The Shape of the Supply Curve

Here’s a great example of a practical question that someone well-informed about microeconomics has a better chance at answering correctly. The gist of the question is this:

If individual energy users use energy more efficiently, what will happen to price and equilibrium quantity?

The person asking the question is suggesting that it’s possible the same amount of energy will be consumed if these energy-saving devices are widely adopted.

First understand the question, then read the comments. What do you think?

Answers for 10-28 Take Home Quiz

1. D   2. B  3. A  4. C  5. C  6. B  7. A  8. D  9. B  10. A

11. C  12. A  13. A  14. A  15. B  16. C  17. A  18. B  19. C  20. C  21. A

Good for Gap, Bad for…?

As usual, the news of a company closing something in the U.S. and opening something else in China gets spun as a sign of relative U.S. decline. Journalists can’t seem to get over the “trade-as-a-sports-competition” analogy, where a win for one side must mean a loss for the other side.

Gap is closing stores in the U.S. and opening new stores outside the U.S. Bad sign for the U.S., right?

But take a closer look:

• Gap says it’s reducing its square footage by 10% but reducing stores by over 30%. That must mean it’s closing its smallest, presumably least efficient stores. A 10% reduction focused on the worst performing locations isn’t as bad as “stores closing in the U.S., moving to China” sounds.
• If Gap didn’t have access to foreign markets, it would have to chose lower-performing investments in stores in the U.S. It’s likely the trend that’s bringing greater market access for U.S. retailers in places like China is simply opening up better investment opportunities for Gap.
• There is almost certainly an export component of this move that benefits the U.S. Domestic suppliers of services (legal, design, systems, and even management) are more likely to get more business from growing foreign stores than from struggling domestic ones.

It’s not necessarily bad news for anyone. Chinese consumers get more choices, and a U.S. company gets additional, better product markets.

Guess Who Opposes Minimum Wage Increases? Now, Guess Why?

Ilyana Kuziemko and Michael I. Norton find something surprising about who favors and opposes minimum wage increases:

In our surveys, we asked Americans whether they supported an increase to the minimum wage, currently $7.25 per hour. Those making $7.25 or below were very likely to support the increase – after all, they would be immediate beneficiaries. In addition, people making substantially more than $7.25 were also fairly positive towards the increase. Which group was the most opposed? Those making just above the minimum wage, between $7.26 and $8.25.

But why?

They attribute this to something they call “last place aversion.”

Students in my most recent class, if they were following closely, have another way of looking at this result.

For which group would unemployment likely increase the most if the minimum wage is increased?
a) those making minimum wage or below? (the article doesn’t explain how people can make below minimum wage, so make an assumption)
b) those making just above the minimum wage?
c) those making well above minimum wage?

It’s clear on which group the price floor will become binding, isn’t it?

Is it possible low-wage workers are smarter than Kuziemko and Norton give them credit for being?

Better Advice for Students

Megan McArdle explains why following Steve Job’s advice just doesn’t make sense for most students:

I’m not sure that Jobs was trying to signal anything as much as he was offering very good advice . . . for Steve Jobs. Steve Jobs’, um, job, is to tell graduates how they could be Steve Jobs. And if they are to have any chance, they do indeed need to follow their bliss and take risks rather than settling down to a degree in accounting.

But not everyone has the potential to be Steve Jobs. Not just because most people are rather more ordinary, but because there are a limited number of jobs that are really fun, greatly admired, and fairly well remunerated, which is what most people want.

The problem is, the people who give these sorts of speeches are the outliers: the folks who have made a name for themselves in some very challenging, competitive, and high-status field. No one ever brings in the regional sales manager for a medical supplies firm to say, “Yeah, I didn’t get to be CEO. But I wake up happy most mornings, my kids are great, and my golf game gets better every year.”

That’s most people. But what does Steve Jobs have to tell them? I doubt he can imagine what that’s like, much less empathize, or come up with solid advice on finding a great hobby. So he tells them how to be Steve Jobs. Which sounds great, and is of very limited practical value, even to Stanford grads.

Everyone wants to encourage students to be their best. No one wants to say “Maybe you should consider a life ambition that’s something less than ‘as famous as Bill Gates and as successful as Warren Buffet.'”

Helping students be realistic isn’t as exciting as inspiring them…but may be a lot more useful.

Waiting, Waiting…

The last Nobel Prize to be announced this year is the Sveriges Riksbank Prize in Economic Sciences. The announcement is scheduled for today at “1:00 p.m. CET at the earliest.” We’re six hours ahead so by 7 or 8 p.m. we should know for sure that it wasn’t me.

But it could be Greg Mankiw! And if you can’t be a Nobel Prize winning economist yourself, at least you can use their textbooks! Any brush with greatness will do…

Competitive Markets, Marginal Prices and Oil Supply

An interesting intersection of topics we’re covering in class in this article:

One reason for the renaissance has been OPEC’s erosion of market power. “For nearly 50 years in this country nobody looked for oil here and drilling was in steady decline. Every time the domestic industry picked itself up, the Saudis would open the taps and drown us with cheap oil,” he recalls. “They had unlimited production capacity, and company after company would go bust.”

Today OPEC’s market share is falling and no longer dictates the world price. This is huge, Mr. Hamm says. “Finally we have an opportunity to go out and explore for oil and drill without fear of price collapse.”