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Archive for September, 2013

When Doesn’t Trade Make Everyone Better Off?

September 23, 2013 Leave a comment

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There’s lots of good thought in this article by Megan McArdle. But this especially caught my eye, as we head into a class on the benefits of trade:

Nor do transfers seem ideal — necessary, maybe, yet also curiously inadequate. A disability check is a poor substitute for a job, from both the recipient and the taxpayer’s perspective. The sort of person who prefers a disability check to a decent job is the only person we don’t want to help.

It’s fairly easy to demonstrate that when two countries trade, both are better off, in total.

We know that within countries, there will be winners and losers, and that the gains of the winners are bigger than the losses of the losers, so that, in theory at least, the winners could compensate the losers–could literally give them cash!–and still everyone would be better off.

McArdle is pointing out one of many practical problems with this idea: many of the losers may receive lower utility from compensation. In that case, you could have a society where winners and “losers,” after compensation, are both better off, and yet in terms of utility, society is worse off.

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Class Videos: The PPF

September 23, 2013 Leave a comment

Two more good videos for review of material we covered in class on our special Sunday afternoon class to make up for the Mid-Autumn Festival holiday:

Categories: Microeconomics, Videos

Class Video: Graphic Review

September 23, 2013 Leave a comment

Simple but effective for students who have graphphobia:

Categories: Microeconomics, Videos

People Respond to Incentives: Burger Flippers Edition

September 15, 2013 Leave a comment

Lately fast food workers in several cities have been protesting for higher wages. For some reason, they seem to have settled on $15/hour as a reasonable wage. Many are paid the current minimum wage of $7.25/hour.

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Some of my students, thinking about equity, will say this is well-justified. They might argue that they should be paid more, and that they are being exploited unfairly by their employers. Others will disagree.

No matter what one thinks about the fairness of the wage, I’d like to ask my students to consider these protests in light of one of the ten principles of economics we studied this week: people respond to incentives.

Suppose the workers’ protests are effective and somehow fast food companies must now pay all their workers $15/hour.

This will change incentives. Most people are focusing on the change to the employers’ incentives: by raising the cost of labor, the employees may hire fewer worker, or automate more.

But what about the benefits side of the equation?

Let’s suppose:

  • Many, many  people who are not currently interested in working for a fast food company now work in other companies for $10, $12 or $14/hour.
  • We can safely assume they do not work in fast food because they have more skills than most fast food workers and will work in the companies that will pay them for their higher skill level.

If the wage for fast food workers is changed to $15/hour, which kind of employee will fast food companies hire? The ones currently employed for $7.25? Or will they find themselves suddenly faced with many workers from other industries–more skilled than their current workforce–happy to work for a fast food company now that the wage is $15?

What will happen to the current protesters? Will many of them lose their jobs to more qualified people who–now that the wage is $15–are happy to work in fast food?

I wonder how many of these protesters have thought of the possibility that their victory–should they win–might change the incentive for other workers to compete for their jobs?

People Face Trade-offs: Pollution and Eagles Edition

September 13, 2013 Leave a comment

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One of the ten principles of economics in our text’s first chapter is that people face trade-offs.

Here’s a good example:

Wind energy reduces pollution. It’s a cleaner form of energy generation than, say, burning coal.

But it’s not entirely without costs. There are some important trade-offs. For cleaner energy, what do we have to give up as a society?

Besides the visual impact (at first, windmill farms looked futuristic and cool; after 20 or 30 years, they start to look like clutter on the horizon), the noise pollution they generate, and the cost of the materials to build them and transport them to the best locations, they kill birds.

Some of the birds they kill are relatively rare, and therefore prized by conservationists and environmentalists.

Should we build more windmills? Might there be any other trade-offs we haven’t thought of?

Welcome, New Microeconomics Students

September 11, 2013 Leave a comment

Yesterday was the first day of microeconomics class for entering freshmen.

Always, students will ask for the powerpoint presentations. I can’t give them to you (they belong to the owner, and I use them by permission)!

But the textbook’s publisher makes a lot of good free resources available to students, here.

Just check out the links on the left hand side.

Categories: Education, Microeconomics