Supply & Demand

Tag: Supply & Demand

Losing Interest

When I have the occasion to make a sizable consumer item — a house or a car or even a big green egg — I often will borrow some money to finance the purchase. In the past few years, the person extending the credit invariably tells me that interest rates are historically really low and you should lock in now because rates have to go up in the future.

Really?

Yes, of course. How much lower could interest rates go?

Well, I was reading a White House report on interest rates (from July 2015) that had a figure that shows yields on 10-year treasuries have been on a downward trajectory for a very long time, like 20+ years. Not only that, people who forecast such things have pretty much grossly overestimated future interest rates at pretty much every turn. In other words, for the past 20 years people have been saying that interest rates “have to go up” and for the past 20 years these people have been wrong.*

Yeah, sure, but how much lower can they go? It’s not like interest rates are going to go negative now, are they?

Well, actually, the bond yields for government debt around the world are increasingly going negative, with Quartz reporting that a third of all government debt worldwide has negative rates. People are paying governments for the privilege of having a nice, safe place to park their money.**

Right, right. Okay. But I’m not an investor and you aren’t a government. You don’t expect me to pay you to borrow money from me, now, do you? I mean, I’m already offering a discounted price and zero-percent financing for 60 months, plus this oven mitt here….

*In fairness, the earlier forecasts on this table just predicted interest rates to be rather flat going forward, which, incidentally, is a trick I learned from my time series professor — a pretty good estimate is whatever rates happen to be right now. If I knew where rates were going, (1) I certainly wouldn’t be telling you; and (2) I’d be enjoying a much different standard of living.

** Here’s “Everything you need to know about negative rates.”

Supply & Demand in the News

From *both* of my final exams administered today….

Illustrate each of the following using “comparative static” analysis. That is, draw a supply and demand graph, show a shift in supply or demand consistent with the headline.

“Even with lots of fish, halibut prices high,” Homer News, June 7, 2016

“Salmon prices are rising due to the death of millions of fish in Chile,” Daily Mail, June 7, 2016

“Lumber Prices Tumble as Demand From China Falls,” 24/7 Wall Street, January 20, 2016

And my personal fave:

“Germany had so much renewable energy on Sunday that it had to pay people to use electricity,” Quartz May 10, 2016

Finally, for the environmental students, we give you:

“Fish Factor: Permits plummet, halibut prices soar,” Juneau Empire, March 16, 2016

A Slippery (North?) Slope

In the past, I’ve often harangued my environmental economics students with the question of why, if we are running out of natural resources, the futures markets don’t project substantial increases in oil prices. After all, a constrained supply should lead to higher prices on the one hand, and the industrialization of China, India, and other countries suggests that world demand will continue to increase (or, at least, it won’t decline substantially). Add together lower supply and higher demand and we should be seeing higher prices.

The scholars at www.Env-Econ.net have a nice overview of the canonical Hotelling Rule that provides some logic for increasing oil prices, along with a potential price trajectory based on marginal production costs.

Yet, anyone looking out in the world today certainly has noticed that oil prices have dropped precipitously. This screen grab from Bloomberg shows that in late 2014 oil prices moved from the $80-100 range to the $40-$60 range for the better part of 2015. Prices have continued to slide, and were just north of $30 as of a few minutes ago.

So what are we to make of all of this? Continue reading A Slippery (North?) Slope

iArbitrage Opportunities?

The limited release of the iPhone 6 has Jason Kottke wondering about international arbitrage, what he calls a “black market.” Check out the video.

He links us up to Bloomberg News report on international arbitrageur, Mr. Liu, who is a specialist in matching up international supply and demand:

While the device debuted today in the U.S., Hong Kong, Japan and Australia, there is no release date set for the world’s biggest smartphone market. That creates an opportunity for Liu, who promises two-day delivery of a 16-gigabyte iPhone 6 for 8,000 yuan ($1,303) — almost double the price on Apple’s Hong Kong website.

What a great quote:

“It’s going to be a while before the new iPhone comes to China officially, so if you want it now, you have to pay up… Give me a call if you want one.”

