Key Terms:
6 Principles of the Economic Perspective:
1. People choose in a world of scarcity
2. All choices have costs - opportunity costs
3. Individuals respond to incentives in predictable ways
4. Institutions are the rules of the game
5. Choices have consequences that lie in the future and reshape what’s possible
6. All people gain when they trade voluntarily
Maximizing utility: Individuals working in and for their best interests.
Markets: Any mechanism or institution in which buyers and sellers interact.
Securitization: The process of converting a mortgage, car loan, insurance payment, student debt, etc., into a tradeable asset.
Hedge funds: A financial institution made up of partnership of investors, of whom invest a minimally regulated pool of capital, in an unorthodox manner, in hopes of significant return.
Price: The cost of a particular commodity. Additionally, serves as a method of rationing, in capitalism, as the higher the cost of good, the more capital on hand required. In short, the affluent have greater access to more commodity.
Bounded rationality: The concept of individuals making decisions using general intuition.
Price discrimination: Companies sell items at different prices to different people, based on what they will pay for the item and the demand the individuals express.
Superstar phenomenon: Minute differences in ability tend to magnify into huge pay differentials as the market grows large.
Circular Flow (CF) model: This model displays the basic transactions present in the economy. The circular nature of model is dependent on consumption, thus if people don’t buy, the model fails.
Production Possibility Frontier (PPF) curve model: A model displaying the trade-offs and maximum output capability of two outputs given a fixed amount of resources.
Keynesian economics: An economic theory, in which the government spends to stimulate economy in times of economic downturn. The government spending serves as a way to reinvigorate businesses and employ the unemployed.
Multiplier effect: Associated with Keynesian economics, the influx of government spending has a greater impact than the initial spending of the government. The spending of the government leads to the creation of more jobs, more players in the economy, thus growing the economy.
Current Event Articles:
This article, “Hunt for Holiday Workers Heats Up, Giving Wages a Boost” by Laura Stevens and Loretta Chao, discusses the increased demand for employees as the holiday season nears. This article ties in with our economic principle, of people reacting to incentives in predictable ways. Companies such as Amazon, Walmart, and FedEx, are following this principle by offering increased wages in hopes of incentivizing people to come work for them, in order to fulfill quarter four demands. In the end of the third and beginning of the fourth quarter in 2013, many companies were understaffed and failed to optimize on the spending nature of the time. Therefore, companies are learning from their mistakes and increasing part-time wages by $1.50-$3.00 an hour. Additionally, wages are now being used as a method of bidding for workers. Companies are in a race to offer higher wages than competitors in order to attain a larger part-time work force. This competition for labor is reminiscent of how companies will lower prices so more people can buy product. Additionally, another concept that I extrapolated from the article was in regard to the cyclical nature of the economy. Companies tend to hire more in quarter four, which corresponds with consumer purchasing most in quarter four. In all, the article expresses ideas of incentive, competition, and cyclical hiring, all of which help the economy function.
This article, “Amazon and Pandora to Gauge Music’s Value in the Internet Age” by Ben Sisario, discusses how Amazon and Pandora are attempting to provide a $5/month music streaming service, a price half of the current pricing model. Currently, the two major players in the music streaming industry are Spotify and Apple Music which both price out at $10/month. Essentially Amazon and Pandora, by charging half the cost, are attempting to make music streaming even more accessible than it already is. This past week we discussed how pricing serves a rationing mechanism in a capitalist society. Both Amazon and Pandora are attempting to eat into the significant market share of both Spotify and Apple Music, by offering a lower price alternative. The lower price enables both Amazon and Pandora to appeal to even more as the cost is less. Additionally, by pricing at a lower model, Amazon and Pandora are incentivizing individuals who currently subscribe to Spotify and Pandora, to suspend their subscriptions for a cheaper alternative. Amazon and Pandora are both banking on the principle, that people will react to incentives in predictable ways. Together, Amazon and Pandora are employing lower prices for music streaming to make the service even more accessible, while also attempting to convert users of competitors to switch over, as they will only pay half the price per month.
Takeaways:
Over the past week one concept that stuck with me was the multiplier effect, expressed in Keynesian economics. The multiplier effect, as highlighted in “key terms,” occurs when the government spends in a faltering economy, in hopes of catalyzing economic growth. The Keynesian economics reading highlighted the example of the government spending $10 billion for a new aircraft carrier. What fascinated me was how the $10 billion in spending had a significantly broader effect. The purchase, would require the company to hire new employees to fulfill the order, thus decreasing unemployment. Furthermore, by employing the previously unemployed the government is thus creating a greater amount spenders. Therefore, the government's payment of $10 billion revitalizes a previously stagnated company and simultaneously grows the amount of active consumers in the market place. The multiplier effect also stood out to me as it aligns with the concept of the circular flow model we learned about in class. In simple terms, the circular flow model shows us the market is dependent on consumption. When the market is in decline there tends to be less consumption, and the circular flow model doesn’t function. In spite of the circular flow model not including government spending, the ability of the government to spend allows for the circular flow model to function again, as through employment consumption increases as people have money to spend. I do believe that the idea of multiplier effect, and Keynesian economics, in its simplest sense is wonderful. The ability for the government to make positive economic change is obviously quite enticing. However, the inherent bureaucratic and partisan nature of the government makes me skeptical of the feasibility of the multiplier effect and Keynesian economics in general.
Another concept that I took away from this past week, associated with general concept of model thinking, was the Production Possibility Frontier (PPF) curve. The idea of the PPF curve stuck out to me, as we had discussed how in economics there are trade-offs, and I do believe the PPF curve serves as a simple way of explaining those trade-offs. We used comparisons of “guns” and “butter” (LBJ’s Great Society programs), to explain these trade-offs. LBJ could have pushed government spending entirely toward national armament and spend none on the “butter,” or vice-versa. However, LBJ decided to operate outside the PPF curve, by trying to spend copious amounts on both “guns” and “butter.” By LBJ operating outside the PPF curve, he instituted a great amount of debt. Ideally, LBJ would’ve maximized his ability, without incurring debt, by operating somewhere in the middle of the curve LBJ could’ve addressed concerns about national armament and domestic well-being. Assessing the PPF curve in a general sense, by operating on the curve, there should be no negative outcomes. However, by operating outside the curve, debt and inflation can occur. By operating inside the curve, the institution is failing to operate at its optimal capacity, thus inefficient. Overall, the PPF curve serves as a valuable, and simple, way of assessing the economic trade-offs individuals and institutions must make.
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