Economic prosperity in Aftrica

In this opinion published in the Richmond Times-Dispatch, Walter Williams argue that the solution to Africa's economic woes is more economic freedom. 

Does the minimum wage spur automation?

This opinion in the WSJ argues that on effect of the minimum wage is for employers to substitute capital for labor.

Can you trust consumers?

This letter to the editor in the WSJ argues that government interference in otherwise free markets may protect consumers from mistakes that they would otherwise make.

Wal-Mart considering price match

This article from the WSJ reports that Wal-Mart is considering expanding its price-match program to include online sellers as well as bricks-and-mortar stores. This article from Yahoo! has more details about the Savings Catcher program.

TOPICS: Pricing

SUMMARY: Wal-Mart is testing a program to match online prices from rivals like Amazon this holiday season, a move that could make the discounter more competitive but cut into profits.

CLASSROOM APPLICATION: Students can evaluate two aspects of Wal-Mart's price-matching strategy. First, they can examine the factors that caused the company's to switch its pricing strategy from not matching online prices to matching online prices. Second, students can study whether the price-matching strategy is anti-competitive in the sense of resulting in higher posted prices.

QUESTIONS: 
1. (Introductory) Why did Wal-Mart introduce its online and mobile tool Savings Catcher?

2. (Advanced) Will Wal-Mart's price-matching strategy lead to Amazon setting higher prices? Evaluate the effect of the introduction of Wal-Mart's price-matching strategy the increase in Amazon's profits from lower the price it sets for a particular product?

3. (Advanced) What is the effect of the quantity of Amazon's sales of a particular product on Wal-Mart's profit from shifting from not matching to matching Amazon's prices?

Reviewed By: James Dearden, Lehigh University

Natural gas prices are falling

This article from the WSJ reports that the price of natural gas is falling at a time in the year when it typically starts to increase.

SUMMARY: When cold weather looms across the U.S., natural-gas prices usually rise. This year they are falling, after a record production boom nearly replenished stockpiles left at their lowest since 2003 by last winter's freeze.

CLASSROOM APPLICATION: Students can use supply and demand to examine the effects of shifts in both demand and supply on the equilibrium price of natural gas. Also, they can compare factors, such as weather, that have differing effects on the prices of two major energy sources: natural gas and oil. Lastly, they can examine how bottlenecks in supply chains affect prices.
QUESTIONS: 
1. (Advanced) How do weather forecasts affect the price of natural gas? Why does the weather have a greater effect on the price of natural gas than it does on the price of oil?

2. (Advanced) During periods of high demand for natural gas, how do bottlenecks in the natural gas supply chain affect the price of natural gas?

3. (Introductory) Why did prices for prices for natural gas last week reach to their lowest point of 2014?

Reviewed By: James Dearden, Lehigh University

To buy the bundle or not to buy the bundle?

This article from the WSJ is a great example of the effects of (un)bundling. 

SUMMARY: A future where television viewers subscribe to each channel they want could make the average cable TV bill-which hovers about $90-seem like a bargain.
CLASSROOM APPLICATION: Instructors can use the article to compare bundling and a la carte pricing. They can present bundling as a means to extract consumer surplus and also possibly as a means to improve economic efficiency (by providing goods should be, but are not, provided under a la carte pricing).
QUESTIONS: 
1. (Advanced) Consider a simple case in which two people can subscribe to a cable network, ESPN for example. Person 1 values the network at $10 and person 2 values it at $20. The total cost of providing the network to either one or two people is $25. Is it efficient to provide the network? Suppose a cable company charges each person the same price for the network. What is the minimum price for which the network would be provided? If the network is provided a la carte at this price, would both people subscribe to the network? Suppose the network is bundled with others in a cable package. In doing so, the price of the bundled package would increase by the minimum price needed to provide the network. Is it possible that both people would subscribe to the bundled package? If so, would the shift to bundled networks from a la carte pricing improve economic efficiency?

2. (Advanced) Consider two people. Person 1 values ESPN at $12 per month and Bravo at $5 per month. Person 2 values ESPN at $5 per month and Bravo at $12 per month. Suppose the total cost offering each network is zero. What is the profit-maximizing (i.e., revenue-maximizing) price of the bundled networks? What are the profit-maximizing prices of the a la carte networks? Does the cable company prefer to bundle the networks?

3. (Introductory) "All these things are so much more expensive when you separate them out," said David Bank, an analyst at RBC Capital Markets. "You are going to have to pay more for less choice." Does this statement imply that everyone would be made worse off by the shift from bundled network pricing to a la carte pricing? Is it the case that everyone would be made worse off?

Reviewed By: James Dearden, Lehigh University

Price discrimination on the Web

This article in the WSJ reports that e-commerce companies charge different sums for the same goods, or push some people toward higher-priced offers and do not tell the consumers.

