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    Shrinking Packages

    Feb 17 • Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement • 549 Views

    Have you noticed that the 64-ounce Tropicana Orange Juice container now holds 59 ounces of juice? Or, that Scott Toilet Tissue is 104.8 sq. ft. instead of 115.2 sq. ft.?

    Other shrinking packages include…

    The 24-slice package of Kraft American Cheese has 22 slices.

    The 16 oz. Haagen-Dazs ice cream container has 14 oz.

    At 24 oz., Ivory Dish Detergent is now 6 oz. smaller.

    The 12 oz. package of Hebrew National Franks has become 11 oz.

    According to Consumer Reports, many everyday goods are getting smaller. When cotton, wheat, oil, sugar, oilseeds (e.g. soybeans and sesame seeds) and other commodities become more expensive, then suppliers have decisions. Absorb higher production costs? Increase prices? Shrink product size? Many have chosen to preserve profit margins by downsizing.

    The Economic Lesson

    According to the Bureau of Economic Analysis (BEA), the Consumer Price Index (CPI) recalibrates when package size changes. They explain it here. However, I do wonder whether the CPI adequately reflects the inflationary implications of smaller packages.

    The December-to-December, 2009-2010 inflation rate is 1.5%.

     

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    U.S. Affluence

    Feb 16 • Developing Economies, Households, Macroeconomic Measurement • 404 Views

    How rich is the U.S.? Economist Branco Milanovic, in The Haves and the Have-Nots, gives us a really interesting answer.

    The poorest people in the U.S. are richer than most of the higher income individuals in other countries. Specifically, the poorest 5% of all Americans rank 68% in terms of world incomes. In other words, our poorest are richer than 2/3 of the world (p. 117).

    The Economic Lesson

    While Dr. Milanovic is looking at worldwide income distribution, we can also look at income distribution at home. 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. 

    You can see Dr. Milanovic’s graph for worldwide income distribution here.

     

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    Looking For A Reality Check

    Feb 15 • Economic Debates, Government • 431 Views

    Saying how the U.S. government spends our money, Washington Post columnist Ezra Klein said, “It’s an insurance conglomerate…”

    His explanation?

    Medicare, Medicaid and Social Security expenses add up to 2/5 of federal spending. With Medicare covering health insurance for people over 65, Medicaid relating to health insurance for  low income individuals and families, and Social Security primarily covering old age insurance, yes, we could say that the government is in the insurance business.

    His point?

    That the debate over the President’s 2012 budget proposal makes politicians sound fiscally responsible without focusing on the real issues.

    Meanwhile, one writer at The Atlantic says spending proposals are like a spork. “The same way a spork makes an incomplete fork and an ineffectual spoon, this compromise budget provides for both incomplete investment and ineffectual deficit reduction.”

    Paul Krugman, though, tells us to focus instead on House Republicans. Providing insight about why politicians are focusing on cuts in discretionary spending, he says it is all about the future. If, as a recent Pew Survey indicates, voters really want no cuts that affect them, then what to do? Cut “future-oriented” programs in order to slice immediate spending.

    The Economic Lesson

    For a reality check, we should return to the report from the President’s Deficit Reduction Commission. Their recommendations cover 6 categories. 1) Discretionary spending cuts 2) Comprehensive tax reform 3) Health care cost containment 4) Mandatory savings 5) Social Security reforms 6) Budget process changes. For a quick summary, you can look at pages 14-16 of their report.

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    Search Engine Competition

    Feb 14 • Businesses, Demand, Supply, and Markets • 551 Views

    Reading about Lillian Virginia Mountweasel in the 1975 edition of the New Columbia Encyclopedia, you would have discovered that she, a fountain designer and rural mailbox photographer, died in an explosion when working for Combustibles magazine. 

    But she really didn’t.

    Mountweasel was a fake entry.

    Encyclopedias, dictionaries and search engines use an occasional bogus entry to identify copycats. Columbia, for example, knew that any other encyclopedia with Mountweasel had lifted the info from them because it existed nowhere else. Similarly, Google has just accused Microsoft’s Bing of a copycat offense. Using the fake search term, “Hiybbprqag,” Google says that Bing was guilty of what we could call search engine plagiarism. In response, Microsoft pleads, “Not guilty.”

    On a different front, Google is facing competition from smaller search engines with niche specialties.

    The Economic Lesson

    As economists, we can look at how firms compete. With only a few large firms providing search answers to many millions of queries, the search engine market structure is oligopoly. One way in which oligopolies compete is product differentiation. Any copycat activity challenges their ability to differentiate.

    Along a continuum of market structures, we can list four benchmarks. At the far left is perfect competition with many firms, identical products such as potatoes and broccoli, many consumers, and a market that determines price. Next, to the right, is monopolistic competition where firms have a bit more power. Supermarkets and beauty salons are examples of firms in monopolistically competitive markets. Then comes oligopoly and firms with a lot of power to affect price. Kellogg’s Cereals, Coca-Cola, and pharmaceutical firms are oligopolies. Finally, at the far right is monopoly, where one firm controls the market.

    Are the newer, smaller search engines changing Google’s market structure?

     

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    How Do You Disconnect the Internet?

    Feb 13 • Businesses, Developing Economies, Macroeconomic Measurement, Regulation • 402 Views

    As a Vodafone New Zealand customer, events in Egypt directed affected you. With a Cairo based call center that had to be closed, Vodafone said that people needing assistance waited 7 or 8 minutes for service that was directed elsewhere. According to The New Zealand Herald, Vodafone also had been instructed by the Egyptian government to “disconnect” its 31 roaming customers in Egypt.

    How does a country disconnect? It can instruct service providers to shut down. In Egypt, that meant contacting 5 providers. For the U.S., it would be much more difficult, because in addition to the 10 firms that dominate the market (70% concentration), so many more businesses and people are involved.

    An interesting fact: The Estonian parliament and France’s highest court have declared internet connection is a basic human right.

    The Economic Lesson

    The Organization for Economic Cooperation and Development (OECD) estimated the direct and indirect impact of the 5-day internet shutdown in Egypt. Directly, they estimate $18 million a day in lost revenue. Also though, the financial implications for tourism, inoperative call centers, and multinationals’ worries about future reliability are incalculable.

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