Archive
AS & A2 Revision – How PED varies along a demand curve
Been doing some more revision courses on CIE AS economics and went through how the elasticity of demand varies along a demand curve. Notice in Case A that the fall in price from Pa to Pb causes the the total revenue to increase therefore it is elastic – the blue area (-) is less than the orange area (+). In Case B the opposite applies – as the price decreases from Pa to Pb the total revenue decreases therefore it is inelastic – the blue area (-) is greater than the orange area (+). In Case C the drop in price causes the same proportionate change in quantity demanded, therefore there is no change in total revenue – it is unitary elasticity. Remember where MR = 0 – PED = 1 on the demand curve (AR curve).
WSJ Graphic – Federal Reserve Stimulus And Its Impact On Yields
Here is a cool graphic from the WSJ that looks at the impact of the US Fed’s monetary policy of dumping trillions of dollars into the economy in order to stimulate economic activity – it covers the period from September 2008 through to today. The graphic shows the impact on the following:
* 10 year treasury yields
* DJIA – Dow Jones Industrial Average
* WSJ US dollar index
Click WSJ Interactive Graphic to go to the page.
Open University – 60 second adventures in economics
Here is a series of 6 cartoons from the Open University about economic concepts – I got this link from Mo Tanweer of Oundle School in the UK. They are very well done and make for good revision with the forthcoming exams. Below is one on The Invisible Hand. To view all 6 click on the link -
Open University 60 second adventures in economics.
Great Sports Economics Videos
A hat tip to Matthew Ryan from the University of Auckland for these Sports Economics videos. The six short videos (called Some Sports Economics) are produced by Dr Liam Lenten from La Trobe University in Australia explaining basic economic concepts (such as prisoners’ dilemma, absolute/comparative advantage, complementaries, etc.). Well worth a look and notice the kit change for each video. Click on the link below to go to the playlist. Below is the video on “When scoring an own-goal is the only way to win”.
Road Runner cartoon – Wile E. Coyote moment hit in 2008
Another interview with Paul Krugman this time with Paul Solman of PBS. Krugman describes the events in 2008 as the Wile E. Coyote moment – a character in the Road Runner cartoons. That is, according to the law of cartoon physics, it is only when you look down that you realise that there is nothing below. Krugman likens this to the situation where housing bubble had started to burst and banks called in loans to be repaid.
But when everyone everybody tries to pay down debt at the same time what happens is the economy shrinks, prices of assets fall and people lose their jobs, people lose their income, profits crash, and everybody ends up being in a worse financial position than they were before because they’re, they’re… When everyone tries to do it at the same time, the result is mutual destruction.
Videographic – If Greece leaves the Euro
Below is a very good video from The Economist on the impact of Greece leaving the Euro. Thanks to John Wilson of AGS for sharing this on twitter.
Giant Poster on Money
Found this poster on a guide to money on the xkcd site. It started as a project to understand taxes and government spending, and turned into a rather extensive research project. It goes through from Dollars – Thousands – Millions – Billions – Trillions. The 36″x24″ high-quality poster print allows you to stand back and, all at once, take in the entire world economy. Below is the part on Trillions. To order go to the store.
Oligopoly and the kinked demand curve – download
I alluded to in the last post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.
In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.
With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.
Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.
If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Oligopoly
Grand Central Station becomes 3D movie theatre
The Financial Times has produced a series of three interactive 3D infographics covering business, economic and technological topics demonstrating the global breadth and expertise of the Financial Times. What is unique about these is that they are displayed in the Vanderbilt Hall in New York’s Grand Central Station so commuters can catch a glimpse of them on their way to catch that train. It is brilliantly done by David McCandless. If you heading to New York soon you must go to Grand Central and see for yourself. You can view the 3 presentations at FT Graphic World. They are on the following topics :
Global Economy
Money Talks
Recession & Recovery – see below.
Khan Academy – some great presentations on Macro and Micro
Below is one of many really good presentations on macro and micro economics from the Khan Academy. They are particularly useful for the more theoretical parts of the course and include just about every topic in the AS/A2 syllabus as well as other presentations on current economic issues like the one below. Here they are looking at the difference between quantitative easing in the US and in Japan. Well worth a look.
Lake levels in New Zealand and the spot price of electricity.
