• everyday economics and complementary goods

    Chips and Cheese Insight

    Jul 14 • Businesses, Demand, Supply, and Markets, Economic Humor, Lifestyle, Thinking Economically • 95 Views

    Cheese and chips are complementary goods.

    From: xkcd


    Our Bottom Line: Complementary Goods

    When you see retailers selling sofas and throw pillows, do think about how they are increasing their sales by providing goods that go together.

    Like cheese and chips, sofas and pillows need each other. When demand for one increases, its partner also becomes more popular. Thinking economically, we can use supply and demand graphs to show the boost in demand.

    An increase in demand for cheese…

    Increase in demand because of complementary goods

    creates an Increase in demand for chips.

    Increase in demand because of complementary goods

    So, when you see retailers selling sofas and throw pillows, do think chips and cheese.

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  • Everyday economics and how prices differ in the U.S.

    Why Starbucks Coffee Costs More in California

    Jul 13 • Businesses, Demand, Supply, and Markets, Entertainment, Financial Markets, fiscal policy, Government, Labor, Lifestyle, Thinking Economically • 122 Views

    Starbucks just raised its prices.

    On July 7, on some drinks, the tab went up somewhere between 5 and 20 cents. Indicating that hot coffees were the target rather than iced drinks, Starbucks did not specify the hike for any specific item. A possible reason? Because it depends on where you live.

    Where are we going? To how purchasing power varies in different states.

    Where We Spend More

    Whenever I visit Peoria, Illinois, my Starbucks costs less. In Peoria, the price of a Tall Latte is $3.25 and in NJ, $3.37.

    Purchasing Power Parity at Starbucks

    The different prices for a Tall Latte pretty much correspond to the following map from the Tax Foundation. Based on BEA data from the U.S. Department of Commerce, it shows us that your dollar will buy you the most in Mississippi and the least in Washington, D.C. Explained slightly differently, we can say that it takes after tax earnings of $68,000 in Washington D.C. and $50,000 in Mississippi to buy the same things.

    With the same Tall Latte priced at $3.16 in Mississippi and a whopping $4.02 in Washington D.C., Starbucks confirms their conclusions. (The difference between NJ and California though is not quite what I would expect. Could it be competition from Dunkin’ Donuts in NJ?)

    Where else will Starbucks charge the most? Based on the following map, probably in a yellow state.

    Purchasing power parity in the U.S.


    Our Bottom Line: Purchasing Power Parity

    Theoretically, the price of an identical good should be the same everywhere in the U.S. But if that were true, then your purchasing power would be the same in every state.

    It is not.

    And that takes us to purchasing power parity (PPP). Called regional price parities in BEA documents, it compares a hypothetical national price level of 100 to local prices. I wanted to include the specific BEA numbers below because they help to understand the tax foundation map.

    Regional price parities in the U.S.

    From: BEA

    So yes, living in Mississippi is relatively inexpensive. However, their average per capita income is lower also.

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  • Disaster economics indicate that developed nations tend to lose more property and developing nations more people when a natural disaster strikes.

    The Cost of a Parmesan Catastrophe

    Jul 12 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Government, Households, International Trade and Finance, Labor, Lifestyle, Thinking Economically • 121 Views

    Just before a 6.0 magnitude earthquake hit the Emilia-Romagna region of northern Italy in 2012, a local cheese producer said that his 230 cows began desperately mooing. When the quake hit, he ran outside. Checking afterwards, he said his dairy and storage facilities seemed okay…until he entered a warehouse that housed 11,000 eighty-pound wheels of aging Parmesan cheese. The shelves had collapsed and €6 million of cheese appeared to have been destroyed.

    Where are we going? To how disasters affect nations differently.

    The Parmesan Catastrophe

    Parmigiano Reggiano is a valuable commodity. A cheese with a legal identity, the name can be used only by the approximately 600 producers from Reggio Emilia and Parma, Modena or Mantua. Having a protected Designation of Origin (DOP) means a quality guarantee.

    Watching the first episode of the Netflix “Chef’s Table” series, I saw Parmigiano Reggiano through Chef Massimo Bottura’s eyes. As he took viewers to his restaurant’s kitchen and then to a Parmigiano Reggiano warehouse, the producers’ artisanal skill became increasingly evident. Thinking of Parmigiano Reggiano production as an art made it much easier to comprehend the devastating damage to 400,000 aging wheels that tumbled off collapsed storage shelves.

    One goal after the quake was to sell as much of the salvageable cheese as possible. That was when Chef Massimo’s transformed a “dairy disaster” into a “cheesy miracle” by proclaiming a Parmigiano Reggiano Night. Because throughout Italy and beyond, people needed one-half pound of Parmigiano Reggiano to prepare their Risotto Cacio e Pepe, the demand curve for the cheese shifted to the right. But still, the losses were immense.

