April 2006 Archives

NOTE: As of now, there is a lag between your submitting a post and its appearance on the blog. I have to "approve" them by clicking on them. Don't resend.

REMINDER: In order to receive credit, these comments need to be posted by 11:10 AM on Monday. Remember that this is a public site, and you are responsible for the content of your postings.

At this time, you are supposed to have read Chapter 8, “The Power of Organized Interests.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

1. "When it comes to interest group politics, it pays to be small." (page 140) Imagine that your world is limited to the MPA community. Give an example that you think supports this claim made by Wheelan. (You should avoid mentioning names if it might be controversial or hurtful in any way.)

2. What SHOULD we do when it comes to ethanol?

3. How do we keep interest groups from using/abusing the political process to "generate regulation that either helps them or hobbles their competition?" (page 142) Should we even try to control this? Why or why not?

4. Is giving a president "fast-track authority" desirable? (page 146) Why or why not?

5. "Creative destruction" is a term coined by Joseph Schumpeter. (page 144) Using examples from today's world, comment on the desirability and/or drawbacks of such a process from your perspective.

Welcome back. We'll continue our look at the world economy with an examination of the United States and issues of trade.

Post your blog entry for Chapter 8 by Monday's class. Please have chapter 9, "Keeping Score," read for Wednesday.

There are a couple more definitions we need to make sense of this information we will consider today.

Balance of trade: Balance of trade data describe the exports of goods and services produced in the U.S. and sold abroad and the imports of goods and services produced abroad and sold to individuals, businesses, and governments in the U.S. To obtain the balance, imports are subtracted from exports and the result is described as a surplus if exports are greater than imports and a deficit if imports are greater than exports.

More commonly, you will hear of the trade deficit. This is exports minus imports.

bilateral trade negotiations: These are trade negotiations between two coutries only

most-favored-nation clauses: These extend the benefits of lower trade barriers granted to one country to all nations what have most-favored-nation status. This term is being phased out in favor of the terms, normal trade relations or permanent normal trade relations.

The Status of US Trade: Charts and graphs...

You can download this Powerpoint of September 2003 trade report graphs and charts.

Here's more current information from the US Government on our trade balance and situation.

Specific issues in US trade policy: We'll access resources from the "Public Citizen" web page. They call themselves a national, non-profit public interest organization. Ralph Nader helped found this organization 30 years ago, so there is a definite liberal perspective here.

We'll have you pick one of these issues. I want you to figure out the basics and report back to us. In addition, please consider what you think the "conservative" response might be...

World Trade Organization (WTO)
North American Free Trade Agreement (NAFTA)
Free Trade Area of the Americas (FTAA)
Central American Free Trade Agreement (CAFTA)
Offshoring

We'll do the rest of my "introduction to trade" stuff today...

I have a short (2 page) reading that I want us to do. It may be the single most effectively worded defense of trade that I have ever read. Let me hand it out... Read it and talk about it.

Next, let's think about the limits that are put on international trade. These barriers can take a number of forms.

* tariffs - taxes on imports (either for generating revenue or sheltering firms from competition)

* quotas - restrictions on the quantity of a good that may be imported or exported

* non-tariff barriers - regulations on labeling, packaging, and testing; customs restrictions

* embargo - This, of course, is a cutting off of trade with another country.

A couple questions with which to close:

What are the arguments in favor of restricting trade?
What are the arguments against restricting trade?
In your opinion, when are restrictions on trade justified?

This will begin our shift from micro-economics to international economics (both micro and macro-level). This lesson will probably cover the next two sessions.

We'll begin our look at the world economy with an examination of the basics of trade. The amount of hype and misinformation surrounding the issue of trade in the United States is truly staggering. Our goal is to cut through some of this lack of understanding.

First, I want to begin with a brief discussion. Very often, discussions of trade center on "winners" and "losers". Let's consider the case of NAFTA, the North American Free Trade Agreement. NAFTA went into effect on January 1, 1994. Its goal was to limit trade barriers among Canada, the United States, and Mexico. (We'll forget about Canada, since we have long had very free trade with them.)

Who do you believe have been/ will be/ are the "winners" and "losers" under NAFTA?

We'll brainstorm two lists at the board.

Second, we need to learn a bit of vocabulary that goes along with international trade. There are two fundamental terms that often cause confusion.

absolute advantage: When two countries can each produce a different good (or service) more efficiently than the other country, each of the countries has an absolute advantage in the good or service they produce more efficiently.

comparative advantage: When Country A can produce two different products more efficiently, but has a greater advantage in one product than the other, they have a comparative advantage in the product with the greater relative efficiency. Country B has a comparative advantage in the product in which the disadvantage is less large.

