Economics in the News: Week 1
WHO should decide how we use scarce resources?
WHAT’s the economic problem every nation must solve?
Scarcity= “more want than stuff”. Economics is the study of the choices people make
within the conditions of scarcity.
“Indian Fiber Weaves a Crisis”
Jute is a fiber used in weaving bags that store wheat as per federal regulation.
Problem= these bags are inefficient and wasteful, especially as food waste in India is
embarrassingly high. There are better products.
why did this happen?
• in the 1980s government stipulated that wheat and rice must be packed in
jute bags to protect jobs in the industry
• this is the pitfall of PROTECTIONISM
•over time, wheat crop has risen while jute has not
GOVERNMENTAL DECISIONS SEEMING GOOD IN THE SHORT RUN
ARE HARMFUL IN THE LONG RUN
“What Paul Ryan and his Critics Can Learn from Canada”
Canadian Medicare system= block grants given to provinces to allocate Medicare funds
with optimal decisions made at the margin
•incentive= provincial governments may utilize leftover funds!
“Ford Plant Reopens”
Great Recessiontype economy lessens demands for goods, so jobs down
Ford decides to be staunchly free market; close plant in Kentucky because of low
demand (OPTIMAL DECISION AT MARKET)
Increase in demand with better economy= decision to reopen plant via
MARGINAL ANALYSIS. Shows that market forces should always be the highest
•role of consumers in market= able to increase demand
making choices in society:
o tradeoff: the idea that because of scarcity, producing one good or service
lowers production of another
opportunity cost what is the cost of what you gave up?
THREE KEY ECONOMIC QUESTIONS:
1. What goods or services will be produced?
2. How will they be produced?
3. Who will receive them?
TYPES OF ECONOMIES
1. centrally planned government decides how resources are allocated 2. market economy decisions of households and firms interacting in markets
decides how resources are allocated
“Cell Phones Introduced in North Korea” (Bloomberg TV)
cell phones finally introduced in North Korea; represents opening of economic zones as
they realize that their economy will benefit from market aspects
•The economics problem every nation must solve: equity and efficiency
productive efficiency: good or service produced at lowest possible cost
(consumers prefer cheap products in essentials)
allocative efficiency: production must be in accordance with consumer wants (no
voluntary exchange= we want both buyers and sellers to be made better off by
equity= we want wealth to be fairly equal, but not enough to erase social status
(social status is the incentive to succeed)
Society must deal with the decisions made necessary by the existence of scarcity, trade
what goods and services will be produced? How will they be produced? Who will
ECONOMICS IN THE NEWS: WEEK 2
Apple, America and the Squeezed Middle Class
issue over the fact that iPhone components are made out of the country rather than in
USA (not making any US jobs)
Apple explains economic advantage of this: because workers abroad are so used to
detailed/assembly line style work, they do it better (not necessarily because labor is
cheaper, but because these workers are trained to be flexible and diligent)
comparative advantage in production means that it economically makes sense for these
parts to be made abroad; but US has comparative advantage in marketing, so marketed
and sold here
Colombia’s Free Trade Deal
In May: Andean Trade Promotion and Drug Eradication Act made permanent
utilizes comparative advantage: US is better at farming soybeans, beef, bacon, cotton,
fruit and chickens these are all now tariff free. In return, no tariffs on Colombian mining,
agricultural riches, and flowers
•issue US has comparative advantage in poultry farming will greatly harm Fenavi
(poultry industry in Columbia). US chicken will go for half price in Columbia. Sad for
•but still, Colombia should benefit still
GAINS FROM FREE MARKETS ▯Adam Smith, “invisible hand” Smokers Drop Pricey Cigarettes
government taxes cigarettes in a huge way. However, they don’t tax pipe tobacco
so people begin to roll their own cigarettes
•government lowers demand (rising prices), so SUBSTITUTION occurs
variables shifting demand: income, complements
Orange Juice Prices Fall, Oil Rises (lower supply)
Hurricane Isaac creates problems for Gulf of Mexico gas production; constant
demand leads to price increase (competitors can afford to raise prices without losing
business because of low supply)
what this entails: with necessity goods like gas, people will buy at any price
ECONOMICS IN THE NEWS: WEEK 3
Consumer surplus= difference between what a customer is willing to pay and what they
Producer surplus=difference between what a firm is willing to accept and what it does
Thirty Years Before SOPA, MI feared the VCR
movie industry argues that VCRs are “unfair market intervention” because they supply
the same product as theatres
instead, the VCR went on to become extremely profitable for film companies as a means
of delivery, not displacement
why did they worry?
•when content producers (movie industry) lose control of supply (VCR), leads to
consumer surplus and price decrease (makes industry sad L)
How Teachers are Both Undervalued and Overpaid
“diamond v. water paradox”
• teachers are valuable in society (good teaching increases potential future salary),
but they aren’t rare. High