Drug shortages?

This article in Reader's Digest reports that shortages for many drugs exist and that the number of shortages may grow.

This is an excellent introduction to how prices move in markets. What do economics textbooks say happens to the market price when shortages exist? Why doesn't this happen in the markets described by the article?

It is also an excellent introduction to a discussion of the role of "money" in a market system. The articles says the first reason for the shortages is "all about money". The implication is, I believe, that a quest for profit creates the shortages. Does a quest for profit create shortages in markets where price may move freely? If not, does the quest for profit reward "good" behaviors or "bad" behaviors?

Risk, Preferences, and Rationality

This article from the WSJ reports on perceptions of risk. It illustrates that whether an action warrants its risk depends upon preferences and raises questions about what we mean when we say that taking the action is rational.

Supply and Demand in Action in the Milk Markets

The article in the WSJ reports the effects of the shift in domestic demand away from animal milk to plant milk and surging demand for animal milk overseas. Supply and demand predicts accurately the effects: the price of raw animal milk increased, sales and profits on animal milk products has decreased, and sales and profits of plant milk products increased. The article also reports that decreases in the price of raw animal milk in the 2009 led dairy farmers to exit the industry and that a drought contributed to the reduction in supply of raw milk. It reports that the supply of raw milk "is expected to increase this year, easing costs for Dean."

Supply and Demand in Action in the Diamond Market

This article from the WSJ, http://online.wsj.com/articles/diamonds-regain-their-sparkle-for-miners-on-rising-demand-and-prices-1404826159, is a good example of supply and demand in action in the diamond market.

Game Theory Secrets for Parents

This article from the WSJ, http://online.wsj.com/articles/game-theory-secrets-for-parents-1405005848, is an intriguing introduction to game theory.

Political Philosophy

John Stuart Mill and the Minimum Wage

My reading of John Stuart Mill is that he would oppose any attempt by the government to impose or raise the minimum wage. In On Liberty he wrote:

… the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. … the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, to do so would be wise, or even right. These are good reasons for remonstrating with him, or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil in case he do otherwise. … The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.

I suspect that he would see no harm to anyone when an employee voluntarily agrees to work for an employee at a wage to which both agree. I suspect that he would argue that each of the two parties would agree to the contract only if each expects to gain. I also suspect that he would argue that the agreement imposes no direct or obvious cost to anyone else.

One goal in when I teach principles of economics is to have students on their political philosophy. Political philosophy examines fundamental questions about why governments exists, its proper role, and what warrants government intervention into the lives of its citizens.

Here are some possible perspectives based on my reading and definition of terms. Please comment if you have suggestions for improvement.

1. Anarchy. Any government is immoral.
2. Classical liberalism. The goal of government is to maximize the individual liberties of its citizens. To do so, it provides citizens with laws and courts to protect them from theft, coercion defends them from invasion, and supports rules of law that define and protect property rights and contracts. I think that they generally agree that the government should also provide public goods when markets fail to do so and intervene when market transactions impose external costs or benefits on others.
3. Utilitarianism. The goal of the government is to maximize the total welfare of its citizens. Government should act if the sum of the benefits to it citizens exceeds exceeds the sum of its costs, even if some citizens suffer a net loss.
4. Pareto optimality.   The government should act only if every citizen benefits. This position is not practical in most situations. A more practical refinement is that the government should act only if the vast majority of its citizens benefit and the loss suffered by the minority is small and as small as possible. The refinement recognizes that transactions costs of both reaching unanimity and identifying benefits and losses are high. It allows for government to act when everyone knows that some people will suffer some harm but cannot identify easily who or exactly how much.

Which of these positions best reflects your political philosophy? Feel free to add a comment with your preference. Combinations are new positions are welcome.

Education is a scarce good

I think that learning is a noble pursuit, that I am privileged to help students learn, and that students are privileged to have the opportunity to learn. Here is some advice to help students make the most of their opportunity. Remember: people generally get out of an activity what they put into it.

You will learn more as you devote more time and effort to this class. Since education is not a free good, the cost of learning is not zero. The cost comes in many forms, some explicit and some implicit. The explicit costs include the tuition you pay and any subsidy that the government gives to the University. The implicit costs are the time and effort that you, the student, must devote to your classes. The rule of thumb is to spend three hours studying outside of class for every hour spent inside class. Completing an economics class successfully is unlikely without spending a considerable amount of your time and effort. If you limit your effort to only the time spent in the classroom, you will not learn much and the experience might be miserable.

“Read, read, read; write, write, write; think, think, think” is how a group of teachers summarized the goals of education. I believe that you will learn much and enjoy the class if you read, write, and think about the material on a regular and ongoing basis. This article from the NYT argues that your study time is more effective if you break it into several small sessions.

Preparing before class is crucial. I attempt to fill the time we have together with problems, exercises, discussion and debate; students without proper preparation will not be ready to learn because they will not be ready to participate meaningfully. Complete readings and assignments when they are due, not after.

Use the time we have together wisely. 

1. Bring questions to class about material we covered earlier that you don’t understand. 
2. Be ready to start on time, clickers, paper, notes, and pen or pencil out and ready to use. 
3. Take good notes: summarize the main points and outline the discussion. Writing down what you are seeing, hearing and thinking helps you remember.
4. Pay attention and avoid distractions. Contrary to some popular conceptions, your brain works better when it focuses on one activity at a time. Browsing the Internet and social media are distractions to your brain and the brains of the students seated near you. Contact the instructor if another student’s use of the computer distracts you.

Review and organize your notes the day you take them. Studies show that if you review and organize your notes within 24 hours of taking them you will retain 80% of the information for 8 weeks. A student who heard this remarked, "That's long enough."

Identify and learn the general principles used in the course as you study. Economics is more about the forest than it is about the trees. Learning why you followed a particular approach to solve a problem is usually more important than learning how to solve the problem; the problem is usually an example of a more general principle. The goal is to have you apply the principles and concepts to draw your own conclusions and to support them. “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions” (John Maynard Keynes).

Does Amazon understand the Nash Bargaining equilibrium

This article from the WSJ reports that Amazon has offered to let Hatchette's authors keep 100% of the revenues for books sold on Amazon while Amazon and Hatchette negotiate a contract: . Amazon wants a larger share of the revenue and lower book prices.

Does the offer improve Amazon's bargaining position?

Who enrolled in Obamacare?

This article in the WSJ reports who enrolled in Obamacare during the initial registration period and who did not: http://online.wsj.com/articles/sign-ups-not-the-only-way-to-gauge-health-laws-success-1404413482. 

Are the trends consistent with the rational actor paradigm?

Do they illustrate the problems asymmetric information cause when selling insurance?

WalMart, Strategy, Dynamic Pricing, and eBusiness

This article in the WSJ is a great introduction to both strategy and dynamic pricing: http://online.wsj.com/articles/wal-mart-looks-to-grow-by-embracing-smaller-stores-1404787817. 

Why has the price gap dwindled?

What is dynamic pricing?

What role does IT play in dynamic pricing?

Is dynamic pricing easier to implement in an eStore or one made with bricks and mortar?