Friday, April 18, 2014

Update on the price of limes. Quantity Supplied is still less than Quantity Demanded---only more so now...

Visited my local Kroger (burbs North of Columbus, Ohio) to do some shopping and checked in on the price of Limes---$1.49 each today (April, 18th, 2014). On April 1st they were $.99 each. That is a 51% increase in the span of less than 3 weeks.
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April 18th, 2014

Weather and gang activity are to blame. Bet those two variables are not put together very often to describe the price of produce.

This was the price on 4/1/2014:
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Family Dollar is closing lots of its stores. Is this a sign that it is an Inferior Good?

Is the retail chain Dollar Family Stores an "Inferior Good" or a "Normal Good"?

Here is an article regarding the closing of over 300 stores nationwide with the implication that as the economy recovers and incomes rise fewer people are shopping at their stores.  They experienced rapid growth during the recession as unemployment spiked and incomes decreased.

Family Dollar: Is bad news for store good news for US economy? 

 Family Dollar is closing 370 US stores and will open fewer new ones. After booming during the recession and its aftermath, Family Dollar could feel the pinch of Americans feeling richer, some say.

If Income decreases and the Demand for a good (or service) increases the good (or service) is considered to be "Inferior".  Make less money you downsize from something more expensive to something less expensive.  The opposite is true also:  if Income increases the Demand decreases for the good or service. Inferior goods are characterized by an inverse relationship between changes in Income and Demand for the good or service.

With a "Normal" good or service there is a direct relationship between changes in Income and changes in Demand.  Make more money you "up-size" from something less expensive to something more expensive. When income decreases consumer Demand less of the good or service.

All this really describes is desirability of a good or service relative to changes in income at any point in time.

One person's Inferior good might be someones elses Normal good.  

If you are a Target shopper and your income decreases you have to shop at Family Dollar, then Target is a Normal good for you and Family Dollar is an Inferior.

If you are a Family Dollar shopper and your income increases you start shopping at Target, then Family Dollar is Inferior and Target is Normal.  

While it certainly varies from individual to individual I would say Family Dollar is an Inferior good, not in terms of the value it adds to society, but as descriptor of a basic term we learn in Microeconomics.

The Opportunity Cost of Water Use: California Marijuana Edition.

I previously posted this graphic that shows how water intensive some agricultural products are.  California is a major source for these food items, and as we know there is a water shortage in some of the areas most in need of water for growing these crops.

I just came across this statistic from The Smithsonian:
Pot plants, says the Press Democrat, can take anywhere from 6 to 15 gallons of water per day throughout the growing season. To feed the region's grow ops, then, takes upwards of 720,000 gallons of water per day. By comparison, corn takes, roughly, 9 gallons of water per day per plant.
Nice example for a discussion on Opportunity Cost for scarce water consumption.

Source: Mother Jones

Headline from the Washington Times today. They must have boosted hiring in the their Dept of The Obvious...

Made me chuckle.  :)

Washington Times

Thursday, April 17, 2014

Sriracha Sauces loss is my gain. Nice example to show how a potential change in fixed costs and variable costs affect a firm.

Sriracha sauce maker considers relocation

The makers of the most popular Sriracha sauce (Huy Fong Foods) is facing a dilemma.  A by-product of producing the sauce is an awful smell that permeates the air in the City of Irwindale, California where the manufacturing facility is located.  Area residents don't like it and want something done about it.

The city wants the company to install air-scrubbing technology.  Apparently this is very expensive to do and the company is resisting.

I suppose if the company refuses it can be fined, better yet for our analysis, a "per unit tax" could be levied on each bottle produced.

So, the firm faces the possibility of having to incur a large up front "fixed cost" of installing the equipment or face a small-ish "per unit tax" variable cost on each of the bottles it produces.

Which is better for the firm?

Let's see how this affects the firm in context of how we study it in AP Microeconomics.

I presume Hoy Fung Foods in one of several competitors in the market for Hot Sauce.  As such, I will classify it as operating as a "Monopolistic Competitor".

Here is what the firm graph would look like assuming Hoy Fung Foods is making "Economic Profits" and operating as it has been.

Installing the equipment would be a "fixed cost" for the company.  It is a cost that is incurred regardless of how many bottles of the hot sauce are produced and the cost is spread out over an all the additional bottles produced.  

This affects the AVERAGE TOTAL COST ("ATC*) of producing ONLY and NOT the Marginal Cost ("MC*) of producing each bottle.

This will SHIFT the ATC curve "ATC*" UP to "ATC 1".  The profit maximizing quantity at MR=MC stays the same  at Point "A" (read that again!).   What does change is the firms Economic Profit. 

