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Thursday, May 18, 2017

The Economic Issue of Scarcity

The Central theme of the study of Economics is how humans manage scarce resources, as those resources have alternative uses. Why are those resources scarce?

Law of Marginal Utility

The individual preference ranking, or utility ranking, is central to economic action. Humans make choices and act on those choices in a spatial and temporal fashion. If an economic actor chooses activity A prior to activity B, it is clear that that actor prefers activity A over activity B, in that particular moment...in time. Likewise, if B is the next preferred activity, it is preferred over C and D. These activities are ranked from top preference, in an ordinal fashion, to the lower preference of activity. This process happens naturally, as the human mind processes this information.
As time progresses, the preference, or ordinal ranking of preferences will change. This is not a static process, as it is highly dynamic in action.

For example: I may have a list of "to do" items, at the beginning of the day. However, I may have external events that alter my preference listing, or "to do" list. I may experience heavy traffic that causes me to run late for my first appointment. This will alter my priority of things on my "to do" list, as sitting in traffic ranks higher on my "to do" list.

Space and Time

Since we only have 24 hours in one day, things must be done in a priority fashion, as mentioned in the previous paragraph. However, time is a factor in scarcity. In fact: Time is the notion that creates scarcity. It is not resources. Another fact: so is space. Space is the other cause of scarcity.  This is also true since we can only occupy one space at one time.

Time is a notion of our intuition. It is not something that is external to us, rather it is internal to us. This also goes for the notion of space. Space is a concept, along with time, that is vital to how the human mind processes things through the senses. Since humans are not demigods, and we do not possess the trait of omniscience or omnipotence, time and space becomes the restricting factors. It is our minds that create the scarcity.  This does not mean that somehow we can expand our thinking to rid ourselves of scarcity, as this impossible due to the law of negation. This law impacts us spatially and temporally.

Example: Can a person be at the barbershop, but not at the barbershop at the same time? Of course not. Thus, the person must be at one place at one time. Since this concept is true universally, we must now deal with the law of marginal utility. One preference over the next, acting in time and space. This is how it works no exception.  Staying consistent with the barbershop example, either we can go to the barbershop, or we can go to the movies. If the barbershop is chosen, it's clear, based on that decision at that time, the activity of going to the barbershop is preferred over the activity of going to the movies. 

Conclusion

Time and Space are the causes of economic scarcity. As objects appear to us, these objects, or concepts, appear to us in our minds as things in space and we act upon them temporally. Since space and time are concepts of our intuition, we are limited on those things we can act upon during one moment in time and in space. 



Monday, May 15, 2017

What is the Significance of Elasticity of Demand?

Elasticity of demand is a concept that is tied into the subjective value of the individual actors, to wit, buyers of the good or service. It is a concept that can be used to analyze how to target a particular group of potential buyers for a product or service. It is a way to attempt, for business owners,  to measure how consumers will respond to the price of a good or service. This concept is the foundation of many uses in business, specifically, revenue optimization.

Price Discrimination with Elasticity of Demand

Airlines may implement “price discrimination” by segmenting the price of their services, as this is a means to optimize revenue. This notion is based on the principle of elasticity of demand. Some customers are willing to pay more for a seat, e.g. First class passengers, for the exact same flight. Whereas other passengers are less willing to pay for a first class seat, but are willing to pay for a coach seat. Airlines then will attempt to optimize their marginal benefit by allocating a certain number of seats for 1st class, followed by the rest of the seats for coach passengers on one flight. Hotels utilize a similar strategy to fill up hotel rooms. They will price the rooms higher for business clients, who typically stay Monday through Friday. The hotel will lower the price on the weekends to drive up demand for the non-business clients. Using this pricing strategy, hotels can maximize their revenues to cover the costs to run the hotel.  In both cases, prices still can be further segmented in both of those respective groups.

Consider another example of Price Discrimination: Cell Phones. When the latest version of a cell phone is marketed to the public, the news will show clients standing in long lines for hours, as they are willing just to obtain this latest cell phone. Cell phone producers know this, as this segment pays a higher price for that cell phone. Buyers who are more responsive to price increases, will simply wait until the price of the cell phone falls, then attempt to obtain the latest model. The cell phone manufacturer optimizes its profits for the economic costs to produce and bring that phone to market.

The significance of the elasticity of demand is that individuals value things differently. An increase in price, or costs from the business owner, simply can not be passed onto customers on an absolute scale. If the price is raised too high, then many customers will simply look for alternatives for that good or service. When this happens, the business owner will see a decline in revenue. Yet, if the business owner locates the proper price point, he/she can optimize their revenues and make a profit, relative to their costs to run the operation.

