As Wage Debate Rages, Some Have Made the Shift

This article in the WSJ reports the effects of local minimum wage laws that set the minimum above the national rate. The effects vary, some good - higher moral and better customer service - and some bad - closing stores, fewer hours, higher prices, from location and business type.

SUMMARY: In cities where local wages exceed the national minimum, the consequences are big and small, cutting across everything from the number of hours assigned to employees, to menu prices to food ingredients. The article cites a paper in Review of Economics and Statistics: "The reaction among San Jose employers [to an increase in the city's minimum wage] was largely in line with a study of 288 areas where the minimum wage differed across county borders. The research, published in the Review of Economics and Statistics in 2010, found municipalities with higher pay didn't suffer job losses among low-wage restaurant workers. Nearly half of all minimum wage-earners work in food service."

CLASSROOM APPLICATION: Students can examine the effect of an increased minimum wage on firm decisions. "The real-world impacts [of an increased minimum wage] can vary: Some companies had no difficulties passing along labor-cost increases while other businesses said they might close marginal stores to pare losses.... For businesses in San Jose, the results aren't entirely negative. Low-wage employers in the city have raised prices and trimmed costs, but some also report improved employee morale and better customer service."

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the minimum wage on the supply of fast food? What is the effect of the change in supply on the price of fast food?

2. (Advanced) Suppose an increase in the minimum wage results in a $0.25 increase in the marginal cost of making a hamburger. How does the increase in the equilibrium price of hamburgers due to the increase in the minimum wage depend on the price elasticities of supply and demand?

3. (Advanced) Why are some fast food establishments increasing prices in response to increases in the minimum wage while others are cutting back on the number of employees? Why could each of these two responses possibly be profit-maximizing?

4. (Advanced) Is it possible that an increase in the minimum wage does not result in layoffs? Does the article offer good evidence that an increase in the minimum wage does not result the decreased demand for labor?

Americans Lose Their Taste for Cereal, Soda and Soap

This article in the WSJ reports that the use of price discounts has increased and describes possible reasons why. (Conduct a Google search on the title if the article does not load properly.) It is a good introduction to supply and demand. The discussion of price wars might be a good introduction to game theory. Finally, the report that increases in the prices of energy and education are driving down the prices of consumers goods might be a good introduction to monetary policy and inflation, particularly the view that higher oil prices result in inflation only if the Fed monetizes them.

SUMMARY: Makers of consumer staples are resorting to aggressive discounts to overcome an unexpectedly persistent problem: Their industry is barely growing. The article offers a reason for the lack of growth. "Many segments are affected by changing preferences, habits and spending priorities.... The problem for makers of household basics is that consumers are devoting a shrinking share of their wallets to packaged goods as other costs of living rise more sharply, such as health care and education." The article also suggests that product discounting is the result of the stagnant or decreasing demand. "Discounts are in the standard tool kit for consumer-products makers. Still, the current level of activity is particularly high. All told, some 33.7% of consumer packaged goods-from soda and razors to shampoo, shaving cream and paper towels-were sold on promotion in the 12 months through February 2014, according to data from Nielsen." Commenting on the possibility of price wars, "They are the easiest things to start, and the hardest to finish."

CLASSROOM APPLICATION: Students can evaluate the cause of the decreases in demands for consumer products, which presumably is a change in preferences, and the result of the shifts in demands. The short-term consequence is lower prices. Instructors can also ask students to conjecture about long-term price changes.

QUESTIONS: 
1. (Introductory) What factors have caused the decreases in the demands for consumer staples? Discuss preferences, technological change, and the prices of related products.

2. (Advanced) Why are manufacturers and retailers wary of offering frequent discounts on products? What factors in the markets for consumer staples are causing frequent discounting?

3. (Advanced) What is a "price war"? Why are price wars easy to start and hard to finish? What factors in the markets for consumer staples could prompt price wars?

Transparency pricing in healthcare

This article in the WSJ reports on the advantages of increasing the transparency of prices. Conduct a Google search of the title if the full article does not appear.

SUMMARY: There's a major effort under way to make sure patients know how much they'll pay-before they make treatment decisions. "Princeton economist Uwe Reinhardt likens using the U.S. health-care system to shopping in a department store blindfolded and months later being handed a statement that says, 'Pay this amount.' The price-transparency movement aims to lift that veil of secrecy and empower patients and other payers to be smarter health-care consumers.... Experts expect consumers to be much more price-sensitive as they shoulder a growing proportion of health costs themselves."

CLASSROOM APPLICATION: Instructors can present two points about the incentives of patients to consider price when choosing health-care providers: price transparency; and consumers paying at least some of the cost of care.

QUESTIONS:

1. (Introductory) Why is better consumer information about health-care prices important in bringing down the cost of health care?

2. (Introductory) Why is more patient responsibility in paying for the price of a procedure important in bringing down the cost of health care?

3. (Advanced) How would better consumer information about the prices of various health care providers for a particular procedure combined with greater consumer responsibility for the price of the procedure affect the cost health care?

4. (Advanced) How would "reference pricing" affect the quality of care? How would it affect the compensation of health-care providers?

Food prices surge

The article from the WSJ reports that food prices are increasing. It is a great introduction to supply and demand; it illustrates nicely the effect of a decrease in supply.