It’s not clear to me where the moral high ground is — why should citizens in western countries have preferential access to these new technologies? Is there really anything wrong with hooking our Chinese brethren up with a phone when they come out, rather than having them wait three months like the last iPhone release? Again, here’s Bloomberg:

The phones are multiband devices that will work anywhere. Yet anyone selling a device on China’s black market breaks at least two laws — the requirements to pay hefty import duties and to only use mobile phones sanctioned for sale by the government.

There it is.

I’m Lovin’ It. But if that Counter Guy Gets $15/hour, I’m Lovin’ Less of It

I see that McDonalds employees from around the country have been walking off the job to protest low wages, even causing some restaurants to shut down temporarily. What would happen, do you suppose, if McDonalds started paying its employees more?

Writing in Forbes, Tim Worstall makes the extraordinary claim that McDonalds could raise workers wages to $15 an hour and it would have no impact on the price of a Big Mac! This is such an extraordinary claim that I will go ahead and quote it at length:

Hmm. Well, what else can we surmise about a rapacious capitalist organisation? In that ruthless pursuit of gelt and pilf for its shareholders it is going to gouge the customers for the absolute maximum that it can, yes? … What limits McDonald’s ability to entirely empty our wallets every time we want a hamburger is that there are other people who will also sell us one. Wendy’s, Jack in the Box, In and Out, there’s a multiplicity of places where we can go to fur our arteries. Which leads to our conclusion on pricing in a capitalist and free market economy. The capitalists charge the absolute maximum they can get away with, that ability being limited by the competition that comes from alternative suppliers.

Thus the price is not determined by the cost of production of an item. Which means that, if we raise McDonald’s production costs by increasing the wages of the workers, the price isn’t going to change. For it’s not production costs that determine prices: it’s competition that does. Another way to put this is that McDonald’s is already charging us the absolute maximum that it can for its current level of sales. Thus it cannot raise its prices if its production costs go up.

All of which means that the real change in the cost of a Big Mac, or the dollar menu, if McDonald’s workers were paid $15 an hour is: nothing. For production costs simply do not determine the prices that can be achieved in a competitive market.

I’m not sure I’ve ever heard anyone argue that costs don’t matter in determining prices: Every text that I’ve taught out of walks through the logic of a firm’s profit maximizing decision — firms maximize profits by setting output where marginal revenue equals marginal cost. So, costs do help to determine prices, at least the way I teach it. Continue reading I’m Lovin’ It. But if that Counter Guy Gets $15/hour, I’m Lovin’ Less of It

Bad News for Law Schools

From today’s New York Times, a sea change in the demand for legal education:

As of this month, there were 30,000 applicants to law schools for the fall, a 20 percent decrease from the same time last year and a 38 percent decline from 2010… Of some 200 law schools nationwide, only 4 have seen increases in applications this year. In 2004 there were 100,000 applicants to law schools; this year there are likely to be 54,000.

The demand decrease, it seems, is largely due to a combination of the law school price tag (a movement along the curve) and a sour job market (a shift in the curve). If the short-run supply curve for providing legal education is somewhat inelastic, expect a free fall in tuition rates.

A few schools, like the Vermont Law School, have started layoffs and buyouts of staff. Others, like at the University of Illinois, have offered across-the-board tuition discounts to keep up enrollments.

Demand decreases, quantity decreases, price decreases.

I wonder what this portends for undergraduate institutions?

People, It is a Commodities Boom

If you didn’t know already, the U.S. and many other parts of the world are amidst an epic energy boom that has sent natural gas prices tumbling. One back-of-the envelope calculation suggests that consumers have benefited to the tune of more than $100 billion (that’s a lot); another suggests it’s more like $300 billion annually (that’s even more).

So, with that in mind, which group of graduates on average do you think earned a higher starting salary last year — those from Harvard University or those from the South Dakota School of Mines & Technology?

Answer here, if you haven’t already guessed.

Plenty more at Mark Perry’s blog.

Supply & Demand Mania Continues

Don Boudreaux has assigned a Pop Quiz over at his blog, Cafe Hayek.