Grant Cleland in this month’s “Parliamentary Economic Review”, looked at storage levels of hydro lakes in New Zealand and how much the New Zealand consumer was being charged. Hydroelectric power accounts for 11% of the total primary usage in New Zealand with imported oil and oil products making up 70% of the primary energy. Hydroelectric power accounts for 57% of the total electricity generation in New Zealand
In early February 2,521 Gigawatt hours (GWh) of water was stored in New Zealand’s lakes – normally around this time of year 3,100 – 3,200 GWh is available. This reduction in supply has pushed up the spot price of electricity from approximately 2.5 cents per Kilowatt hour (c/KWh) last year to 11.7 cents earlier this month.
It is interesting to look at the close correlation between lake levels and electricity prices in the graph below. Notice as lake levels are higher than what is normal for the time of year the spot price drops and vice-versa.
McDonald’s on Marx street
Here is an image that might be useful for teaching economic systems – Unit 1 AS course (CIE). It shows a typical McDonalds fast-food restaurant in Germany but what you need to do is zoom in on the name of the street. It is sort of ironic that one of the major symbols of the free market should be located on a street of this name. This could be used in class discussion or as a topic for an essay. “Outline the characteristics of the economic systems that are evident in the photograph”
Great Poster – A Visual History of Financial Crises
Following on from the poster set, “Tracking the Credit Crisis” from the Museum of American Finance in New York, there is another which is well worth a look. I mentioned the book “This Time is Different” on a previous blog which maps the cyclical history of financial crisis from 1810 to 2010 for sixty-six countries representing 90% of world GDP. Click below to go to the site to order a poster or you can view it online by zooming in.
Cycles of Financial Crises 1810 to 2010
The giant wave in the top section of the graphic depicts the percentage of world GDP by region in crisis during the 200 year period. It includes the four major financial crisis types (sovereign default, banking, currency, and inflation) along with stock market crashes.
The bottom section provides a detailed chart of all sovereign defaults by country, region and year. It shows the repeating nature of sovereign default, a central theme of Reinhart and Rogoff’s book.
Created in partnership with the Princeton University Press, this graphic provides a comprehensive yet accessible view into the historical and current cycles of financial crises.
Skyscraper completion = Economic Downturn
Barclays Capital have produced an interesting indicator in that its Skyscraper Index shows the relationship between construction of the next world’s tallest building and an imminent financial crisis.
Over the past 140 years it is interesting to see the economic environment post skyscraper completion. The Great Depression was matched by 3 record breaking New York skyscrapers. With the completion of the World Trade Center skyscrappers in 1973/4 saw the looming spectre of stagflation (high unemployment and high inflation) in both the US and UK economies. This condition was further compounded by the breakdown of the Bretton Woods Agreement.
The Petronas building in KL was followed by the Asian currency crisis and the Taipei 101 coincided with the early 2000’s recession and the end of the technology bubble. The Burj Khalifa was completed in 2010 which was amidst the current financial crisis. Its increase in height over the previous highest skyscraper is indicative of the extent of the current economic crisis.
Source: Barclays Bank – Equity Research
Here is an image from the Barclays Capital publication which might be useful for the classroom environment. Just click on the image.
First lesson back
For those in the southern hemisphere who are about the start, or have already started, the academic year here is a graphic that I use in my first lesson. Just click on it to get the full size image.
A model of over-indebtedness
A research paper in the New Zealand Economics Papers Journal (April-August 2011) focused on the impact that money management and mental accounting has in over-indebtedness. Over the last decade the increase in consumer debt in Western societies has risen dramatically and when you consider the recent financial crisis it is likely to get worse. Exisiting reserach on over-indebtedness has largely focused on the following:
- individual socio-economic, personal, and situational circumstances
- employment conditions
- time preferences.
Money management refers to an ability to organise and pay bills on time and also plan for future expenditure over forthcoming years
Mental accounting refers to consumers’ cognitive monitoring of upcoming expenditure and income. It is said that consumers form mental structures for money coming in and for money going out. It is sometimes refered to as Mental Money Management.
It is difficult to follow rigid money management practices unless these have been internalised or practiced mentally although mental accounting structures will be at least partly informed by a person’s money management practices.
The graph below shows that over-indebtedness will nearly always be intiated or prevented by personal and situational factors such as: social networks; financial literacy; divorce; illness, unemployment etc.
