Econ Rap

An economics rap by Professor Daniel Hamermesh:

It’s all about the Law of Supply and Demand,
Prices are set by the Invisible Hand.

A floor that’s put on your product’s price
Is something the consumer will find not nice.

If you raise your price when demand’s elastic,
Your revenue will drop and you’ll go ballistic.

Get the same extra utiles for each extra dollar,
The maximum utility is sure to follow.

Produce where price equals marginal cost
If you don’t you’ll find that your profits are lost.

Always think about cost, opportunity,
If not, you’ll find you’re hurting your community.

Think margin, think margin.

Monopolists set MR to marginal cost
The result is that consumer surplus is lost

Make sure your strategies are subgame perfect
Plan your strategic interactions without any defect.

Tax the inelastic, or you’ll be hurtin’
Because you’ve created a large excess burden.

With positive externalities it’s always wise,
To encourage more production — subsidize.

A tariff or a quota helps a few producers,
But consumers will always be the big losers.

Sometimes you gotta choose efficiency or fairness,
Ya need more than econs, ya need political awareness.

Think margin, think margin.

Hot-Dog Vendor Economics

Daniel Hamermesh writes,

A Slate article mentions that the annual price of a hot-dog stand license near the Metropolitan Museum of Art in New York City is $362,201. Licenses are very limited and are bought at auction. The price presumably reflects the economic rent associated with the particular site (the price would be a lot lower in the middle of Central Park). Yet at a fixed cost of $1,000 per day, how can a hot-dog vendor make enough money to cover his variable cost, including the value of his own time?

If, on average, he sells only one hot dog and drink every minute the Met is open, with about 500 average daily opening minutes, that’s 500 servings per day. If he charges $3 for a dog and drink, his revenue of $1,500 leaves him $500 per day to cover variable costs. Seems possible, but I would expect that he’s not making economic profits.

If the city were to issue many more licenses, we would see more vendors, cheaper hot dogs, but, in the end, no higher net returns to the vendors.

First time in history: ‘Higher-income folks work more hours than lower-wage earners’

Dalton Conley, the chairman of New York University’s sociology department, writes:

Perhaps for the first time since we’ve kept track of such things, higher-income folks work more hours than lower-wage earners do. Since 1980, the number of men in the bottom fifth of the income ladder who work long hours (over 49 hours per week) has dropped by half, according to a study by the economists Peter Kuhn and Fernando Lozano. But among the top fifth of earners, long weeks have increased by 80 percent.

This is a stunning moment in economic history: At one time we worked hard so that someday we (or our children) wouldn’t have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel).

In other words, when we get a raise, instead of using that hard-won money to buy “the good life,” we feel even more pressure to work since the shadow costs of not working are all the greater.

One result is that even with the same work hours and household duties, women with higher incomes report feeling more stressed than women with lower incomes, according to a recent study by the economists Daniel Hamermesh and Jungmin Lee. In other words, not only does more money not solve our problems at home, it may even make things worse.

It would be easy to simply lay the blame for this state of affairs on the laptops and mobile phones that litter the lives of upper-income professionals. But the truth is that technology both creates and reflects economic realities. Instead, less visible forces have given birth to this state of affairs.

One of these forces is America’s income inequality, which has steadily increased since 1969. We typically think of this process as one in which the rich get richer and the poor get poorer. Surely, that should, if anything, make upper income earners able to relax.

But it turns out that the growing disparity is really between the middle and the top. If we divided the American population in half, we would find that those in the lower half have been pretty stable over the last few decades in terms of their incomes relative to one another. However, the top half has been stretching out like taffy. In fact, as we move up the ladder the rungs get spaced farther and farther apart.

Ayn Rand Meets Wild Bill Hickock

Daniel Hamermesh is watching the outstanding (albeit prematurely cancelled) HBO series Deadwood. One of the show’s protagonists, Albert Swearengen, comes off as a near-Randian hero in his anti-government,  pro-business philosophy (he deviates somewhat with all the knifing and shooting, however). On the Freakonomics Blog, Hamermesh draws an economics lesson from the show’s second season:

I’m watching Deadwood, the remarkably well-written HBO series of a few years ago. In Episode 16, several wealthy townspeople, including the hotel owner, are spreading rumors that the gold field claims will soon be voided.

