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    Apple vs. Amazon in the Fight Over Gaga

    May 27 • Businesses, Demand, Supply, and Markets, Households, Innovation, Thinking Economically • 494 Views

    From a guest blogger, Frances Bird, AP econ student:

    Lady Gaga, America’s current pop queen sensation, is being used to boost Amazon sales, if not permanently, then temporarily. Amazon is using Lady Gaga’s recent album, Born This Way, to compete with Apple Inc.’s iTunes in the digital music industry. While iTunes is selling the album for $11.99 and each song for $1.29, Amazon is selling the album for $6.99, $2 below wholesale prices!

    Amazon is using amazing discounts to woo customers while Apple sits back and attracts consumers. Amazon can barely make a dent in the sale of music on iTunes because Apple products are the best in the business. Forget about price competition. Apple Inc. doesn’t need to lower prices to attract consumers!

    On another note, Lady Gaga cannot be forgotten when talking about economics and Born This Way. Lady Gaga is a marketing genius because she is unique and she is real. Gaga has transformed the music industry, tearing up the standard of what famous people are supposed to wear and how they are supposed to look. Each stunt Gaga pulls is unique and unconditional, which makes for a truly shocking and awesome performance. Lady Gaga fights for a cause and she fights hard, so everyone knows what she truly believes.

    Maybe Gaga taught Apple a lesson on how to fight for what you want!

    The Economic Lesson

    With Amazon’s fight to be in the running, what market is the music selling industry a part of?

    An Economic Question: When trying to pursue something difficult, think of the strategies you could use economically to end up on top. After all, Lady Gaga did not become famous because of her musical talent.


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    Barbecue Inflation (A Hot Topic?)

    May 26 • Businesses, Demand, Supply, and Markets, Economic Debates, Macroeconomic Measurement • 593 Views

    Shopping for your Memorial Day barbecue, you will pay close to 29% more than a year ago. According to the New York Post, not only is a gallon of gas up 44% in the NY area, but also, lettuce will cost you 28% more and tomatoes, 86%. In addition, the New York Post shopping list included hamburger meat, hot dogs, potato salad, supermarket ice cream and coffee.

    Last March, NY Federal Reserve Bank president William Dudley tried, with little success, to convince people to focus on an increasingly healthy economy in which prices were not rising. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful.” In response, one person in the audience said, “When was the last time, sir, that you went grocery shopping?”

    The Economic Lesson

    Still though, the Bureau of Labor Statistics (BLS) reports an annual inflation rate of 3.2% and an annual “core rate” of 1.3%.

    How can we have such a discrepancy between respected stats and everyday reality? The key is the philosophy behind the yardstick we use to measure price increases, the Consumer Price Index (CPI). All agree that the CPI reflects the price of a market basket of goods and services. However, what should be in the basket?

    As the source of the “all items” 3.2% inflation rate, the entire CPI market basket includes many goods and services beyond food and energy. Meanwhile, the 1.3% inflation rate is called the “core rate” because it excludes food and energy prices.

    You might wonder why many economists respect the core rate. 1) They say that price fluctuations for food and energy are volatile; 2) Food prices are too dependent on such temporary circumstances as weather; 3) Compared to other goods and services, food prices play a lesser role in the economy; 3) Changes in food prices cannot be moderated by monetary policy.

    An Economic Question: Explain why you believe the “overall rate” or the “core rate” is more valid for deciding whether inflation is a problem?


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    Too Big To Fail

    May 25 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Financial Markets, Households, International Trade and Finance, Money and Monetary Policy, Regulation • 451 Views

    The HBO documentary, “Too Big To Fail” was excellent. But what to come away with?

    TBTF (Too Big To Fail) solves problems and it creates them.

    TBTF can reverse a confidence crisis. When the world is worried that the failure of a large bank will catastrophically ripple from one institution to the next until all financial markets are frozen, TBTF can solve the problem.

