Saturday, 12 November 2011
EWOT Goggles #10 "Law of Demand in China" (11/12/2011)
While the Law of Demand states that as the price of a good increases, the quantity of the good demanded decreases, Giffen goods seem to defy the Law of Demand. If the price of a good increases, and the quantity demanded increases, this good is said to be a Giffen good. However, economists have had a hard time finding real world examples of Giffen goods. But in part of China, rice appears to be a Giffen good. People need 1600 calories to live per day - this means consuming enough caloric food. The price of meat is expensive (in comparison to rice). As rice prices rose, Chinese could no longer afford meat to supplement their diet and turned to buying more rice (which was still cheaper than meat) in order to get their 1600 daily calories. Giffen goods are rare but a very cool economic anomaly.
Reading Analysis #10 "What is seen and What is unseen" (12/11/2011)
A)
This essay recounted the economy that arose in a German POW camp during WWII, enterprising POW's created a system of trade and a vibrant market system based on the currency of cigarettes. The entire piece is interesting, especially how real a currency the cigarettes became. With credit being used and all sorts of other mechanisms which we find in the real world. However the most interesting section, and also the most amusing, was the section on price fixing. Some one in authority decided that the prices for food needed to be set by the central store in order to make sure everyone had enough food. However in a classic example of why central planning cannot work the price fixing system failed. Rapid deflationary pressure from other sources changed the real value of goods, but the store could not adjust quick enough and most exchanges went to the black market. Thus the system was forced to be shut down.
B)
B)
- Using the POW camp as proof, can it be proved that a modern economy can survive without a manufacturing base?
- How can the lesson of the Medical Doctors attempt at regulating prices be applied to today's economic problems?
- Would it have been better for the camp to stay in BMKs or do you believe the Cigarettes were a better currency? And how is this similar to the idea of gold/silver vs. dollars.
C.
This essay shows how markets spontaneously erupt out of the natural human behavior. It also demonstrates how supply and demand determine prices in a market. Nothing needs to be done to create the system of the market and the prices, it happens naturally.
Sunday, 6 November 2011
Class #27 "Transaction Costs" (11/4/2011)
All models so far have assumed zero TRANSACTION COSTS, which are:
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- Cost of arranging/negotiating/enforcing contracts and agreements. There are three categories.
1. Physical Costs: Transportation, distance, (time?)
2. Costs from Ignorance: Not being fully aware of all the opportunities available.
3. Interferance: from religious and cultural rules, laws, ect.
- The best transaction cost reducers are the "Middle Men" (ex. grocery stores) They have the comparative advantage in reducing transaction costs.
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What is it that solves the massive information problem in large, complex, impersonal, societies?
Prices: Signal of value and scarcity. Steers resources to where they are most valued.
Prices emerge from markets, and produce order. There are three categories.
1. $ prices (dollars)
2. Non-$ prices, (time, health, ect.)
3. prices which are a mix and have some $ price and some abstract price as well.
In the marker there are two types of people:
Buyers = Demanders
Sellers = Suppliers
Everyone(people, companies) are both buyers and sellers, whether it is for goods or for production factors.
-Rizzo
Daniel Gaona
Class #26 "Transaction Costs / Demand / Market" (11/02/2011)
Transaction Costs
They prevent beneficial transactions from taking place. Middlemen, despite their terrible reputation, have a comparative advantage in lowering transactions costs for consumers and producers by bringing buyers and sellers together. Supermarket is the ultimate middleman by reducing transaction costs between farmers and consumers. At Wegmans, you were buying that apple at the particular time in that location at that temperature - not just an apple. Bridging the barriers between transaction costs gets your rich. The reason middlemen are to able to do what they do is because they echange property rights.
Demand
Since we live in a large, impersonal world, how do we produce goods and get them to the people who want them? People must specialize (and it cannot be planned) and not resort to self sufficiency. While exchange can occur in small groups, 2 problems arise in a world of 7 billion.
Information Problem - How do you know what people want?
Transaction Cost Problem
What is a price really? It is information (signals to buyers and sellers). Signlans to buyers about what is scare. Also a signal to sellers about what you (buyers) value. This steers knowldege and resources in a way that allows order to emerge.
They prevent beneficial transactions from taking place. Middlemen, despite their terrible reputation, have a comparative advantage in lowering transactions costs for consumers and producers by bringing buyers and sellers together. Supermarket is the ultimate middleman by reducing transaction costs between farmers and consumers. At Wegmans, you were buying that apple at the particular time in that location at that temperature - not just an apple. Bridging the barriers between transaction costs gets your rich. The reason middlemen are to able to do what they do is because they echange property rights.