That seems like a mouthful, but let's try to make sense of it. Clearly, it is in both counties' best interest to trade in a situation of absolute advantage. What if we are talking comparative advantage?

Third, let's work through an example of a simple economy. Download this Comparative Advantage handout, and work through the scenario with a partner.

Be sure you have worked through this before class on Friday...

NOTE: As of now, there is a lag between your submitting a post and its appearance on the blog. I have to "approve" them by clicking on them. Don't resend.

REMINDER: In order to receive credit, these comments need to be posted by 11:10 AM on Wednesday. Remember that this is a public site, and you are responsible for the content of your postings.

At this time, you are supposed to have read Chapter 7, “Financial Markets.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

1. Wheelan explains that there are four functions for all “financial instruments”: raising capital; storing, protecting, and making profitable use of excess capital; insuring against risk, and speculation. Project yourself two decades into the future, and assume that you are in a good, but not great, financial situation, maybe with a family. Prioritize these functions in terms of how you would anticipate using “financial instruments” at that point in your life. Explain why you ordered them that way.

2. Are you more “risk adverse” or “risk tolerant” when it comes to financial issues? React to one or more of the insurance anecdotes (or another with which you are familiar) in this chapter.

3. Later in the chapter, Wheelan shares some “lessons” about the markets. Comment on anything you “learned” in the anecdote about the “brownstone” or anything else.

4. On pages 130 and 131, Wheelan talks of a monkey picking stocks. (OK, a fictional monkey – maybe Curious George?) What do you make of this story? Does it change your level of “confidence” in financial markets?

5. In the section entitled “Diversify” (page 134), Wheelan urges his students to flip coins. Do you think this is a valuable activity here? Can you think of another that you would recommend for students learning about financial markets?

We'll start with anything in chapter 7 from Naked Economics. (Please have chapter 8 read for next Wednesday.)

I asked you to think about... a business that you believe is either a "success" story or a "failure". Tell us why you think that business is either succeeding or failing...

Competition and Business: Let's look at the different market structures that exist for the goods. Most economists hold that there are four basic types of market competition: perfect competition, monopoly, monopolistic competition, and oligopoly. (The last three are summed up as forms of "imperfect competition".)

These characteristics help determine the market structure for a given good:

* number of firms in the industry
* the presence (or absence) of product differentiation
* ability (or lack of ability) of any or all firms to influence the market price

Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure" competition):

* There are numerous sellers in the market, all selling identical products. This means their are no quality differences, no brand names, no need for advertising, etc.

* There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.

* No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers".

* All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...

In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.

Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist in our country today are probably some government-regulated public utilities.

* The seller holds a large degree of control over price. The monopolist is a "price maker".

* The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.

* Sources of monopoly:
- Economies of scale
- There are some "natural monopolies" like bus companies and public utilities.
- Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
- Patents- These give the exclusive rights to use, keep, or sell an invention for a period of years.
- Competitive tactics- These would include pirating, pressuring, and predatory pricing.

Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.

* Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize

* Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates

* Federal Trade Commission Act of 1914 - created an organization to police unfair business practices

Oligopoly: This is a market structure in which relatively few firms produce indentical or similar products.

* The actions of any one firm in terms of price and output will be noticeable by others.

* There is interdependence among firms in setting their pricing policies.

* Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership".

Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.

Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.

* Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's produst as unique.

* Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.

Questions to Discuss:

Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?

How much monopoly is too much? (In what ways are monopolies beneficial?)

Should the government work harder to regulate potential monoplies?

If you were trying to gain a monopoly, how would you work to limit competition?

Are oligopolies necessarily bad for an economy? Why or why not?

How is product differentiation achieved? What methods do you believe are most effective?

Which market structure do you believe is best for consumers?

We're just going to pick up with the information that we couldn't get to Friday due to the #^$&(&$## assembly schedule... Here's what guides businesses as they make decisions regarding production.

What determines a firm's profits? To figure this out, we need to look at both costs and revenues.

costs: There are two types of costs - fixed and variable

fixed costs: These are the production costs that do not change with changes in the quantity of output. The largest of the fixed costs are usually those associated with depreciation. (Depreciation is the costs of buildings, machinery, tools, and equipment that are allocated to output over a given production period.)

variable costs: These are the costs that change with changes in the quantity of output. They would include the labor, raw materials, and other costs that change with the quantity of goods produced.

If you like to do math, you can get two more terms. Total costs are simply the sum of fixed costs and variable costs for a particular level of output. Average cost would be total cost divided by the number of units produced.

