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    Food or Energy?

    Apr 11 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 434 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 • 384 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.


    • 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 • 473 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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    Internet Distractions

    Apr 8 • Behavioral Economics, Businesses, Labor • 370 Views

    At work, we “should not be watching that excellent new video of a schnoodle howling along to its own piano playing.” Yes?

    According to New Yorker journalist James Surowiecki, the answer actually is, “No.” Citing recent academic studies, he says that people “addicted” to the Internet are more productive when permitted to indulge during business hours.

    This takes us to “willpower” studies. Presented with a platter of radishes and a platter of chocolate chip cookies, the group asked to avoid the cookies did more poorly on subsequent tasks that required self-discipline. Somewhat similarly, when a group was divided between people who could watch a funny video and those who were not allowed to see it but heard others enjoying it, the people who saw the video then performed a task more accurately then those who did not.

    The Economic Lesson

    Defined as more output per labor hour, productivity results from more inputs (land, labor and/or capital), better inputs, and/or a more effective combination of inputs.

    Surowiecki asks whether we might be more productive at work if company policy permitted us to surf the internet during “internet breaks.”


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  • The Congress and the Deficit

    Budget Issues

    Apr 7 • Economic Debates, Economic History, Government, Macroeconomic Measurement • 397 Views

    There are so many budget issues. How to remember them? You might think of 3 and 8.

    3 decisions:

    1) The shutdown: There might be a partial government shutdown on Friday, April 8, because Congress cannot agree on the 2011 budget. So far, where necessary, short-term measures called Continuing Resolutions (CRs) have authorized 2011 spending.

    2) The debt ceiling: May 16 is now the estimated date on which the U.S. will reach its legal debt limit. While the Treasury says that “extraordinary measures” can be taken to extend the limit to July, still the Congress has to act to avoid default. This brief article from the Concord Coalition ideally explains the debt ceiling issue.

    3) 2012 budget: And finally, there is President Obama’s 2012 budget proposal that has to be considered. This Washington Post interactive provides an overview of the federal budget process.

    8 categories: Congress’s 3 decisions primarily involve debating 8 categories (from the “Battle of the Budgets,” the WSJ (4/6, p. A7).

    1) Medicare, 2) Medicaid, 3) Social Security, 4) Defense Spending, 5) Non-defense Discretionary Spending, 6) Farm Subsidies, 7) Corporate Taxation, 8) Individual Taxation

    The Economic Lesson

    Described in John Steele Gordon’s Hamilton’s Blessing (pp. 22-25), one of the Congress’s first tasks, in 1789, was to generate revenue. The primary source, they decided, would be import duties. Meanwhile, a secondary stream of money would come from excise taxes on everyday goods ranging from carriages (which targeted the rich) to salt, which touched everyone, and whiskey (which led to the Whiskey Rebellion in 1794). Not until the First World War did the income tax become a major source of government funding.

    Meanwhile, on the other side of the ledger, John Steele Gordon tells us that in 1792, outlays were so massive that the budget deficit was 38% of revenues. Then, “except for periods of …crisis, the government would never again run up so large an annual deficit in terms of a percentage of total revenues…until 1992.” (p. 6)




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