1. Which group of persons would most likely benefit from rent control (i.e., a price ceiling or price cap) imposed in the city of Washington, DC?

a. landlords in Washington, DC

b. persons seeking to rent apartments in Washington, DC

c. landlords in the DC suburbs without rent control

d. renters in the DC suburbs without rent control

2. Suppose that engineers at BMW invent a new machine that dramatically increases BMW’s efficiency at producing automobiles and, thus, causes BMW’s production costs to significantly fall. As a result, BMW expands its output and lowers its prices. But also, BMW patents this new machine; only BMW can use it. What is the most likely consequence of this particular invention on the prices that General Motors, Ford, Toyota, and other auto makers charge for the automobiles they produce?

a. no change in the price of non-BMW automobiles

b. the price of non-BMW automobiles will fall

c. the price of non-BMW automobiles will rise

d. there’s insufficient information to answer this question

3. In the 1970s, the federal government imposed price ceilings on oil. The goal was to make fuels such as gasoline and heating oil more affordable. One consequence was

a. consumers ended up getting less oil (and oil products, such as gasoline and fuel oil) than they would have gotten without the price ceiling

b. gasoline shortages

c. higher costs to consumers of acquiring oil and oil products

d. all of the above

For answers, either work on them, or go check out the Cafe Hayek blog.

More ‘Gas’ than You Can Handle

The always-on- the-lookout-for supply & demand examples duo at www.env-econ.com are shaking their heads at the continuing disconnect between how politicians talk about prices and how the price system actually works. Today’s contribution is gasoline prices.

Here’s a taste:

Increasing taxes on oil companies will not lower gas prices, so Democrats are hoping that voters see it as unfair that oil companies are making so much money and receiving tax breaks (economists don’t have much to say about equity arguments — there is no economic theory to explain differences in your “fairness” and my “fairness”).

And this:

Expanding domestic production of oil and gas will not reduce gas prices significantly

“The proposal would end a series of tax advantages for the five companies and produce about $21 billion over 10 years, Democrats say.”

Let’s do the math. Suppose the five major oil companies are able to take the entire $21 billion in higher taxes over 10 years and pass it along to consumers in the form of higher gas prices. U.S. consumption is about 132 billion gallons per year (source: EIA). Dividing $2.1 billion per year by 132 billion gallons gives a price increase of about $0.16 per gallon. A fairly typical driver (12k miles, 20 mpg) would pay about $96 more each year as a result. You can determine for yourself if this is a price increase that politicians should worry about…

Those back-of-the-envelope calculations can be so refreshing!

Causes of Demand Curve Shifts — Expected Price Changes

The first thing to remember about the law of demand is “all else constant.” What we are holding constant includes expected future prices. This from the Financial Times:

Chinese consumers, increasingly alarmed at the rising cost of living, cleared supermarket shelves this week of shampoos, soaps and detergents after state media said four consumer goods companies … would raise prices by between 5 per cent and 15 per cent.

Via Marginal Revolution.

Econ 100 Preview, Complements

Suppose the NFL players and owners fail to agree to terms on a new contract, thus reducing (or eliminating) the number of professional football games this coming season. What are the expected changes (if any) to the equilibrium price and quantity of chicken wings?

Answer here.

Certainly, you will be more likely to get the correct answer if you rely on the basic theoretical model, rather than just winging it.

Blackout is Another Word for “Shortage”

No doubt you have heard (okay, perhaps I have some doubts) about the blackouts rolling across Texas this past week. Blackouts occur, of course, because the quantity of power demanded at a point in time exceeds the quantity of power supplied, leaving some folks literally in the dark. And out in the cold.

So, the key question is why power supply was insufficient. Michael Gilberson of Texas A&M provides a preliminary analysis of why Texas power producers failed to meet demand. The first reason is that it was very cold, so the demand for power increased. The cold also caused the power to decrease (!) as power plants themselves suffered outages due to frozen pipes at large coal-fired plants (didn’t their mothers ever tell them to leave the water dripping?).

Actually, that isn’t really the first reason. The real reason is likely Texas’ famous electricity isolationism; that is, the state deliberately lacks to infrastructure to export or to import electricity. Why would they pursue such a policy? To avoid federal (i.e., inter-state) regulation.

Here’s another explanation along the same line.

That electricity markets tend to be very complicated to understand, but supply and demand fundamentals are not.

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