Products that are 100% Inelastic, do they exist?

No good, service or product is 100% Inelastic.  Mainstream economists will teach that Insulin, for example, is absolutely inelastic. This is not true. Yes, it is relatively more inelastic as compared to other goods. But, when dealing with humans, each of us value things differently....as value is subjective. In short, if the price of insulin was too high, humans would seek other means to deal with their diabetes issues. Those options maybe so extreme to the point that they stretch out how frequently they utilize insulin. Or, they may resort to stealing the insulin, or other extreme measures. The point is that there is no way to absolutely predict what all humans' actions would be based on raising the price to the point of beyond anyone's reach. And, the business owner, in turn, would eventually lose money...even with insulin if the price was raised egregiously high.

A thought exercise: If Insulin was absolutely inelastic, then drug companies could charge whatever price needed to make an egregious amount of profit.  However, they do not, since they need consumers to continue to purchase the insulin on a regular basis. It makes no sense to charge too much, as consumers would reduce their purchase of insulin, and the drug companies would take a loss on the profits of that drug. Remember: Drug companies inject large amounts of capital to manufacture drugs, and these companies want to earn a profit to provide a return on capital for that large capital investment.

To assume no elasticity, or a good that is 100% inelastic, would assume no scarcity, as this is a false concept. The next blog article will discuss the notion of scarcity, and the origins of this concept. Scarcity is the foundation of the Science of Economics.

Monday, March 27, 2017

How to Interpret the Shape of the Yield Curve

How to Interpret the Shape of the Yield Curve: Historically most recessions in the US are preceded by significant declines in the differential or interest rate spread between the 10-year T-bond and the 3-month Treasury security. Typically, this narrowing in the spread occurs many months before the onset of the recession.

Monday, March 20, 2017

Capital and Interest | Robert P. Murphy

Tariffs and Free Trade

Here is an excellent article titled, America Is Hardly a Bastion of Free Trade, as this is a key excerpt: "Rhetoric has recently trumped reality. It has become a misconceived bit of common “knowledge” that the United States of America is a bastion of free trade. Little could be further from the truth."

The author makes some good points, from an economic analysis standpoint. Tariffs, properly implemented and enforced, have an adverse effect on the market. It displaces scarce resources, and both markets(nations) suffer adversely. Of course, the incentive is in the favor of the domestic producers of the product to rent seek the local Government for the implementation of tariffs.

From a supply and demand analysis, tariffs shrink the supply, yet if demand is constant, the prices of the good rise. Another effect of tariffs: It reduces the number of firms in the marketplace. Since the cost of entry into that said marketplace includes the tariffs, potential firms will seek out other means that require their capital.



Tariffs acts similar to a tax, as the producers, or firms, pay the economic cost for the tax As previously mentioned, it raises the price of the good, but consumers price elasticity may push them to buy substitutes for that good. Once this happens, the substitutes will rise in demand, and the original good would drop in price.



If tariffs did not exist, then more firms would enter the marketplace, providing more options for the consumers. The more options that exist, the prices will fall accordingly. And, substitutes would appear on the marketplace for those consumers that prefer alternatives.

Tuesday, March 14, 2017

What Happens to Bond Funds When Interest Rates Go Up?

Bonds, on average, will decline when interest rates rise. In the capital markets, this is a common inverse relationship. Why?
Back to the fundamentals of Economic thought..
The true notion of interest rates is based on the time preference of consumers in the marketplace: The ratio of prices is based on consumption of goods in the present vs consumption in the future. If this ratio is lower, consumption is preferred in the present, conversely, if higher, then consumption is preferred in the future.
A bond is simply a debt instrument. It allows firms, or Govts, to raise capital, to wit, borrow the money, to expand operations. Investors will purchase these financial instruments to obtain a certain fixed percentage yield from the bond, as this income payout takes place until the maturity of the bond.
Since the bond yield is fixed, as it pays an income stream over time, if the interest rate rises, investors simply want to seek other investment opportunities away from bonds that will yield a better ROI. If the interest rate is lower, the fixed income stream, from the bond, works better, for the investor, in a lower interest rate environment.
In a lowered interest rate environment, capitalists will seek to acquire more equipment, spend more money to invest in their business, expand operations, and etc. This activity includes the intense purchase of bonds, as they are a means of raising capital.
This marvelous ebb and flow interplay between Bonds and interest rates creates arbitrage opportunities for investors, as interest rates rise and fall.
This quick analysis is an introduction into the notion of business cycle theory, as interest rates play a vital role in this process.

