Here is a clip from Seinfeld that I use when teaching Behavioural Economics. It seems rational that Jerry gives Elaine $182 for her birthday but it really is inappropriate. Cash replaces social norms by market norms and ruins the feelings usually evoked by a typical non-cash birthday gift. The deadweight loss of giving is the loss of efficiency that occurs when the value of the gift to the recipient is less than the cost of the gift to the giver. In this case, economists argue that cash would be a more efficient gift.
HT to Kanchan Bandyopadhyay for this piece from Bloomberg by Noah Smith entitled ‘5 Economics Terms We All Should Use’
He suggests that rather than the usual economic terms that are banded about like recession, downturn, boom, unprecedented trade deficit etc, there are other words that are far more useful especially when you think about policy. He suggests the following:
Something is endogenous when you don’t know whether it’s a cause or an effect (or both). For example, in the simple supply and demand model, suppose that there is a change in consumer tastes or preferences (an exogenous change). This leads to endogenous changes in demand and thus the equilibrium price and quantity.
Marginal versus average
Economists like to say “on the margin.” This refers to small changes instead of big overall effects. Another example is the importance of effort versus natural talent. Natural talent might matter a lot on average, but a little more effort could go a long way.
Present value and discounting
Present value means trying to figure out how much some long-term thing is worth today. Discounting means you have to decide how much less you value things that come far in the future.
Conditional versus unconditional
One common example of this is life expectancy. People like to point out that life expectancy in the Middle Ages was only about 35. But that includes lots of infant mortality. If you lived in the Middle Ages and you made it to adulthood, you would probably live well past 35. While conditional life expectancy has increased since then, it hasn’t gone up by nearly as much as the unconditional version — reductions in infant mortality have been the biggest difference.
Economists say that something that works individually doesn’t work in aggregate. Another good example is debt. Individually, borrowing and spending money reduces your wealth. But in aggregate, debt doesn’t reduce the value of the whole world’s wealth, since one person’s debt is another person’s asset.
I do like his comment at the end of the article:
So there are five econ terms I think should enter our everyday vocabulary. As long as this doesn’t happen endogenously, the marginal increase in the aggregate present discounted value of our public discourse would have a high conditional probability of being positive!
The 1983 movie ‘Trading Places’, staring Eddie Murphy and Dan Aykroyd tells the story of an upper class commodities broker Louis Winthorpe III (Aykroyd) and a homeless street hustler Billy Ray Valentine (Murphy) whose lives cross paths when they are unknowingly made part of an elaborate bet.
There is a great part in the movie when they are on the commodities trading floor that explains price and scarcity. Winthorpe and Valentine are up against the Duke Brothers in the Frozen Concentrated Orange Juice (FCOJ) futures market.
How a futures market works
As opposed to traditional stock/shares futures contracts can be sold even when the seller doesn’t hold any of the commodity. For instance a contract of $1.30 per pound for a 1000 pounds of FCOJ in February indicates that the seller is compelled to provide the produce at that time and the buyer is compelled to buy the produce.
Here’s how it worked in the movie
The Duke Brothers believe they have inside knowledge about the crop report for the orange harvest over the coming year. They are under the impression that the report will state the harvest will be down on expectations which will necessitate greater demand for stockpiling FCOJ – this will mean more demand and a higher price. Therefore at the start of trading the Dukes representative keeps buying FCOJ futures. Others saw they were only buying and wanted in on the action, those that had futures were not willing to sell so the price kept rising. However the report was fake and Winthorpe and Valentine had access to the genuine report which stated that the orange harvest had not been affected by adverse weather conditions. Knowing this they wait till the the price of FCOJ reaches $1.42 and start to sell future contracts.
Then when the crop report is announced and it indiates a good harvest investors sell their contracts and the price drops very quickly. The Dukes are unable to sell their overpriced contracts and are therefore obliged to buy millions of units of FCOJ at a price which exceeds greatly the price which they can sell them for. In the meantime Winthorpe and Valentine for every unit they sold at $1.42 they only have to pay $0.29 to buy it back to fulfill their obligation. This results in a profit of $1.13 per unit.
You may remember a previous post I did on ‘WetheEconomy’ now there is ‘WetheVoters’ The site has 20 short films designed to inform, inspire and ultimately activate voters nationwide with fresh perspectives on the subjects of democracy, elections and U.S. governance.
Below is a parody of the television programme “Real Housewives” with a political and economics twist. It shows a good example example of the current political climate and some possible avenues for change. On the one side you have Jessica who is concerned with the government balancing its budget and Lara who believes that the government needs to spend more on infrastructure etc to stimulate the economy and creates jobs. She also uses the austerity measures in the EU as an example to support her opinion. Jessica does make the point as to who is going to pay for all this spending – our kids. Then there is Vanessa who is neutral although does get into trouble by informing Lara that Jessica thinks the government should increase defence spending. From this point it gets quite heated but they do make up. Enjoy!
A HT to Michael Cameron associate professor in the Department of Economics for his post on Bazinganomics. It is a website that uses scenes from the comedy show The Big Bang Theory to illustrate economic concepts which mainly fall into micro topics:
MARKETS AT WORK
EXTERNALITIES & PUBLIC GOODS
COSTS & PRODUCTION
MONOPOLY AND PRICE DISCRIMINATION
STRATEGIC BEHAVIOR & OLIGOPOLY
BEHAVIORAL ECON & RISK
Like the Economics of Seinfeld, the purpose of Bazinganomics is to provide teachers with video clips from a popular television programme that can be used in the classroom to help facilitate engagement. Worth a look especially if you are a fan of the show.
Here are a couple of cartoons that I picked up from The New Yorker magazine. I am off to the beach for Christmas so out of Internet range for a couple of weeks. Have a good festive season.
Just had a great day at the RBNZ for the Monetary Policy Statement this morning – as you may know the RBNZ dropped interest rates by 25 basis points. Below is a bit of humour as to how they arrived at their decision.
And they say we are not thinking practically!