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    Surprising Biofuels

    Nov 10 • Businesses, Demand, Supply, and Markets, Economic Humor, Environment, Financial Markets, Innovation, International Trade and Finance, Thinking Economically • 613 Views

    McDonald’s used fryer grease?

    Alaska Air might want it. On 75 commercial flights, they will partially fill their tanks with biofuels that contain used cooking oil. Selecting algae for its biofuel blend, United flew from Houston to Chicago on its “Eco skies test flight.”

    Commercial aviation is looking at biofuel blends to diminish their carbon footprint. In a WSJ list of 4 airlines, Lufthansa has the greatest commitment with 1200 commercial flights while United, with one, is at the bottom. Next year, the European Union has said it will implement a carbon emissions trading program for airlines. The problem, though, is that biofuels are 6 times as expensive as normal jet fuel.

    The Economic Lesson

    The key is cost. Thinking of the determinants of demand and supply, what might sufficiently shift a curve to lower the equilibrium price of one or several of the types of biofuel?

    An Economic Question: On a demand/supply graph, describe a (hypothetical) reason that the supply curve for cooking oil-based biofuel might shift to the right.

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    “Tweakers”

    Nov 9 • Behavioral Economics, Businesses, Economic History, Innovation, Macroeconomic Measurement, Regulation, Thinking Economically • 679 Views

    Referring to Steve Jobs, most of us think of innovation and entrepreneurship. Like Thomas Friedman in “(Steve) Jobs, Jobs, Jobs, Jobs,” we imagine business starters and young Thomas Edisons.

    Instead, in the New Yorker, Malcolm Gladwell tells us that Jobs was a “tweaker.” The mouse and icons? Jobs saw a version at Xerox in 1979. The iPod? Music players were horrible. The iPhone? Jobs thought phones were as bad as music players used to be. You can see where this is going. Each time Steve Jobs and his designers “tweaked” someone else’s idea until the design satisfied him.

    To meet a host of “tweakers,” here, you can read Andy Kessler’s wonderful history of technology. More academic, here is the study cited by Gladwell about the “tweakers” of the British Industrial Revolution

    The Economic Lesson

    Mathematician Benoit Mandelbrot (1924-2010) was the father of fractal geometry and the idea that the closer you look, the more you see. From a distance, the British coastline will appear straight. However, looking closer and closer increasingly reveals indents and zigzags. Consequently, Dr. Mandelbrot believed that it was actually much longer and even infinite.

    Similarly, innovations can be incremental. Or, as Albert Einstein has been quoted as saying, “The secret to creativity is knowing how to hide your sources.”

    An Economic Question: Knowing that innovation is important for economic growth, how could educators develop “tweakers?”

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    The Future of Oil

    Nov 8 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, Innovation, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 629 Views

    When will we run out of oil? A room full of pistachios might have the answer.

    In the first several pages of The Invisible Heart: An Economic Romance, a teacher says you have been given a room filled 5 feet high with pistachio nuts. The nuts are free, you are a nut lover, and you have only one rule to follow. The empty shells have to remain in the room. At first, you dive in. Eventually though, you are searching for uneaten nuts through mounds of empty shells. Finally, you stop looking. Why? It costs you too much time, energy, effort. It is “cheaper” to switch to cashews.

    Reading “Could Shale Gas Ignite the U.S. Economy” reminded me of pistachio nuts. The U.S. currently gets almost half of its electricity from coal, one-quarter from natural gas, one-fifth from nuclear, and the rest from hydro and wind. Saying, “The United States has the capacity to become the Saudi Arabia of natural gas,” the CEO of an energy company explains why shale rock could represent the future of electricity and “reduced oil dependence for transportation.”

    This takes us to George Mitchell, the son of an immigrant Greek goat herder and the “kitchen” in which hydrocarbons “cook.” Mitchell, now 92, discovered how to get the gas in the “kitchen,” the shale rock, to flow up and out through a well. Others honed the process, massive U.S. shale rock formations have been identified, and the rest is history…or probably will be.

    Here is a past econlife post that also connects innovation to natural gas.

    The Economic Lesson

    With coal environmentally problematic and foreign petroleum dependency undesirable, the opportunity cost of acquiring energy in the U.S. is becoming unacceptably high.

    Just like with pistachio nuts, when you have a high opportunity cost for your current energy sources, you look for alternatives. Or, as with natural gas, you innovate until you create a lower opportunity cost.

    An Economic Question: Starting with questions about techniques used to access natural gas, an environmental opportunity cost has been cited. Looking at the 8 page Bloomberg Business Week article and this MIT study, how would you assess the cost and benefit of shale sourced natural gas?

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    Women’s Work

    Nov 7 • Gender Issues, Households, Labor, Thinking Economically • 781 Views

    The CEO designate of IBM will make it 29. There will be 29 women who are CEOs of Fortune 500 companies. 27 of those women are married, one is divorced and one never married.

    Financial journalist James Stewart explains in the NY Times that the traditional balance of power in a family shifts when a woman runs a major corporation. Rather than the wife helping her husband, the husband “does the laundry.” In his article, Stewart asks whether we can respect the CEO’s househusband as much as we respect a CEO’s wife.

    Our bottom line? As an economic unit, the family is changing.

    The Economic Lesson

    Led by Nobel Prize laureate Gary Becker (1930-  ), behavioral economists think of the family as a little factory in which a division of labor creates “products” including children and communal activities. Becker says in The Essence of Becker, “Members who are relatively more efficient at market activities would use less of their time at consumption activities than would other members.” (p. 108)

    An Economic Question: Knowing that labor has a price, would you agree with Eduardo Porter when he says in The Price of Everything that the “price” of women changed with their increased labor force participation?

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    The Cost of Seat Belts

    Nov 6 • Behavioral Economics, Regulation, Thinking Economically • 706 Views

    Can we assume that seat belts make us safer? Maybe. Writing about seat belts in 1975, University of Chicago economist Sam Peltzman described what we now call the Peltzman Effect.

    Sam Peltzman said that yes, seat belts do make us safer. However, making us safer has an unintended consequence. Because seat belts protect us, we might drive more dangerously. As Peltzman describes it, when regulation changes incentives, people’s response can offset the intent of the regulation.

    Since the Peltzman Effect was first proposed, researchers have explored its broader implications. The availability of flood insurance can encourage people to build waterfront homes. Taking Lipitor might increase the amount of cheese and steak that we consume. And today, the Peltzman Effect is cited when financial reform is discussed. Doesn’t it make you think about “Too big to fail”?

    The Economic Lesson

    In economic terms, seat belts lower the cost of dangerous driving. Thinking of the law of demand, lower cost creates an increase in quantity demanded. If the cost of  dangerous driving drops, some people will accept the risk more readily. 

    An Economic Question: Using supply and demand, how might you graph the impact of seat belts on safe driving?

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