One claimant thinks the rumors are bluffs circulated to get current claimants to sell out cheaply to large mining interests. Since the hotel’s revenue comes from the derived demand from gold mining, this claimant creates a strategy to induce the hotel owner to reveal the truth: she names a low price and offers to buy his hotel.

If the claims were to be voided, the hotel owner’s revenues would drop and he should be happy to sell out cheaply. But he refuses to sell, which tells her that he views the hotel as yielding a large stream of returns. She concludes the rumors are false and that her stake is still valuable. When asked, she thus refuses to sell her claim on the cheap.

The fact that Daniel Hamermesh is not only a fan of Deadwood, but used it for an economics lesson, gives me an even higher estimation of the series than I already hold (for another lesson in libertarianism from HBO, check out The Wire).

Beautiful people earn more than the ordinary

Steven E. Landsburg writes,

“I know what wages beauty gives,” said the poet William Butler Yeats about a century ago. Modern econometricians know more precisely. In their published research, Professors Daniel Hamermesh and Jeff Biddle estimate that if you’re perceived as beautiful, you probably earn about 5 percent more than your ordinary-looking counterparts.

As beauty is rewarded, so ugliness is penalized. Ugly women earn about 5 percent less than other women, and ugly men earn about 10 percent less than other men. That’s right; the market punishes men more than women for being unattractive. Moreover, men’s looks haunt them at every stage of their careers: Better-looking men get more job offers, higher starting salaries, and better raises. For women, good looks will get you better raises but usually not better job offers or starting salaries.

A separate study found an even larger disparity:

Good-looking men and women have a greater confidence that gives them an edge in the job market, a study from the University of Florida showed.

“We’ve found that, even accounting for intelligence, a person’s feeling of self-worth is enhanced by how attractive they are and this, in turn, results in higher pay,” Timothy Judge, the study’s lead author, told ScienceDaily in a story published Saturday.

Judge and his team compared data from the Harvard Study of Health and Life Quality on 191 men and women between the ages of 25 and 75. The 191 were questioned about their education and finances, and had their pictures taken and rated for attractiveness by the Harvard researchers.

Judge’s team found people rated good-looking made more money, were better educated and felt more confident, The Daily Telegraph reported.

Kosher Economics

A lesson in demand for meat from one of my favorite economists, Daniel Hamermesh:

The Economist reports that pork prices have plunged 24 percent in the past year, partly because the demand for U.S. pork exports has dropped sharply. I don’t eat pork, so how does this help me?

With a lower price of pork, the quantity demanded will rise, as people shift into this now-cheaper meat. And that will shift the demand curve leftward in related markets, including pork substitutes, such as beef and perhaps even chicken. Since I eat those, I will benefit indirectly from the drop in pork prices.

Furthermore, the drop in pork prices may be a long-run phenomenon, since one reason for it is a set of technological improvements in pig-raising. With lower long-run average costs, prices will remain lower than they were last year for quite a while. That means that my benefits will continue even without any efficiency gains among beef and chicken producers.

This, of course, only works under the assumption that pork, beef and chicken are substitutes (which, to the majority of consumers, they are). This same principle, moreover, applies to imported goods that are cheaper than domestic goods.

For instance, foreign cars in the U.S. drive down (our should have driven down) the prices of domestic cars –resulting in a greater consumer surplus. Where does the surplus go? Either into other sectors of the economy or capital markets (i.e. investment). Sadly, the U.S. government has instead chosen to extort money from taxpayers to allow domestic car manufacturers to keep producing at their inflated costs and selling at their inflated prices. The consumer surplus–instead of flowing back into the economy–evaporates to the government where it is allocated less efficiently than it would have under a market mechanism.

A free market leads to innovation, production and prosperity. A government-run economy results in nothing but stagnation and poverty.

Senior Discounts: A Thing of the Past?

In my introductory economics course (ECON 011: Microeconomics, taught by Prof. Anthony “The Razor” Yezer), Daniel Hamermesh was required reading. He has a knack for applying economic principles to everyday topics (dating, babysitting, senior discounts, etc.). I’m somewhat surprised that we haven’t linked to one of his articles before now.

Enjoy Senior Discounts While They Last