Where I shifted the "ATC 1" curve, it assumes that it is at "Break Even" (in Economic terms, not Accounting terms) at Point "B".

So, Hoy Fung Foods is breaking even and still producing the same amount of product at Qe and at the same Price consumers are willing and able to pay at "Pe".  Status quo, except for profits!!

What if instead a per unit tax is assessed on each bottle of hot sauce. That would be a small dollar amount for Hoy Fung to absorb, so it MUST be better....right?

A per unit tax affects BOTH the ATC and the Marginal Cost (MC) of producing.  The tax applies to each unit and increases the cost of producing each unit by the amount of the tax. This will shift the ATC curve and the MC curve together.  The MC curve will shift to the LEFT to "MC 1"(or some say "up").

It is kinda hard to see with all the curves, but notice our "Profit Maximizing Quantity" at MR = MC is now at a different spot---Point "A" at "Q1".  Because MC shifted it will intersect Marginal Revenue (MR) at a different spot along the MR curve.  THIS IS KEY!!

Let me clean up the graph above for you.  See below. As a result you can see that the PRICE consumers pay is higher than it was ("P1") and the quantity sold is less too.

BUT is gets worse for the firm.  Notice now that the ATC of producing Q1 bottles of hot sauce is now GREATER than the Price received from consumers (ATC 1 more than P1).  The firm is now incurring Economic LOSSES equal to the area "P1-"C"-"D"- P1".

In this simple analysis holding LOTS of variables constant, we can see that Hoy Fung Foods should probably install the equipment to avoid a per unit tax.  It appears it will be the best outcome for the firm.

While this example might not completely reflect the real time situation, I hope it helps you understand the different way a fixed cost and a variable cost (per unit tax) affects a firm.

This is a must-know concept for the AP Micro test!!

Wednesday, April 16, 2014

Community Colleges get a boost. To state the obvious, enhanced skills are the pathway to the jobs of the present and future.

"The White House on Wednesday will announce $500 million in grants aimed at increasing coordination between community colleges and industry groups and another $100 million to expand access to apprenticeships to boost job training, administration officials said. 
The grants will be unveiled during a visit by President Barack Obama and Vice PresidentJoe Biden at the Community College of Allegheny County in Oakdale, Pa. 
The initiatives are similar to approaches used by some states, which have tried to leverage relationships between community colleges and local businesses to steer workers toward available jobs. But the proposals also show the limits of White House power. While most of the grants will be more targeted, the initiative essentially is a continuation of existing grants already disbursed to community colleges"--Wall Street Journal
Allocating resources (read that money--which is not an economic resource) to help the long term unemployed gain or regain relevant work skills is a necessity right now.  It is a festering issue that will impose costs on society one way or another.  We pay now or pay later in myriad of other social costs, explicit or implicit.

This is a great initiative, in theory AND practice (see HERE and HERE), and COULD BE money well spent.  However, as is the case quite often, it is not targeted towards the greatest need but towards the best grant writers.  And the best grant writers are often employed by the better served areas that need money, but less than communities severely stricken by the recession.

I am not a pessimist but a realist.  Please, Federal Government, target the skills gap not the political favoritism gap.  Thank you.

Supply and Demand Lesson: Fruit and Vegetable Edition. Salad bars are about to become more expensive.

This graphic, from the Wall Street Journal, shows how the prices of various fruits and vegetables are expected to rise in the near future due to drought conditions in California.  The salad bar at your favorite restaurant is likely to be more expensive very soon.
Source: Wall Street Journal
While not a good turn of events for the marketplace, it does provide this economics teacher the opportunity to illustrate supply and demand with graphs.  So, for your learning pleasure I created a set of slides that tell the above story.
"California is the largest domestic producer of each of the products Mr. Richards identified, ranging from grapes to peppers. And in the case of avocados, it’s the only state with a significant crop.The drought has wiped out between 10% and 20% of California crops for the eight items, but the size of the expected price increases varies widely. Lettuce prices could jump as much as 34% and avocado prices could rise 28%, the largest projected increases. 
“People are the least price-sensitive when it comes to those items, and they’re willing to pay what it takes to get them,” Mr. Richards said. “It’s hard to make a salad without lettuce.”In basic economic terms, the drought reduces supply, which puts upward pressure on prices. But how high the price can rise is determined by consumers’ willingness to pay more against their ability to find a substitute".-(Wall Street Journal)

Monday, April 14, 2014

Income vs Substitution Effect. Both explain the downward sloping nature of a Market Demand Curve.

My PPT slides to explain the two main reasons a Market Demand Curve is DOWNWARD sloping.

Hope it helps someone out there who is confused about this topic.  It is tested on the AP Microeconomics test so it is in your interest to learn it here OR somewhere!! :)

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