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I have begun tweeting from @austinboyleecon on Twitter.  I am making "micro posts" there much more frequently than my entries here.

The Economics of Writing in Cursive

This is what a pen used to look like.  In fact, the Spanish word for a pen is "una pluma" which means "a feather." (note:  there are other words for pen as well).  You used to have to dip the feather in a container of ink and scribble down a few words on your paper before the ink was gone and you had to dip your feather in the ink bottle anew.  Every time you lifted the pen from the page, you risked dripping a bit of unwanted ink on your document.  That is the reason why people wrote in cursive.  With cursive, you basically lift the pen from the page only once per word.





These days, nobody uses the quill pen because we have ball point pens that are better in just about every way.  Ball point pens can be placed in a bag and will not leak ink on everything.  They are cheaper, more compact, and longer lasting.  One more improvement that is easy to overlook is its ability to write without dripping ink on the page.  The reason why we print in modern day is that we can afford to pick up our pen every time we write a letter since the pen does not drip unwanted ink on the paper.

Teaching Economics: Long-Run Equilibrium Adjustments in Perfectly Competitive Markets

I just made these videos for some students in my class and figured I would share with the world.  They cover what happens when there is an increase in demand (my constant-cost industry example) or a decrease in demand (my increasing-cost industry example) for a perfectly competitive market that begins in long-run equilibrium.

The videos go over how to make a long-run supply curve.  I think it is particularly useful to see these graphs drawn out as a process instead of seeing the finished product on the page because the snapshot does not give as good of an idea of the process that generates the graph.

Constant-Cost Industry:



Increasing-Cost Industry:

Teaching Microeconomics: Complements and Substitutes

When teaching about factors that change demand, one of the items included in almost every introductory textbook is the price of a complement or substitute good.  Complements are used together like peanut butter and jelly or bicycle helmets and bicycles.  Substitutes are used instead of one another like Coke and Pepsi or driving and taking the bus.

We are taught the following:
1. When the price of a complement good rises, demand for the other good in the pair falls.  This is because a higher price of peanut butter will lead me to buy less peanut butter.  Therefore, I need less jelly to go with it.
2.  When the price of a substitute good rises, demand for the other good in the pair rises.  This is because a higher price of Coke leads me to buy less Coke.  Therefore, I need to drink more Pepsi to quench my thirst for soda.

The problem with the textbook presentation is:  The above stuff that we're taught assumes that the supply curve shifted to change the price (peanut butter got more expensive because there was a weak crop this year or Coke got more expensive because the price of high fructose corn syrup rose).  What if instead, peanut butter became more expensive because it was discovered that eating PB makes you live longer and that caused people to want more of it?  Wouldn't that lead to more PB&J sandwiches (therefore increasing demand for jelly)?  And what if Coke got more expensive because consumers decided that Pepsi is garbage and they'd rather drink "the real thing?"  That should lead to less Pepsi consumption.

What we should really be teaching students is to think about the changes in the quantity demanded. In fact, the story always told with the price change is that a higher price leads to lower quantity demanded.  This is only true when that higher price is caused by a supply curve shift.  Why aren't we instructing students to think about what matters?

I gave a homework assignment with the following question:  Metal knives and ceramic knives are substitutes.  Show what happens in both markets when advertising causes consumers to buy ceramic knives.  The instructions read "for each of the problems below, you will want to begin each market in equilibrium then draw how each is affected by the scenario described.  It is assumed that everything else not mentioned in the question is held constant...write how price and quantity [in each market] were affected."  The correct answer is that demand for ceramic knives increases, causing an increase in the quantity of ceramic knives.  Since ceramic knives and metal knives are substitutes (you don't wield one in each hand), you are using more ceramic knives which leads to less of a need for metal knives thus reducing demand for metal knives.  Price and quantity of ceramic knives rise; price and quantity of metal knives fall.

Note:  I give credit to N. Rosario for first bringing this idea to my attention by asking a question while enrolled as a student in my class.  He mentioned the demand curve shifting and I agreed with what he said.  I looked through numerous textbooks and always found that the textbook presentation dealt with supply curve shifters as the reason for the initial price change.

#teachecon

I, Pencil

Recently, this animated short was produced based on Leonard Read's eponymous 1958 essay.  It shows how we are all dependent on each other and that we cooperate with untold numbers of people just by living our daily lives.

