph for the same year.

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    Pricey Pigeons

    Feb 3 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 658 Views

    At the Paradise Pigeon auction in Belgium, a Dutch breeder sold a female pigeon to a Chinese shipbuilder for $328,000. Purchased to breed rather than race, Dolce Vita (the bird) will enable Hu Zhen Yu, also the owner of a pigeon racing group, to elevate China in a sport that had been dominated by Germany, Holland, Great Britain and Belgium.

    With the capacity to fly more than 60 miles an hour and to cover 500 miles in one day, carrier pigeons are faster than any horse and rider. As a result, sort of like FedEx, they were used to fly stock prices between cities during the mid-19th century before the telegraph replaced them.

    Our bottom line? Prices created by markets convey valuable information.

    The Economic Lesson

    A market is a process that determines the price and quantity of a good or a service. The demand schedule records the different amounts of a commodity, at different prices, that people are willing and able to buy. Correspondingly, the decisions of those who are willing and able to sell different quantities of the item at different prices are the supply side. When they interact, a market results.

    The price of Dolce Vita was more than a number. It represented a wealth of facts about the carrier pigeon market. Because a market created the price, it was meaningful.

    An Economic Question: Think of a $20 sweater and a $100 sweater. What information does each price convey?

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    Super Bowl Economics

    Feb 2 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement, Thinking Economically • 777 Views

    The least expensive Super Bowl weekend in Indianapolis might cost close to $6248. That means you purchased a “nosebleed” seat for $2100 from StubHub, your coach airfare from NY or Boston was $1379 instead of the usual $400, and you are paying $1840 for a 2 night stay in an airport hotel that typically charges $47 a room. For your car, Hertz shifted its normal weekend rate from $102.42 to $429.89 and a parking spot near the game might cost $499.

    $2100 (tickets)+$1379 (airfare)+$1840 (hotel)+$430 (car) +$499 (parking)=$6248

    Other Super Bowl economics? The National Chicken Council reported that on Super Bowl Sunday last year, we consumed more than 1.24 billion chicken wings. Likewise, according to The Big Three (Pizza Hut, Papa John’s and Dominos), we doubled our pizza orders.

    Do Super Bowl cities benefit from a surge in spending? Maybe. It all depends on several questions.

    1. Leakage: Does the money go elsewhere? Does the money spent at Pizza Hut and elsewhere go to a local owner or to the national firm?
    2. Crowding out: If locals stay home, will certain retailers experience less business?
    3. Money transferred: Would some of the money spent for Super Bowl goods and services have been spent elsewhere anyhow?
    4. Investment: How much money did the city spend to prepare for the event?

    The Economic Lesson

    The blip in prices is perfectly illustrated on demand and supply graphs. Perhaps all you need for the supply side is a shift in the curve’s position and also a change in its shape. The shift is upward and the curve becomes horizontal at the new, high price. Meanwhile, you have a demand curve reflecting individuals and businesses that are willing and able to spend astronomical dollars. Combine the two, equilibrium soars, and as a result, a parking space can cost $499.

    An Economic Question: How would you draw a supply and demand graph illustrating skyrocketing Super Bowl prices?

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