Marginal cost is the addition to total cost from increasing output by one unit.

SEE IT HERE: This is a useful webpage illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.

revenue: This is simply the money that a firm receives from the sale of its products and services.

total revenues: This is the price of the product times the number of units sold.

Marginal revenue is the addition to total revenue from increasing output by one unit.

Profits are determined by subtracting total costs from total revenue.

Want to know if your business is doing well? It would help to know the normal rate of return. That's the rate of earnings on investment that is normal for a given degree of risk. Earnings in excess of that would be termed economic profits.

Next time, we'll look at competition (or lack of) and how it affects business decisions.

For now, think about these questions:

When should a business produce? When should it decide to increase production? Decrease production?

How much profit does a business need to remain viable? How certain does profit need to be for a business to be viable?

DO THIS: Think of a business that you believe is either a "success" story or a "failure". Be prepared tnext time to discuss the business and what you believe makes it work or not work.

SMALL GROUP SESSION #8

A – Monday, April 10, 2006
B – Wednesday, April 12, 2006
C – Tuesday, April 18, 2006

We will NOT cover any new material at these sessions. They will be a chance for people to come and make up their “Taking Sides” debates if they need to do that. We also will listen to “Everyday Economics” presentations from those who have read those articles.

If you need to do any of those things, you can come to whichever of the sessions works for you best. If you are caught up on these, you can wait until the next batch of small group sessions starts…

LARGE GROUP CLASSES DO MEET AS SCHEDULED THIS WEEK…

REMINDER: Naked Economics Chapter 7 should be read for Tuesday.

Types of Business: We'll start by looking at the various classifications of businesses that you find in the economy. This matrix will help you fill in the necessary information.

What determines a firm's profits? To figure this out, we need to look at both costs and revenues.

costs: There are two types of costs - fixed and variable

fixed costs: These are the production costs that do not change with changes in the quantity of output. The largest of the fixed costs are usually those associated with depreciation. (Depreciation is the costs of buildings, machinery, tools, and equipment that are allocated to output over a given production period.)

variable costs: These are the costs that change with changes in the quantity of output. They would include the labor, raw materials, and other costs that change with the quantity of goods produced.

If you like to do math, you can get two more terms. Total costs are simply the sum of fixed costs and variable costs for a particular level of output. Average cost would be total cost divided by the number of units produced.

Marginal cost is the addition to total cost from increasing output by one unit.

SEE IT HERE: This is a useful webpage illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.

revenue: This is simply the money that a firm receives from the sale of its products and services.

total revenues: This is the price of the product times the number of units sold.

Marginal revenue is the addition to total revenue from increasing output by one unit.

Profits are determined by subtracting total costs from total revenue.

Want to know if your business is doing well? It would help to know the normal rate of return. That's the rate of earnings on investment that is normal for a given degree of risk. Earnings in excess of that would be termed economic profits.

Next time, we'll look at competition (or lack of) and how it affects business decisions.

For now, think about these questions:

When should a business produce? When should it decide to increase production? Decrease production?

How much profit does a business need to remain viable? How certain does profit need to be for a business to be viable?

DO THIS: Think of a business that you believe is either a "success" story or a "failure". Be prepared tnext time to discuss the business and what you believe makes it work or not work.

Weird week coming up. We'll look at the "market" a bit today (not "stock" or "grocery," but rather the "place" where supply and demand do their thing...)

I do want to take some time and talk about chapter 6 in Naked Economics first today. There's good stuff in there. We'll shoot for having chapter 7 read for class next Tuesday.

When Markets Fail: Heilbronner and Thurow identify a number of reasons why markets don't always operate according to the prinicples of Adam Smith and his "Invisible Hand." Since we're not reading the book this year, we should talk about it a bit.

Here are some examples of "failures" in the market:

* "Marketers" may lack information. Their decisions may reflect luck, accident, or ignorance. (Consider the role of advertising here as well.)

* Pure public goods", such as defense, national security, or lighthouses, cannot be effectively allocated. (The "free rider" problem is a version of this...)

* Externalities, such as pollution, are the effects that goods and services have on third parties.

* The public wants some goods and services, such as health care, to be distributed more equally than the market would.

Let's see if there are any questions from the supply and demand vocabulary we have been doing...

ON-LINE SIMULATION ON DEMAND AND SUPPLY: The University of Omaha has done a neat on-line "tutorial" on using supply and demand.

Exploring Supply and Demand: Here's the quiz. Work through the problems and see how you do. Notice that the curves will actually move to help you better understand.