Learn Liberty vs. Reich on Raising Minimum Wage

The following are two opposing views on the minimum wage.  Who do you think makes a better, more sound economic argument?

Socialism vs. Capitalism - Milton Friedman

Milt points out that you have to compare real world socialism to real world capitalism, not a utopian idea of socialism to empirical capitalism.

Hans Rosling and the Magic Washing Machine

Hans Rosling is an amazing presenter.  I love how he uses humor and engages the audience.  He will act out parts of the story he is telling.  In the video above, he has someone hand him books from inside the washing machine to demonstrate that the opportunity cost of washing by hand is forgoing the education you could get if you had a washing machine.

Hans also has a really good talk about how humans' standard of living has been rising over time in which he uses a really cool data visualizaiton that he helped create.  It's pretty widespread now.

Costume Parties as Signaling Devices

When I moved to Tallahassee, I noticed a big difference between Tallahassee parties and those at my small undergraduate institution. The majority of parties I attended in Tallahassee my first year here were themed such that attendees were encouraged, if not required, to dress up. Not that there was an absence of themed parties at the old institution, it's just that there was maybe one costume party to every 15 normal ones. In Tallahassee, there are about 15 themed parties to every non-themed one. Why the difference? If you guessed economics, you must have read the title of this post...

Have you ever been to a normal (non-themed) party when some people who were not invited stopped by and somehow ended up ruining everyone's good time? I can remember a post high-school shindig where everyone was sent home because some unknown guest punched an invited party-goer in the nose. There was a party from which I was fortunate enough to be absent when some kids tried to sell hard drugs then stole some personal property. I think everyone's had the experience of wondering if some of the people at the party are vouched for or if they're just drinking free booze.

Dressing up is a way to let everyone else at the party know that you are on the inside. You got the invite and prepared for the party so you belong there. This mechanism wasn't needed at my small undergrad institution because everyone knew everyone else at a glance. If a stranger was spotted, they were asked who they were with. That's not so easy to do when guests come from a school a couple hundred times as large.

I went to a party in Tallahassee where I knew one of the guys who lived there and some other invitees (who had confirmed that they were coming via Facebook). Well, these other invitees ended up going to a different party and I was there with a ton of people whom I'd never met. Luckily, I was dressed for the occasion and nobody thought that I might not belong.

Signaling is costly. It means that one must dress up for parties in Tallahassee. This act requires forethought, perhaps purchase of new attire or accessories, and time to get dressed up. However, the benefits of keeping strangers away (and having an automatic topic of conversation with fellow party-goers) outweigh the costs in places where this phenomenon exists.

Trade Works Because We're Different

“If all men were equal in interest and endowment, natural or artificial, there would be no organized economic activity to explain. Each man would be a Crusoe. Economic theory thus explains why men cooperate through trade: they do so because they are different."' James Buchannan.

The truth of the above statement was really hammered home for me during my first year PhD macroeconomics course where I was given a problem about trade.  For the purposes of the question, we assumed that only one type of person exists.  That is when I saw mathematically that it is better if people are different.

Variety is the spice of life, but it's also the driving force behind economics.  Odds are, I can understand a firm's pricing strategy or the mechanics behind how the authors of Freakonomics arrive at their conclusions better than you can.  Maybe you can cook or sew better than me or you have interior design talents I lack (the last option is highly probable).  The amazing thing about trade is that we can each do what we are good at and provide those goods and services to other people who are also doing what they are good at.  This is the supply side benefit to trade.

There is also a consumption side benefit to being different.  You may have a stopwatch that you no longer use and it's not worth very much to you.  You would really like a Zippo lighter.  The stop watch would be highly valued by a track coach whose own stop watch just broke.  If he offers to give you his old Zippo (because he quit smoking and it's no longer so valuable to him) in exchange for your stop watch, then both of you can benefit.  Even ignoring production, there can be gains from trade.

Sequester: A Problem of Incentives

With the recent budget sequester, spending has been cut "across the board."  However, pay for congressmen and the President were not affected.  How can these people be expected to take their job seriously if they have nothing at stake?  According to NoLabels, Congress has passed its spending bills on time only four times since 1952. In the last 14 years, annual spending bills have been submitted an average of four months late.

