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    Creative Destruction and the Independent Bookstore

    Dec 26 • Businesses, Demand, Supply, and Markets, Economic Thinkers, Innovation, Macroeconomic Measurement, Thinking Economically • 660 Views

    The buggy whip, the typewriter, and now, maybe the independent bookstore?

    In a NY Times Op-Ed, author Richard Russo criticized Amazon for business tactics that would harm independent bookstores.  He cited friends who said, “They don’t win unless they destroy their competition…” and called their price check app “invasive and unfair.” He quoted one author who said “…losing independent bookstores would be ‘akin to editing…a critical part of our culture out of American life.'” Or, as a bookstore owner explained, “If you like seeing the people in your community employed, if you think your city needs a tax base, if you want to buy books from a person who reads, don’t use Amazon.” And finally Russo said that Amazon had become “too big to care.”

    Responding in a Slate column, journalist Farhad Manjoo focused on the benefits of paying less. Authors sell more books, consumers have extra money to spend locally and the economy enjoys more efficiency. Rather than doing harm, Amazon’s e-publishing and e-reader innovations have expanded the publishing world.

    Does the “inefficient” local bookstore deserve preservation?

    The Economic Lesson

    Joseph Schumpeter (1883-1950) best explained the march of new ideas as creative destruction. Overcoming resistance from the people and firms who become obsolete, economies grow as innovation replaces existing goods and services.

    An economic question: Using the independent bookstore as an example, cite examples of the cost and benefit of “creative destruction.”

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    Plane Colors

    Dec 25 • Businesses, Demand, Supply, and Markets, Labor, Regulation, Thinking Economically • 595 Views

    If you are flying during the holidays, do take a look at the color of your plane.

    Is it rather bland?

    The reason is deregulation. After 1978, when government stopped approving fares, guaranteeing profits, and allocating routes, the world of flying changed.

    Before 1978…

    If you wanted to fly from NYC to Washington, D.C., you could take the Eastern Airlines shuttle. The sole source of the service, Eastern guaranteed a seat to every customer. Arrive late and the plane is full? Eastern said, “Not to worry. We have an extra plane.” Similarly, Braniff Airways commissioned artist Alexander Calder for artwork on the outside of planes and had designer uniforms for its stewardesses. Neither Eastern (1991 bankruptcy) nor Braniff (1982 bankruptcy) survived deregulation.

    After 1978…

    Now, in a deregulated world, competition rather than government determines profits. Because painting planes is expensive, airlines avoid colors that need upkeep. Not only is the plane out of service for more than a week but also, you need a lot of paint–250 gallons for a jumbo jet and 60 for something smaller like a Boeing 737.

    More from econlife on airline deregulation, here and here.

    The Economic Lesson

    Deregulation transformed flying. Pre-1978, airlines enjoyed the benefits of monopoly. Afterwards, when the market changed to oligopoly, airlines had to worry about costs, fares, and responding to competition. Here is an excellent video from Annenberg that includes a segment on the impact of airline deregulation.

    I just heard in a podcast that being a good economist means lifting the veil off of the unseen. Have you ever thought about the impact of deregulation on the color of an airplane?

    An economic question: How were consumers affected by airline deregulation?

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    Paying Kids For Good Grades

    Dec 24 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Households, Innovation, Thinking Economically • 693 Views

    What happens when you combine a $100 student payment with a teacher bonus for high A.P. grades, better lab equipment, free tutoring, Saturday classes and extra teacher training?

    At one Boston school, the results for an A.P. statistics class were:

    • A surge in enrollment from 12 in 2008 to 61 in 2010.
    • A grade of 3 or more for 70% of the class including 31 low-income students.
    • A grade of 5 for 1/4 of the class. Worldwide, 13% of all students taking the A.P. stat test got the highest grade.
    • A $7300.00 cash bonus for the teacher.

    Paying kids for grades is controversial. This NYC program was discontinued.

    Here, a Harvard professor discusses the issues that surround money for grades and why it can fail. His conclusions indicate that “traditional price theory” (i.e. a high price) might not work for grades but they can be successful for other tasks such as reading books.

    The Economic Lesson

    Paying for grades related to supply and demand.

    • Supply: Land, labor and capital became cheaper because a nonprofit was providing teacher training, student preparation (tutoring) and lab equipment.
    • Demand: The high price that the school was willing and able to pay crossed the supply curve at a large quantity.  As a result many students were willing and able to “produce” A.P. scores of at least 3.

    Harvard research implied, though, that it was crucial to have had teacher training, student preparation (tutoring) and lab equipment.

    An Economic Question: How might you draw demand and supply curves that illustrate a before and after for the market in AP grades? Assume that what is paid for good A.P. grades can include money and intangibles like pleasure.

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    Fast (and Slow) Food

    Dec 23 • Businesses, Demand, Supply, and Markets, Households, Innovation • 750 Views

    Wendy’s is about to pull ahead of Burger King in the U.S. The reason? People care about their lettuce and the shape of their burgers. Led by new ownership, Wendy’s now has 11 different greens (not just iceberg), a slightly rounded bun and burger, and russet French fries with “gourmet” salt. Maybe though the 2010 stats for the U.S. say it all. 

    • McDonald’s: 14,027 stores; $2.3 million sales per store
    • Wendy’s: 5,883 stores; $1.4 million sales per store
    • Burger King: 7,264 stores; $1.2 million sales per store

    Other food strategies…

    1. Competing for the “casual dining” market, Olive Garden discovered that gnocchi can make a difference…but only if it is in chicken soup. As for pesto, it was rejected as too green (and strong and oily). 
    2. Referring to TCBY’s successful pistachio frozen yogurt launch, a restaurant trade letter says that pistachio nuts may be the 2012 hot item because they are “exotic but not threatening.” 
    3. And finally, molecular gastronomy with an ultra slow souvide approach will be crucial for upscale restaurants. 

    The Economic Lesson

    On a scale of most competitive to least competitive, the 4 basic market structures are perfect competition, monopolistic competition, oligopoly, monopoly. Competing in monopolistically competitive markets, restaurants try to create a unique identity because there are so many similar firms. Beauty salons, clothing manufacturers and supermarkets also compete in monopolistically competitive markets.

    An economic question: In product markets and factor resource markets, how do restaurants compete?

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    Looking back at 2011

    Dec 22 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Financial Markets, Government, Labor, Macroeconomic Measurement, Money and Monetary Policy • 587 Views

    After looking at these 18 charts, I thought, what you learn depends on whom you ask. Created by Washington Post journalist Ezra Klein, the slide show is from “some of his favorite economists” who were asked for “the graph that had done the most to influence their thinking in 2011.”

    My concern is that the topics are precisely what you would expect. Most focus on the U.S. budget, health care, debt, jobs, inequality, interest rates. Even when targeting the developing world, the connection is their savings feeding our debt. Tyler Cowen’s graph is the only chart that relates to innovation.

    Yes, I do recommend looking at the 18 charts for a quick summary of key issues. However, if you ignored headline topics about the U.S., where would you focus?

    The Economic Lesson

    Economist Michael Mandel has said that our economic yardsticks shape our problem solving. The GDP, for example–a total of investment (tools, equipment types of items–not stock market), consumer spending, government spending and exports minus imports–insufficiently focuses on key areas of local and globally interwoven activity.

    His point?  What we measure determines government policy. 

    An economic question: If you were creating 10 charts that not only looked back on 2011 but would take our focus forward productively, which topics would you select? 

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