Labels: Price discimination

TOPICS: Price Discrimination

SUMMARY: A new study of top e-commerce sites found the practice of personalizing prices for the same goods, or pushing some people toward higher-priced offers, is more widespread than previously understood. Related article: The prime time to find airfares has changed. Scott McCartney looks at when to make a purchase and how early the lowest prices pop up.

CLASSROOM APPLICATION: Students can evaluate a third-degree (i.e., multimarket) price discrimination example in which online retailers according to whether students are logging in using Apple's iOS mobile operating system. They can also evaluate a second-degree price discrimination example in which airlines price according to the day of the week in which consumers book flights.

QUESTIONS: 
1. (Introductory) Define third-degree price discrimination. Cite an example from articles of this type of price discrimination.

2. (Advanced) Define second-degree price discrimination. Cite an example from the articles of this type of price discrimination.

3. (Advanced) Why do sellers price discriminate? Include a discussion of price elasticity of demand in the answer.

Reviewed By: James Dearden, Lehigh University

RELATED ARTICLES: 
The Best Day to Buy Airline Tickets
by Scott McCartney

Price of carbon

This article from the World Bank reports that at least 1/2 of the world's countries have either put a price on carbon or put plans in place to put a price on carbon.

Oil prices fall

This article in the WSJ reports that oil prices are falling. It is a great example of the effect of surpluses on market prices.

Supply and Demand in Action in the Fracking Industry

This article in the WSJ reports that the decline in oil prices is affecting fracking and green industries. Here are some questions:

1. How does the reduction in oil prices affect the quantity supplied of oil and gas?
2. How doe the reduction in oil prices affect the market for alternative energy?

SUMMARY: Tumbling oil prices are starting to frighten energy companies around the globe, especially drillers in North America, where crude is expensive to pump. First related article: Oil prices posted their biggest one-day drop in nearly two years amid a glut of crude, threatening the stability of some countries and providing an economic lifeline to others. Second related article: Exxon and Shell are emitting more carbon dioxide despite tapping less oil and natural gas, reflecting the difficulty of tapping new energy sources. Third related article: Since the 1970s, Western politicians keep betting on $10 gasoline that never comes.
CLASSROOM APPLICATION: Students can begin by examining the causes of falling oil prices and then investigate the effects of lower prices on drilling decisions and on the willingness of consumers to switch to greener products. They can also study the effect of various types of drilling on carbon dioxide emissions.
QUESTIONS: 
1. (Introductory) What factors are causing oil prices to fall?

2. (Advanced) What is the effect of lower oil prices on the profits of extracting shale oil?

3. (Introductory) What is causing the rise in carbon dioxide emissions by Exxon Mobil and Royal Dutch Shell?

4. (Advanced) What is the effect of lower gasoline prices on the willingness of consumers to purchase hybrid automobiles? Assume that an equivalent hybrid automobile has a higher price but is more fuel efficient. Draw a graph with the total cost of driving (including the purchase price of an automobile and gasoline expenses) and total number of miles driven. Calculate the effect of a decrease in gasoline prices on the break-even point.

Reviewed By: James Dearden, Lehigh University

Maintaining a cartel is difficult

This article in the WSJ reports that OPEC members' discord adds to slide in oil prices. .

SUMMARY: Discord at OPEC is turning into a price war, loosening the cartel's grip on oil markets and exacerbating a recent steep selloff. The U.S. oil shale boom, the slowing economic growth in Asia, and political problems in the Middle East are affecting the incentives of OPEC members to set prices unilaterally.
CLASSROOM APPLICATION: Students can discuss the effect of reduced demand for oil, increased supply by competitors, and strained relations among cartel members on cartel stability. In the context of a repeated Cournot mode, Advanced students can examine cartel agreements and the incentives of members to abide by agreements.
QUESTIONS: 
1. (Introductory) What factors have led to Saudi Arabia's decision to lower the price of its oil?

2. (Advanced) The article notes a price war among OPEC member countries. But, this is not a price war in the usual sense of firms competing aggressively on price. Rather this price war refers to cartel members unilaterally setting prices below the cartel's agreed price. Demonstrate that cartel members have an incentive to cheat on cartel agreements.

3. (Advanced) Research question. Why has Saudi Arabia historically been the most powerful of OPEC members?

Reviewed By: James Dearden, Lehigh University

Minimum wage, maximum vote

This opinion in the WSJ argues that increases in the minimum wage may be good politics but is bad economics.

Los Angeles may double the minimum wage

The article in the WSJ reports on a drive to increase L.A.'s minimum wage.

SUMMARY: A drive to raise L.A.'s minimum wage to nearly twice the federal level would turn the city into a prime test for whether high pay requirements help lift workers out of poverty or increase joblessness and blunt growth. Related article: A mandated 40% increase in labor costs will put people out of work. But, hey, anything to help get out the vote.
CLASSROOM APPLICATION: Students can use wage and marginal revenue product of labor to examine the effect of an increase in a minimum wage on firm-specific employment decisions and labor market supply and demand to examine the effect of a minimum wage on employment levels in a labor market.
QUESTIONS: 
1. (Introductory) What is the effect of an increase in a minimum wage on employment levels in the fast-food industry?