I'm not against the sequester, and if I wouldn't mind taking a 2% pay cut if I end up working for an institution funded by tax dollars...as long as it's helping pay off our debt AND the fat cats play by the same rules.  Warren Buffet has already called for congress to pay into and receive benefits from the same retirement system as the rest of the country.  It's probably not going to happen because the only people who can change it are the people who benefit from it.  I imagine the system was designed this way by those in power to help themselves.

I just got an email today from Rep. Alan Grayson (D, FL) asking for support to eliminate the sequester.  He wants to pass a bill that says "Section 251A of the Balanced Budget and Emergency Deficit Control Act of 1985 is repealed."  This would allow politicians to keep spending unreasonable amounts of money and keep the support of their constituents.  It is politically attractive to spend money now at the expense of reduced consumption in the future.  Young people and unborn people who will be affected in the future do not get to vote, so they cannot oppose the current spending that will hurt them.  There will come a time when that which has been borrowed needs to be repaid, with interest.  Increased consumption in the past will need to be compensated for by reduced consumption in the future.  Nobody likes this sort of thing, but it's hard to get around.  There comes a point when the options are to default on debt or tighten our belt.  Default would have much worse consequences, especially in the global credit markets.

Do Women Earn Less Than Men?

This came up in a discussion I had on 2/15.  The conventional wisdom is that women earn roughly 77% of the wage that men do for the same job.  In making this type of comparison, it is important to compare "apples to apples" and make sure that the only difference between two workers is the gender.  Steve Horwitz does a good job explaining this perspective in the video below. Links to articles can be found in the comments if  you watch the video on its youtube page.

On the flip side of the male/female coin, Greg Mankiw just had a blog post showing that a college degree is worth more for women than it is for men.

Econ Blogging

So, I've been inspired by some other economists to start an economics blog.  I won't post as regularly as I do to my personal blog, but this one will be way more focused.

Here are some links to other neat blogs/websites maintained by other economists:

The Stand-Up Economist (Yoram Bauman)
The Yogiconomist (Katie Sauer)
Economists Do It With Models (Jodie Beggs)
Greg Mankiw's Blog
Cafe Hayek
Marginal Revolution

Bitcoin

There's a new currency out there and it's called Bitcoin.  Monetary policy for this currency was set even before it began to be used.  There will never be any more than 21 million bitcoins in existence.  This may lead to deflation, but that should not be a problem because bitcoins are infinitely divisible.  Think about a dollar...the smallest portion of a dollar you can spend is $0.01 or a "cent."  Bitcoins are divisible to 8 decimal places at the moment, so you could spend BC0.0000001.  If deflation becomes an issue, then the software could make bitcoins divisible down to one hundred-millionth of a bitcoin.

Bitcoin is interesting because it is as anonymous as cash but can be spent electronically.  Furthermore, people in different parts of the world can transfer bitcoin to each other without losing money to exchange rates.  The transactions also easily remain in the informal economy.

At the moment, there are only about 10.7 million bitcoins in existence.  This number will grow as people "mine" them by solving complicated math problems.  More info about the usage of bitcoin can be obtained here.

Instead of bank accounts, bitcoins are stored in virtual "wallets."  You can get one for free...just don't lose your password or your bitcoins will be useless.  In fact, it is likely that after 21 million bitcoins are mined, there will be fewer than 21 million bitcoins in circulation because people will lose their wallets.

Price of Weed

I was reading an article about how the price of marijuana responds to law enforcement.  I learned of a neat website called PriceOfWeed.com where people can anonymously post how much of which strand of marijuana they purchased (including quality level) at what price.  I don't know how much I trust the data, but it's notoriously difficult to get high quality data on black market transactions.

The basic finding is that :::surprise::: weed is more expensive when enforcement is heavier!  One interesting result that I had never thought about (maybe because I'm never in the market for illegal drugs...) is that latitude matters.  It appears that pot is more expensive the farther north you go, in richer countries, when it's higher quality, or when you purchase it in lighter weights.

The article is:
Thies, Clifford. 2012.  "The Relationship Between Enforcement and the Price of Marijuana." Journal of Private Enterprise.  28(1):79-90.

Debt Limit - A Guide to American Federal Debt Made Easy

In response to the State of the Union address last night, I think this video is appropriate.  It's about what the federal debt would look like on a per capita basis.  People have a hard time telling the difference between a billion dollars and a trillion dollars...making it a size you can understand gives it more meaning.