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    Giving and Getting Gifts

    Nov 29 • Behavioral Economics, Demand, Supply, and Markets, Economic Thinkers, Households, Thinking Economically • 510 Views

    With the holiday season beginning, we should consider the economics of gift giving. Let’s start with University of Pennsylvania Professor Joel Waldfogel who focused on receiving gifts. Then, through Duke’s Dan Ariely, we can look at how to give the best gifts.

    Dr. Waldfogel’s research could make us decide not to buy any gifts. His basic conclusion was that when people express a value for a gift, the amount is usually less than the actual cost. By contrast, when they buy something for themselves the value soars. Empirically, he says that our own purchases generate on average 18% more value than purchases from others. You might enjoy looking at the survey (p. 17 of his paper) that he gave to 202 students.

    Dan Ariely solves the dilemma by suggesting that we give gifts that people would feel guilty buying for themselves. As economists doing cost benefit analysis, we would say that guilt increases the cost side. By contrast, when the same item comes from someone else, because the recipient’s guilt disappears, cost diminishes. The result? Benefit exceeds cost.

    The Economic Lesson

    The loss in value to the gift giver and getter is called deadweight loss. Economists can draw deadweight loss on a demand and supply graph. For us now, though, just think of a loss in value as a cost.

    Because value decreases for a gift, cost rises and everyone’s “pleasure” diminishes. The amount by which “pleasure” falls is the deadweight loss.

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  • Packaging can shape a buying decision.

    A Chinese Coach

    Nov 28 • Demand, Supply, and Markets, Developing Economies, Households, International Trade and Finance • 489 Views

    Coach has 41 handbag stores in China and will soon have 8 more. Coach and China though, are about a lot more than handbags. According to NY Times Magazine columnist David Leonhardt, the Chinese consumer can fuel the world economy with “the urge to splurge.”

    Currently though, annual consumer spending in China is not very high. At $2500 per person, it is less than the U.S. ($30,000) and Brazil ($7,000). What could create that “urge to splurge”? Leonhardt says that China has to move from sweatshops to innovation which means extending free education beyond the 9th grade and making the right decisions about resource allocation, wages and a transportation infrastructure.

    If they are successful, the demand for Coach and other consumer goods and services will come from a larger middle class with more to spend.

    The Economic Lesson

    Between 1790 and now, the U.S. has progressed though 5 stages of economic development. 1) Starting as an agrarian economy, barter was dominant. 2) Then, through road, canal, and railroad building, regional specialization developed. 3) Having a transportation infrastructure enabled us to create a capital goods sector that produced steel and other manufacturing basics. 4) From there came the 1920s with the auto and the consumer taking over economic leadership. 5) Now, a services sector is dominant.

    China is moving through its own development stages.


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    Dietary Incentives

    Nov 27 • Behavioral Economics, Demand, Supply, and Markets, Government, Households, Thinking Economically • 532 Views

    Which would you choose?

    2000 calories from 10 donuts that would cost you $5?


    2000 calories from Greek yogurt, organic raspberries, a turkey avocado wrap, Alaskan King Salmon, green beans, a whole wheat roll, strawberries and heavy cream for $25.86?

    Marketplace.org presented the $5/$25.86 comparison to show us that healthy food is expensive. Predictable? Yes. Then though, they told us something we would not have expected. This takes us to a recent academic study.

    University of Buffalo researchers discovered that when healthy food became cheaper, consumers used their savings to buy less expensive less healthy food. As a result, the overall nutritional value of their diet remained the same. However, when Ritz Bits Peanut Butter Sandwich Crackers, for example, became more expensive by 12.5% to 25%, consumers stopped buying them. Then, with their savings, they purchased healthier alternatives, like bananas.

    The implications for public policy? Tax junk food if you want people’s diets to improve.

    The Economic lesson

    But isn’t it even more complicated? Aren’t we talking about targeting the elastic region of many different consumers’ demand curves? The elastic region is where price rises and total expenditures (TE) drop.

    You might want to look back at the soda tax debate.


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    Economic Insight

    Nov 26 • Environment, Thinking Economically • 575 Views

    Have you ever looked at “The 3 Little Pigs” through an economic lens? Referring to the third little pig, Harvard economist Edward Glaeser suggests the fairy tale is about investing wisely. In my econ class, a student used opportunity cost analysis to show that the first little pig actually made the wisest decision. His straw home gave him shelter and provided time for other worthwhile activities. The alternative, building a more resilient home, would not have provided as many benefits. Like all of us, when the first little pig made his decision, he did not know its consequences.

    Similarly, when we wear an economic lens, we might see that Jon Krakauer’s Into Thin Air is about more than a tragic attempt to climb Mount Everest. For example, using marginal cost/benefit analysis we might conclude that certain decisions were better than their consequences indicate. Perhaps unintentionally, Krakauer also gives us a tragedy of the commons lesson. in The Literary Book of Economics, economist Michael Watts quotes Krakauer saying “…Everest had been turned into a garbage dump by the ever increasing hordes…but in recent years it had been turned into a fairly tidy place…” Why? The incentives changed. Instead of the tragedy of the commons where climbers experienced no cost for littering, “…expeditions had to post a $4000 bond that would be refunded only if a predetermined amount of trash were carried back…”

    The Economic Lesson

    We should remember that opportunity cost analysis is about decision making at the time the decision is made. It is not about the consequences that only someone with a crystal ball could know. By identifying the benefits of a decision at the time it was chosen, we can better understand why it was made.

    You can look at the table of contents of The Literary Book of Economics here.

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    An Economic Story From Plymouth Plantation

    Nov 25 • Developing Economies, Economic Debates, Economic History, Labor, Macroeconomic Measurement, Thinking Economically • 842 Views

    In 1623, two years after the first Thanksgiving, Governor William Bradford was worried about Plymouth’s food supply. The problem, he concluded, was that people shared whatever they produced. Because “able and fit” young men were expected to work harder and then give their food to others, all worked less.

    As Bradford explained it in Of Plymouth Plantation,”So they began to think how they…could…obtain a better crop than they had done…At length…the Governor…so assigned to every family a parcel of land…This had very good results for it made all hands very industrious…”

    You can see what happened. When people could keep what they produced, they became more industrious.

    The Economic Lesson

    Equality or efficiency was a dilemma in 1623 and remains a dilemma today. The basic question involves how much of what we produce should we keep?

    Maybe, especially on Thanksgiving, we can say it all takes us back to the size of the pie.

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