2. (Advanced) The related opinion piece states, "The other 24 employees are responsible for the remaining 75%, which comes to about $3,125 an employee. That is a generous estimate, as entry-level employees likely contribute less than their more experienced colleagues. If minimum-wage crew members working 25 hours a week received a 40% raise, they would earn an additional $3,705 a year. That is $580 more than what the employee contributes to the restaurant's profits." What important point is missing from this analysis? Hint: What is the effect of an increase in the wages paid by all competitors in a market on the equilibrium price of the market's product? Does this analysis imply that all fast-food outlets will lay off all employees, with the exception of the general manager? The opinion piece does continue with the following: "But here's what middle-class business owners, who live in the real world, will do when faced with a 40% increase in labor costs. They will cut jobs and rely more on technology.... The only other option is to raise prices."

3. (Advanced) Do customers of fast-food restaurants effectively pay for an increase in a minimum wage? If so, would the burden of a minimum wage increase fall primarily on lower-income households?

Reviewed By: James Dearden, Lehigh University

Can you trust your doctor?

This story from CBS reports that a surgeon with a financial interest in a medical device company often recommends high-risk surgery that use a device sold by the company.

In a later story,

The Justice Department sued a neurosurgeon and the operators of a network of doctor-owned implant distributorships, alleging they defrauded Medicare of millions of dollars with unnecessary spinal surgeries.

The neurosurgeon, Dr. Aria Sabit, and the distributorship network, Reliance Medical Systems LLC, were the subject of a 2013 Page One article in The Wall Street Journal detailing that Dr. Sabit profited from implants he used in dozens of surgeries at a California hospital, some with tragic outcomes.

Dr. Sabit declined to comment for that article, and his lawyer didn't respond to inquiries Tuesday on the government suit. Patric Hooper, an attorney representing Reliance and its founders, said his clients "did absolutely nothing wrong" and added: "We are going to defend this thing aggressively."

The government built the civil case using cooperating witnesses wearing wires. . . . 

You can find the rest of the story Here.

Unbundling Phones and Service

This article from the WSJ reports that cellular providers are reducing the subsidies for phones while reducing monthly charges.

SUMMARY: Apple faces a risky new environment this week as it unveils new iPhones, with carriers weaning consumers off subsidies for new devices.

CLASSROOM APPLICATION: Students can evaluate whether consumers evaluate new smartphone purchases based on only the total price over the lifetime of a phone of the wireless service plus the phone, or whether they respond also to the structure of the payments : the upfront cost and monthly payments. The analysis involves the marginal price of a smartphone, the discounting future payments and the possibility of behavioral explanations involved in the consumer evaluation of the pricing plans.

QUESTIONS: 
1. (Introductory) Compare the marginal price of a new smartphone under unsubsidized and contract-based plans. How does the marginal price of a smartphone affect the purchase decision?

2. (Advanced) A consumer can pay for a new smartphone upfront or can pay for it in installments. How does the consumer's discount rate affect this decision about paying for the phone?

3. (Advanced) Do subsidies of new phone purchases combined with greater monthly payments for service plans disguise the true price of the phone to consumers? Are consumers affected by this disguise?

4. (Advanced) How would the movement to unsubsidized wireless service plans affect the prices of the best smartphones?

Reviewed By: James Dearden, Lehigh University

Supply and Demand in the Exurbs

This article from REALTORMag reports that housing prices in the exurbs are increasing.

SUMMARY: The exurbs are starting to make a comeback, signaling that the housing market's recovery is slowly spreading beyond major cities and their suburbs.

CLASSROOM APPLICATION: Students can evaluate two points in particular about the housing recovery spreading to the exurbs. First, higher gasoline prices raise cost relative to living in cities and suburbs of living in the exurbs. Therefore, higher gasoline prices cause a decrease in the relative price of exurban housing. Second, those who live in the exurbs were more likely to default on mortgages than those who live closer to cities.

QUESTIONS: 
1. (Introductory) What is the effect of increases in gasoline prices on the price of real estate in the exurbs to the price of real estate in cities and suburbs?

2. (Advanced) Research question. Why are exurban homeowners more likely than suburban homeowners to default on mortgages?

3. (Advanced) Research question. Why has the housing recovery spread from the cities and suburbs to the exurbs as opposed to spreading in the other direction?

Reviewed By: James Dearden, Lehigh University

HP to Split

This article in the WSJ reports that Hewlett-Packard is going to split its personal-computer and printer businesses from its corporate hardware and services ops. It hopes to become more agile.

Ebay and PayPal to Split

This article from the WSJ reports the Ebay plans to spin off PayPal.