Monday, March 6, 2017

Can Yellen Keep the Boom Going?

Can Yellen Keep the Boom Going?: Yellen, like notorious previous Fed chiefs including Strong, Martin, and Greenspan, can now claim success in having prolonged and strengthened an asset price inflation which otherwise may well have been about to enter its severe end phase.

Wednesday, March 1, 2017

Florida's Government Built a Train — And It Didn’t Go Well

Most of these Government sponsored projects, wait, all of them, never make an economic profit. Of course, proponents of these deals will always cite the revenues that the municipalities will earn from these projects. The revenue projections maybe correct, yet these proponents never cite the actual economic cost for these projects.



The tax dollars to underwrite these projects come from the Federal Government, namely, the Dept of Transportation. After those dollars flow to the local municipalities, the locals will have a planning organization to work with the Civil Engineers, and the like, to facilitate the project's creation. Since none of these individuals work for free, the costs mount up just from the planning stage. Include the cost to acquire the materials, and the economic costs continue to rise. Oh yes, there needs to be land to construct the rails for the train....enter eminent domain, hence raising the cost exponentially.


Once the project is completed, behind schedule, on average, the local politicians assume that charging ZERO for the fares, the rail project will make money. Econ 101 tells us that lowering prices will increase demand for that good or service, but in this case, it does not cover the sunk cost of construction. In short, the project continues to lose money, yet all the individuals involved are paid handsomely.



In conclusion, these projects are simply a wealth transfer from the tax payers, to the folks involved in the construction and maintenance of the rail project.



The Article is listed here:

Florida's Government Built a Train — And It Didn’t Go Well: "The state of Florida is well known for many things: beautiful beaches, outrageous headlines, and being the setting for the wacky antics of the Golden Girls."

Sunday, February 26, 2017

Why the Feds Should Legalize Interstate Commerce in Healthcare

Why the Feds Should Legalize Interstate Commerce in Healthcare: In a recent television interview, Aetna CEO Mark Bertolini, head of one of America’s largest health insurers, commented that selling insurance across state lines is “an outdated concept” in these days of the Affordable Care Act (ACA).

End the Sugar Tax Now

End the Sugar Tax Now: “Sugar Vs. Corn Syrup” reads the headline about legal wrangling between enablers of America’s sweet tooth.

Justice and 'Social Justice' Are Two Very Different Things

Justice and 'Social Justice' Are Two Very Different Things: Recently, Harvard political theorist Danielle Allen wrote in the Washington Post of “The most important phrase i

Thursday, February 23, 2017

Ten Great Economic Myths

Ten Great Economic Myths: Our country is beset by a large number of economic myths that distort public thinking on important problems and lead us to accept unsound and dangerous government policies. Here are ten of the most dangerous of these myths and an analysis of what is wrong with them.

Primitive Minds - Cafe Hayek

Primitive Minds - Cafe Hayek: TweetHere’s a letter to a new and intrepid correspondent: Mr. Nolan McKinney Mr. McKinney: You point to Harley-Davidson’s resurgence, after Ronald Reagan drastically raised tariffs on imported large motorcycles, as “evidence of protectionism strengthening our economy.” Harley’s resurgence is evidence of no such thing.  The argument against protectionism is not that it doesn’t help the …

Sunday, February 19, 2017

Say's Law: The Antidote to Countless Economic Fallacies

Say's Law: The Antidote to Countless Economic Fallacies: To understand the principle that has been called Say’s Law, it is useful to start by thinking about what unhampered exchange is: the mutual offering of goods and services between people.

Friday, February 10, 2017

Price Controls and Propaganda

Price Controls and Propaganda: Most economists agree on one thing; price controls do not work. Many go on to say they create shortages of goods, which inevitably drives black market prices even higher than they would otherwise be. Price controls were last tried in the 1970s, and everyone swore, never again.

Friday, February 3, 2017

Why Those Student Loans Aren't Getting Paid Off

Why Those Student Loans Aren't Getting Paid Off: Last month, the US Department of Education admitted that a much larger number of students are defaulting on student loans than previously reported. According to the Wall Street Journal:

Tightening the Money Supply will Inevitably Lead to a Bust

Tightening the Money Supply will Inevitably Lead to a Bust: Fed policymakers are of the view that the correct interest rate policy could bring the economy onto a path of economic stability and low price inflation. The idea is to guide interest rates toward what is called the “natural” interest rate.