    However, TBTF distorts financial behavior. Without TBTF, for chancy loans and risky projects, creditors provide less funding and ask for higher returns. With TBTF, by diminishing risk, the creditors’ incentives change. Consequently, it is much easier to fund speculative ventures that might endanger the institution. 

    In other words, TBIF creates the very problem that it solves!

    Here, during an Econtalk interview, economists discuss TBTF. Also, the book, Too Big To Fail, by a former Federal Reserve president and vice president provides considerable insight. A third resource is the book on which the HBO documentary was based, Andrew Ross Sorkin’s Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves.

    The Economic Lesson

    In 1781, Alexander Hamilton said that, “Banks…have proved to be the happiest engines that ever were invented for advancing trade.” In 1791, primarily because of Alexander Hamilton, the first Secretary of the Treasury, the First Bank of the United States was established by the U.S. Congress.

    With only 3 banks in the entire country, Hamilton believed more could be done to expedite U.S. economic development. His goal was to have more money circulating that businesses, consumers, and government could use. As a powerful and large financial intermediary, the bank achieved his objectives.

    An Economic Question: Looking at 1791 and 2011, explain why borrowing is important for economic activity.


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    Animal Spirits and Gas Prices

    May 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Government, Households, Labor, Macroeconomic Measurement • 536 Views

    Is a 9-cent drop enough to ignite our “animal spirits?” The 9-cent decrease refers to the average national price of a gallon of regular gasoline. And “animal spirits” is the optimism that leads to more buying and investing.

    During the 1930s Great Depression, British economist John Maynard Keynes (1883-1946) said that statistics such as lower interest rates could theoretically stimulate economic activity. However, to generate growth, we also need “animal spirits.”

    Fast forward to 2011. Analysts cite gas prices and unemployment as the two key variables behind rising and falling consumer sentiment. Plunging from a high of 112 during 2000, the University of Michigan measure of consumer sentiment is now 72.4.

    Why care about consumers’ sentiments (aka their animal spirits)? Consumer spending is the largest component of our GDP.

    The Economic Lesson

    Initiated by economist Arthur Okun (1928-1980), the “misery index” is the total of the inflation rate and unemployment. Currently, our misery index is 12.16.

    An Economic Question: Specfically referring to its inflation and unemployment components, how does the misery index relate to consumer sentiment and animal spirits?

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    The Real Cost of a Car

    May 23 • Demand, Supply, and Markets, Environment, Government, Households, Regulation, Thinking Economically • 459 Views

    To see how much a car costs, just add up the purchase price, insurance, gas and a yearly service. Yes? According to one group of researchers, a car that is driven 100,000 miles costs $19,000 more than you might think.

    The $19,000 relates to external costs. Pollution from autos creates health spending. Congestion generates delays, alternative plans, noise. Accidents means fatalities, days lost at work, medical expenses, property damage. In addition, more gas takes us to oil dependency and carbon emissions. Not included in the $19,000 total but also a cost is bridge and road maintenance and construction.

    What does that extra $19,000 mean? It says that the cost of driving is both private and social.

    Citing the private and social cost of driving as one of many examples, a new paper from the Hamilton Project, “Strategy For America’s Energy Future: Illuminating Energy’s Full Costs.” suggests we need to rethink public policy in 4 areas: 1) Changing the incentives that shape consumer and business energy use; 2) Enabling innovators to capture more of the profit of new technology; 3) Using more accurate cost benefit analysis for regulatory policy; 4) Pursuing global solutions to environmental and climate concerns.

    The Economic Lesson

    Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. They see negative externalities when the impact on a third party is harmful. Vaccines usually have positive externalities while pollution is the typical example of a negative externality.

    Taking externalities an economic step further, we can look at cost. On a demand and supply graph, the equilibrium price of a decision that has a positive externality is too high because of the benefits experienced by society. Correspondingly, the equilibrium price of a decision with negative externalities is too cheap because of the associated costs that result.

    An Economic Question: Which business or individual decisions have a social benefit that (theoretically) offsets the private cost? Which business or individual decisions have a social cost that (theoretically) adds to the private cost?

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