If the article does not load completely, conduct a Google search on the title.

SUMMARY: Surging prices for food staples from coffee to meat to vegetables are driving up the cost of groceries in the U.S., pinching consumers and companies that are still grappling with a sluggish economic recovery.

CLASSROOM APPLICATION: Instructors can use the article as a supply and demand case, and also to examine the effect of increased input prices on firm decisions. With a decrease in the supply of food, prices increase. With regard to input prices and firm decisions, "Still, the price increases pose a challenge for food makers, restaurants and retailers, which must decide how much of the costs they can pass along and still retain customers at a time of intense competition and thin profit margins." The article also notes the effect of increases in food prices on consumer decisions.

QUESTIONS: 
1. (Introductory) What factors are causing a decrease in the supply of food? What is the effect of the decrease in supply of food on food prices?

2. (Advanced) How are food makers and restaurants responding to food price increases?

3. (Advanced) What is the effect of increased rice and wheat prices on meat and dairy prices?

Input prices rise in the energy industry

This article from the WSJ reports that "Labor and capital costs have doubled over the last decade" for energy companies. It is a good introduction to supply and demand and derived demand for inputs. It is also a illustration of why the long-run supply in perfect competition might slope upwards.

If the document does not load correctly, do a Google search for the title.

SUMMARY: The energy industry loves to think big and tackle risky projects, but the number of those projects now underway is leading to soaring costs for people, materials and services.

CLASSROOM APPLICATION: Instructors can use the article to demonstrate that an increases in the demands for labor and capital cause short-run increases in wages and rental rates on capital. With increases in oil exploration and production, the demand for labor and capital increases. Therefore, in the short run, wages and rental rates on capital increase, thus increasing the short-run average cost of oil exploration.

QUESTIONS: 
1. (Advanced) What factors are causing the increased demand for labor and capital in the oil and gas industry?

2. (Advanced) What is the effect of the increased demand for labor and capital in the oil industry on the equilibrium wages and rental rates in this industry?

3. (Introductory) How will increased wages in the oil and gas industry affect the number of students majoring in chemical engineering and petroleum engineering?

Pricing seats in airplanes

This article from the WSJ reports how airlines price different classes of seats. It is a great example of indirect price discrimination through versioning.

If the link does not work, do a Google search on the title of the article.

TOPICS: Pricing a Product Line

SUMMARY: For fliers, the ideal seat is usually in first or business class. For airlines, the sweet spot is, increasingly, farther back in the plane, in premium economy.

CLASSROOM APPLICATION: Instructors can present the selection issue associated with offering premium economy. "Airlines want economy fliers to buy pricier seats, rather than business travelers opting for cheaper ones." One way to reduce the selection problem of business travelers selecting down is to improve the quality of business class. "Only after Lufthansa in 2012 began upgrading its business class to horizontal beds from slanted ones was it confident of not cannibalizing its own premium traffic."

QUESTIONS: 
1. (Introductory) Why are airlines introducing premium economy class?

2. (Advanced) In the consideration of whether to introduce premium economy class, what issue concerns airlines about the demand for business class concern airlines?

3. (Introductory) What redesign of Luftansa planes reduced the problem of business travelers choosing premium economy class?

4. (Advanced) The article notes "down-sell risk" and "up-sell potential" for introducing premium economy class. Interpret these two terms.

Veblen goods?

This article from the WSJ reports on the effects of recent price increases in high-end luxury goods. It says that sales of such goods have risen and reports that one analyst says that "companies are selling few units." It mentions that firms use pricing as a way to segment sub-markets. The footnote mentions that an earlier version confused Giffen goods with Veblen goods.

If the link does not work, do a Google search on the title.

SUMMARY: The luxury-goods business has been relying on sharp price increases to drive sales. But there are signs that even the very rich are nearing their limits.

CLASSROOM APPLICATION: Students can investigate possible reasons for luxury good price increases. First, "An economic theory holds that for certain goods, higher prices increase desirability and drive sales, rather than suppress demand as they would for ordinary products. Economists refer to such luxury products as Giffen goods, named for Scottish economist Robert Giffen, who described the phenomenon." Second, "One reason ultraluxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share." Third, "High-end brands said the price increases are necessary to maintain quality and offset the rising costs of production." Fourth, "In Europe and the U.S., brands have pushed prices higher in part to capture more money from Chinese tourists who buy luxury goods abroad to avoid tariffs that can add 40% to prices at home."

QUESTIONS: 
1. (Advanced) Define "Giffen good." Include income and substitution effects in the definition. Do economists refer to luxury goods in which "higher prices increase desirability and drive sales" as Giffen goods? What is the "Veblen effect"? Do high-end luxury goods experience a Veblen effect?

2. (Introductory) Were the luxury-good price increases a result of the increased demand for luxury goods, in part driven by the greater Chinese demand for luxury goods?

3. (Advanced) Consider the statement, "One reason ultraluxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share." Why would producers of high-end luxury goods raise prices in response to greater competition from low-end luxury goods? What factors distinguish high-end luxury good shoppers who consider entry-level luxury goods from those who do not?

4. (Introductory) What factors have driven the price increases of high-end luxury goods?