Maintaining financial self-control can take a lot of willpower. Automated money management practices and internalised mental accounting structures and rules are able to keep the will power required to control the propensity to spend
Gold Prices, Google Searches and S&P Volatility Index
Well, I didn’t get sunburnt after 3 weeks at the beach, however it was good to get away.
Below is a chart from a series that The Economist produced entitled Charting 2011. It shows the correlation between google searches in the US for the “Gold Price” and the “S&P 500 Volatility Index”.
Often referred to as the fear index or the fear gauge, the S&P 500 Volatility Index (VIX) represents one measure of the market’s expectation of stock market volatility over the next 30 day period. It is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. Wikipedia
However it is interesting to relate the above chart to that of the actual gold price for 2011 – see below. Here we can see that there is a reasonable correlation between the actual gold price and the google searches and the VIX. Gold prices rose once again from the turbulence on world markets and recorded its 11th straight gain. Will gold prices continue to rise? The fundamentals that have pushed up the price of gold are still evident, namely:
- the problems of debt within the eurozone
- the concern of a double dip recession in a lot of the larger economies
- the increasing demand for gold jewelry amongst the developing economies such as India and China.
Economics of Crime
Wayne Geerling of La Trobe University in Melbourne has produced some great resources using a variety of media. Here is a video showing “The Economics of Everyday life” and it relates it to marginal cost and marginal benefit analysis. Worth a look.
Still E.C.O.N.
Last week I was at the University of Waikato Professional Development Day for secondary school economics teachers. As well as presentations they showed work done by undergraduate students. Starting in 2011, students in ECON100 Business Economics and the New Zealand Economy have been given the opportunity to complete a video project as part of the assessment for the paper. Below is the students’ Choice Award for Best Video:
Bernanke needs to follow Volcker
US Fed Chairman Ben Bernanke could really take a leaf out of former US Fed Chairman Paul Volcker’s book. In the 1970‘s the US economy was going through a period of stagflation – high unemployment and high inflation (both over 10%). Volcker believed that inflation was one of the worst of all economic evils and that it hinged on the growth of the money supply. He therefore began to target inflation which in turn would break people’s inflationary expectations. With this in mind he tightened the money supply and the prime interest rate reached 21.5% – the economy went into a nosedive. However the policy worked and inflation fell from 11% in 1979 to 3% in 1983 and subsequently with this lower inflation rate unemployment fell to 5.3% by 1989.
Today the US economy has 2.6% inflation and 9.6% unemployment and the current Fed policy, like that used in the pre-Volcker era, doesn’t seem to be working. According to Professor Christina Romer in the New York Times, Bernanke needs to be like Volcker and set a new policy framework which, this time, targets nominal gross domestic product which in turn would favour job creation. In the US normal output growth is around 2.5% and the inflation around the 2% so a target of 4.5% GDP would seem appropriate. How Professor Romer would see it operate would be like this:
The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.
How would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.
The expected increase in inflation would effect inflationary expectations but a small increase in inflation would be beneficial as it would lower borrowing costs and encourage spending a large budgetary items.
Even if we went through a time of slightly elevated inflation, the Fed shouldn’t lose credibility as a guardian of price stability. That’s because once the economy returned to the target path, Fed policy — a commitment to ensuring nominal G.D.P. growth of 4 1/2 percent — would restrain inflation. Assuming normal real growth, the implied inflation target would be 2 percent — just what it is today.
Other policies within the framework include:
Quantitative Easing – printing more money
Lower the US$ – makes exports more competitive
Would this work today to reduce unemployment? I suppose the US Fed are currently running out of policy options and like Volcker in the 1980’s there needs to be a quiet revolution in the Fed’s thinking. I don’t mean the shock therapy used in Latin American countries but a realigning of the objectives of ecoomic policy. It seems that the bold measures of Volcker in 1980’s and Roosevelt in the 1930’s actaully brought the US economy out of its depressed state but in both periods of time the process involved a lot hardship and protest. I just wonder if the US Fed is prepared to go through this pain again? As President Reagan said about the recession the US economy was about to go through in the 1980’s -
“If not now, when? If not us, who?”
However The Economist has a different point of view with regard to targeting nominal gross domestic product – NGDP.
Asking central banks to ditch inflation targeting and to pursue another goal could do more harm than good particularly if it left people less certain about the central bank’s ultimate commitment to prudence and stability. That is why a switch to NGDP targeting, whatever its virtues, should not be undertaken lightly.