    And that takes us to the economic impact of a disaster.

    Our Bottom Line: Disaster Economics

    Like the 2012 northern Italian earthquake, victims and dollars are the two basics of disasters. Through a 2015 report from the reinsurer, Swiss Re, we can see an inverse correlation between the two. Suggested by economist Timothy Taylor in a blog post, the reason could be economic development. In developed nations, assets are worth more and provide the physical security that developing nations lack.

    Below, the top arrow points to $17.5 billion for North America, the highest insurance loss for 2014. However, costing far fewer dollars, shown by the lower arrow, the number of victims of disasters was much higher in Asia and Africa.

    Insured losses and Victims From Natural and Manmade Disasters During 2014:

    disaster economics and the cost of natural disasters


    Covering 1970 to 2014, the list of the top 40 disasters by insurance losses is very different from the top 40 based on the number of people who died or were missing. Below, I’ve copied the top 10 from each list:

    For insurance losses, the list is dominated by the U.S. (Do note that the fifth item was the World Trade Center attack, not a natural disaster)

    Disaster economics and the dollar cost of natural disasters

    From: Swiss Re

    For victims, the list is mostly composed of developing countries. A heat wave in Europe and an earthquake in Japan were the only two entries from the developed world.

    Disaster economics ad victims countries

    From: Swiss Re


    Returning to the 2012 earthquakes on May 20 and 29, the priceless toll in people was 24. Again reflecting that inverse relationship between dollars and victims, the area that was hit had considerable agricultural and industrial activity. From Parmigiano Regginano to Balsamic vinegar to biomedical firms and auto components suppliers, the businesses in the area absorbed an economic punch valued in the billions.


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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Speed Eating to Slow Aging

    Jul 11 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, fiscal policy, Government, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Tech, Thinking Economically • 81 Views

    Our Posts Roundup

    Everyday Economics and Alexander Hamilton and economic independence Sunday 7.05.15

    The Real Father of Our Country…more

    Everyday economics on self-driving cars Monday 7.06.15

    When to worry about autopilot…more

    everyday economics and a good type of taxation, property taxes have incentives that do not constrain growth. Tuesday 7.07.15

    Good and bad taxes…more

    Everyday economics and Aging populations and birth rates Wednesday 7.08.15

    What happens when the aged multiply…more

    Everyday Economics and like competition everywhere, eating contests convey lessons about innovation. Thursday 7.09.15

    Entrepreneurial lessons from a speed eater… more


    everyday economics and cost of growing marijuana Friday 7.10.15

    Why marijuana costs more than we think…more

    Ideas Roundup

    • development
    • innovation
    • technology
    • automation
    • human capital
    • taxes
    • fiscal policy
    • GDP
    • dependency ratios
    • aging
    • entitlements
    • creative destruction
    • entrepreneurs
    • negative externalities
    • environment

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  • everyday economics and cost of growing marijuana

    Why Marijuana is Not Green

    Jul 10 • Businesses, Demand, Supply, and Markets, Environment, Government, Labor, Regulation, Thinking Economically • 120 Views

    Cannabis is a very thirsty plant.

    You can see below that marijuana plants need as much water as almonds.

    Negative externalities from growing marijuana

    Where are we going? To the environmental impact of pot.

    Marijuana’s Environmental Cost

    I am not sure how to imagine 354 “weed cultivation facilities” but that is the total for Denver. Thinking at the margin, our focus is the extra electricity these producers require. Comparing 2012 to 2014, the energy needed by “grow facilities” increased from 86 million kwh to 200 million kwh. The Denver Post reports that almost half of Denver’s growth in electricity demand came from indoor pot growers.

    Indoors, marijuana growers enjoy more product control and better yield but they need a lot of heat and light. Totaling one-third of all production costs, energy is used primarily for high intensity lighting, maintaining temperatures, ventilation and humidity. Comparable to what a modern data center needs, the electricity needed to raise five pounds of pot a year is the same as you use at home.

    Negative externalities from growing marijuana indoors

    So, move outdoors?

    Then we have other problems. Outdoor cultivation returns us to water. Add to that the deforestation and pesticide needs and you again get an environmental cost.

    Our Bottom Line: Negative Externalities

    When the relationships that growers have with their customers affect you and me, we have a negative externality. As a result, if we include the downside that third parties experience, the cost of growing marijuana is really more than its equilibrium price.

    On a graph, a negative externality is illustrated by a new hypothetical equilibrium that reflects the added cost. The supply curve shifts upward because production is more costly.

    Negative externality graph

    Perhaps the legalization of recreational marijuana returns us to fractal mathematician Benoit Malendrot and the British seacoast. The closer you look, the more zigzags you see.

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