Class #41 "Proft, Losses and Entrepreneurs" (12/09/11)

Profits, Losses, and Entrepreneurs
Society doesn't celebrate the accumulation of wealth, only its distribution.

Entrepreneurs - When starting a business, the most important thing to do is understand your real costs.
Factors of Production: (1) land, (2) labor, and (3) capital. You can about explicit and implicit costs
1) Explicit:rent ; Implicit: rent (cost of forgone opportunities)
2) Explicit:wages ; Implicit: forgone wages
3) Explicit: rent (projectors, laptops) ; Implicit: forgone rent

Profitability = Rental Rate + Appreciation Rate - Interest Rate
Benefits of buying an asset: its the forgone rental payments you would have to make.
So annual:
[(rental payments) / (price of good)] + [(Change in asset price)/(price)] - 10% = 2.5%
37.5% + (-25%) - 10% = 2.5%

2.5% means: how much richer I am each year from owning the car as compared to if I rented the car. If the number is positive you should buy; if the number is negative you should rent. If you buy, you are $250 richer than if you had rented the car.

Rizzo

-Daniel Gaona 

Class #40 "Cost of Taxes" (12/07/11)

      In contrast to the excise tax, which is targeted at sellers, the legal incidence of a sales tax is on the buyers. However by graphing supply and demand before and after the tax, we see that the economic incidence of the tax is exactly the same as the excise tax. 75% lands on the buyers, and 25% lands on the sellers.


The cost of taxes is the value of the forgone trades The value of all the bubble gym that doesn't get sold = deadweight loss.
Taxes are merely transfers - the problem is that they change people's behavior. The tax makes you substitute away from bubble gum. Tax gives sellers an incentive to sell something else other than gum.

How big is America's deadweight loss? 30% of the value of taxes is lost because it costs resources to collect taxes and the way we currently collect taxes is very inefficient.

If you want buyers to pay the tax (i.e. sales tax), which side of the market will be affected? Buyers. What happens to their demand curve? Demand cure will shift by the entire amount of the tax.

The Excise and Sales tax graphs look identical. Conclusion: the legal incidence of a tax doesn't matter. Legal an economic incidence are independent.

Economic incidence is determined by the relative elasticity of the supply and demand curves. A very steep demand curve means it is very inelastic (people will buy a lot regardless of the price).

Whichever party is less sensitive to price change will bear the burden of the tax.

Rizzo

-Daniel Gaona 

Class #39 "Costs of Drug Wars/Taxes" (12/05/11)

Continued from last class, some costs of the war on drugs:

-the obvious cost of taxes needed to support all the people and equipment needed to fight the war. 

-But also the less obvious opportunity cost of all the people and money employed. they could be working on something like medicine or science or whatever, instead they are fighting a "War On Drugs"

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Exercise taxes on bubble gums.

-Taxes are not a cost, it is just moving money from one spot to another, taxes in and of themselves are not costly.

- However taxes create dead weight in the supply/demand graph, which IS A COST. The task is to make the dead weight as small as possible. 

- The goal of the excise tax is to target the suppliers, (the stores). But the actual cost ends up being shiftef 75% to the consumers, and 25% to the suppliers. 

Rizzo

-Daniel Gaona 

Reading Analysis #14 "The Heart That Pumps Innovation" (12/06/11)

A) 
      Kling claims the reason for America's economic success stems from the innovation of our entrepreneurs. He contrasts our private-ownership system with Europe's public-ownership system. I wish Kling would give statistics to back up his claims that Europe's economy is stagnating when compared to the U.S., or that "it is easier for large businesses to fail in America." I found the claim that only paranoid businesses survive very interesting; entrepreneurs must adapt to constantly changing market conditions in order to keep up with the competition. Many entrepreneurs usually experience failure before success. I also found the Intrapreneur's Ten Commandments were really interesting - its basically saying that in order to help the company, you must defy it first. However, intrapreneurship forces companies (i.e. shareholders) to bear most of the cost rather than the intrapreneur. My favorite line is: "Someone who fits the description of an un-entrepreneur would be perfectly suited in another role - as a bureaucrat."

B)
1. How many businesses does the typical entrepreneur start before creating a successful business?
2. Is the appeal of starting your own business greater today than it was 10 or 20 years ago?
3. Can you think of any businesses that actually promote intrapreneurship?

C)
      Entrepreneurialism advances the market, while benefiting the consumer, because of competition between rising and incumbent firms. However, in order to create a successful business model, entrepreneurs must be able to adapt to the ever changing preferences of consumers.

EWOT Goggles #13 "Final Exams" (12/04/11)

Finals are here!
       With finals bearing down on us, I just want to take a minute to discuss the rationing of study space. Since Gleason is open 24/7, students are able to take over a booth and literally "hold" it throughout finals. Usually, they leave their belongings to indicate the space is reserved - some even sleep there. Because there are now less spots to study, they raise the marginal cost of a study spot in Gleason. Students who leave belongings to reserve a spot also pose as a negative externality to students who would otherwise use that space to study. One way to deal with the high demand of study space is to increase the cost. But what's the best way to raise the cost? You could forbid people from sleeping in Gleason. But then you have to find people who will enforce the new law - which is a waste of resources because they are not producing anything of value.