Demand
Since we live in a large, impersonal world, how do we produce goods and get them to the people who want them? People must specialize (and it cannot be planned) and not resort to self sufficiency. While exchange can occur in small groups, 2 problems arise in a world of 7 billion.
Information Problem - How do you know what people want?
Transaction Cost Problem
What is a price really? It is information (signals to buyers and sellers). Signlans to buyers about what is scare. Also a signal to sellers about what you (buyers) value. This steers knowldege and resources in a way that allows order to emerge.
Demand is not an all or nothing concept. It is a relationship between the amount you wish to obtain and the sacrifices your must make to get it. Quantity demanded (distinct different from demand) - It's (a plan) (a number). It's the amount of a good that buyers are willing and able to consume, at a particular price.
Law of Demand - other thins equal, the quantity of a demanded good falls when its price rises.
Markets
What is a market? Any group of potential buyers and sellers. Better definition: Any decentralized unorganized interaction between buyers and sellers constitutes a market. When you have a market, 1 of 2 things will emerge (1) The production of money prices or (2) non money prices will occur. The goal being to produce order (order - things work, Rizzos cup of coffee). Most markets blend non money costs and money costs.
Buyers - "Demanders" - In a goods market, the demanders are households. But in factor markets, the demanders are the firms.
Sellers - "Suppliers" - In the goods market, supplies are the firms. In the factor markets, suppliers are the households.
-Rizzo
Daniel Gaona
Reading Analysis #9 "Organization of a POW Camp" (11/06/2011)
A)
Radford quickly establishes the POW camp's economic activity occurred spontaneously because of the prisoner's needs and circumstances. The market evolved as people began trading based on preferences. The information barrier (transaction cost) was bridged by putting up a public notice board, market prices soon reached equilibrium. While cigarettes became the standard form of currency, bartering still took place. I found it interesting that Radford discusses how multiple markets existed within a camp. Prisoners could even take out loans...in cigarettes! It is no surprise that individuals would hold onto rations, say bread, until prices peaked for cigarettes. Radford notes a time in which people began hand rolling their cigarettes, causing market prices to fluctuate because it unstandarized currency. Additionally, the market was plagued with deflation and inflation based on the supply of cigarettes dispersed by the Red Cross. A change in conditions affected the market's price structure more so than the general price level of goods. Paper currency developed, called Bully Marks (or BMs), which were backed 100% by food, but later fell out favor with the prisoners. While there was an attempt to fix prices, this too fell out of favor. Middlemen, much like today, were looked down upon within the camp.
Radford quickly establishes the POW camp's economic activity occurred spontaneously because of the prisoner's needs and circumstances. The market evolved as people began trading based on preferences. The information barrier (transaction cost) was bridged by putting up a public notice board, market prices soon reached equilibrium. While cigarettes became the standard form of currency, bartering still took place. I found it interesting that Radford discusses how multiple markets existed within a camp. Prisoners could even take out loans...in cigarettes! It is no surprise that individuals would hold onto rations, say bread, until prices peaked for cigarettes. Radford notes a time in which people began hand rolling their cigarettes, causing market prices to fluctuate because it unstandarized currency. Additionally, the market was plagued with deflation and inflation based on the supply of cigarettes dispersed by the Red Cross. A change in conditions affected the market's price structure more so than the general price level of goods. Paper currency developed, called Bully Marks (or BMs), which were backed 100% by food, but later fell out favor with the prisoners. While there was an attempt to fix prices, this too fell out of favor. Middlemen, much like today, were looked down upon within the camp.
B)
1. Why don't we see the same cycles of inflation and deflation that Radford described in today's market system?
2. What were the problems with having cigarettes be the standard currency?
3. Why were the main transaction costs one had to endure while in a POW camp?
C)
Radford illustrates how a market arises spontaneously because of needs, wants, and preferences. Also he describes the camp's market instability and shortcomings
EWOT #9 "Technology Compliment Skilled Labor" (11/06/2011)
A representative from BlueCross-BlueSheild came to speak with Public Health 101 class. Although she was there to discuss health insurance, she began talking about the role of technology with regards to the insurance industry. She spoke specifically about a program which automatically compiles company reports with regards to their employee's health. Conventional wisdom suggests that BlueCross-BlueSheild was then able to lay off workers, thanks to this new program. However, just like the bank teller slide from class (while the amount of ATMs has increased, so has the amount of bank tellers), conventional wisdom is wrong. Before the program, it would take an employee a few days to create a report - now it takes a few hours. Before the program, BlueCross-BlueSheild had 5 employees reporting for 30 companies; after the program, BlueCross-BlueSheild has 9 employees reporting for over 1,000 companies. This real world example illustrates how technology can compliment skilled labor.
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