September Comment Cards

Q: I still don't fully understand why we learn the utility theory if it has no practical implications. If it is designed to show us that people are not filled with perfect knowledge or rational, can't we just state that as a tautology? Why all the graphs & equations?

A: In some sense we are providing a history of economic thought as part of the education all economists (and citizens) should experience. It provides us with valuable food for thought. The Theory of Marginal Utility was an exquisite exercise in the late 19th century by ivory tower theorists fascinated by the possibility of quantifying the economic behavior of consumers and producers. Although the assumptions of rationality and perfect information are essentially weak reeds upon which to build a mathematical model that explains the equilibrating forces of supply and demand, it drew economists into describing a world that served to justify unregulated capitalism. Alfred Marshall, an English economist who was John M. Keynes' teacher at Oxford University, wrote the first popular economics textbook that swept up many cockamamie ideas from the "felicific calculus" of F.Y. Edgeworth and the calculus of pleasure and pain of W. Stanley Jevons. Marshall popularized these bizarre theories by reducing them to the simple supply and demand diagram (it came to be known as 'the Marshallian Cross") and economic theory for ever more embedded the theory of marginal utility in, at least the footnotes, of every economics textbook. So, it was its power to reinforce the law of natural selection and the survival of the fittest and extend it to the realm of the free market system that was most compelling. Read the engraved words of John D. Rockefeller on the stone in front of the ice rink at Rockefeller Center in New York City --- a perfect paean to the self-congratulatory world of the Robber Barons.  One would think that this notion of individualism, harmony and systemic self-regulation would have been smashed against the consequences of the Great Depression of the 1930s. It survived.

October Comment Cards

Q: Perfect Competition: consumer surplus -- is that consumers will pay a higher price, but don't have to: Producers will sell at a lower price, but don't have to. Is this correct?

A: You got it about right. The demand curve represents the reservation price of consumers. As more is bought, consumers' reservation prices fall.  If we assume a perfectly competitive market, the firm sells at a single price that is determined by the market (many buyers, many sellers). That part of the demand curve that lies above the equilibrium price represents reservation prices that exceed the price consumers have to pay, i.e., it's a surplus. Marginal cost is the extra cost required to produce a single unit of a good. For that range of output where the equilibrium price lies above the marginal cost curve, the producer realizes a surplus -- she receives a price that exceeds what is required to produce the unit. 

Q: Again, I like this movie [The Corporation]. It is very informative, although very one-sided. It's all about the "bad" corporation, nothing about the good things they do.

A: I think it's a sober look at corporations but I don't disagree with you. Remember the C.E.O.. of the carpet manufacturing company? He did some soul searching after reading the book, Ecology of Commerce by Paul Hawken, and began to change the way his company produced and marketed its product. The movie accurately describes much about the corporate form of doing business. A corporation is a creature of the state. It wouldn't exist without the blessing of the government, i.e., us. The government, our representatives, have the right to revoke the charter of a corporation that misbehaves. We simply don't do it. 

Q: Is MC always positively sloped & MR curve always negatively sloped, or does it depend on a situation? Is there one where MR is up-sloping and MC is down-sloping?

A: Marginal revenue is always below the demand curve if the demand curve is down-sloping. If the demand curve is horizontal, such as for a perfectly competitive firm, then MR is flat and equal to price. Marginal cost does initially fall for a certain range of output in which the division of labor creates increasing returns to added units of labor. After that MC continues to rise in the short run.

Q: So, when marginal cost rises, marginal returns diminish?

A:  Yes, they are inversely related.

Q: Are both oligopoly and monopolistic competitors price takers?

A: Both oligopoly and monopolistic competitors are price makers. They both set price where MR equals MC. 

Q: Are we going to discuss poverty in the market system? How does this change demand and supply curves?

A: Poverty in relation to demand and supply analysis is a very interesting subject. Some economists make it clear that the equilibrium price is in no way a position of harmony (something Adam Smith seemed to make it out to be). There are many people who cannot meet the price for goods that are considered necessities -- some 40 million Americans have no health insurance, for example. 

Q: Do you believe that more regulation is always better?

A: No, but I believe that in an economy where Enron, WorldCom and Adelphia can bankrupt thousands of workers and shareholders to fatten the wallets of a few billionaire executives we could use a few more watchdog agencies that enforce the regulations we have. Society has a right to protect itself. 

Q: In my block course, someone had mentioned that labeling foods (ingredients, organic etc) decreases a person's/consumer's ability to acquire perfect information -- they are no longer searching for information. They see organic on the label and assume that it's good. It could be organic and involve inhumanely killing animals or free range but isn't using open space. Is this a valid statement?

A: Read the answer above. Consumers have to  rely upon government watchdog agencies to ensure that businesses are not fraudulently promoting their product. But even the information required by law (and therefore on the label) is not enough to completely inform the consumer about how and under what conditions the product was produced.

Q: Is the U.S. an agrarian economy or have we moved to some other kind of economy?

R: Less than one percent of the American  workforce is directly connected to farming. At the turn of the 19th century it was closer to 30 percent. It has been said that we are a post-industrial economy. Some social scientists believe the greatest future growth will be in "knowledge workers" -- the professions, technology workers and other highly-educated people working on leading edge economic and scientific activity. Others argue that we are increasingly becoming a service-based economy. The fastest growing segment of the labor force includes restaurant workers, security guards, retail sales personnel and so forth. 

November Cards

Q: How is the idea of poverty and its context addressed by theory? Is there a counter theory that goes against this thought?

A: There is no single theory of poverty. Some believe that poverty is exclusively the fault of the poor -- they lack the skill requirements to get a job and/or the ambition or a work ethic. So, they deserve their poverty. These theorists often subscribe to the idea that a market society is a meritocracy. Those with the most income, wealth and the best jobs are inherently more talented. Others hold that, at least in part,  poverty has a systemic cause. The extreme poverty of the Great Depression of the 1930s wasn't caused because suddenly 1/3 of Americans became lazy or without skill requirements to get a job. Much of that poverty was caused by the collapse of the economy -- a failure of the system. It's like the musical chairs skit that will be performed on Wednesday. Discouraged workers who've stopped looking for jobs might just be rational economic actors. There aren't enough jobs to go around. Underemployment, when workers take jobs requiring substantially less education and training than they possess, like molecular biologists driving taxicabs, is an example of systemic failure. Sub-employment occurs when workers are paid less than a living wage. Again, that is a systemic failure -- unless society is content allowing employers to pay people a sub-standard wage for full-time work.

Q: What is the shutdown point?

A: That is the point of production when a business is not even making enough to cover its fixed costs. Assume a company has fixed costs of $1 million and by producing incurs variable costs of $100,00. It it can sell the output for say $200,000, then it can cut its losses to $900,000 by staying in business. In the short-run, it will pay for it to continue producing. But if it can only sell that output for $100,000 then it doesn't matter whether it produces at the most efficient point or shutdowns. It loses $1 million either way. That is the shutdown point.

Q: What is the reservation price? Is it different than quantity-demanded by consumers?

A: The reservation price is the highest price a consumer will pay for the first, second or any particular unit of a product. If sellers can isolate consumers who are willing to pay high prices and those who will only enter the market if prices are low, they can maximize profits by engaging in price discrimination. Sears Roebuck, WalMart or your local supermarket does that when it sells products under its own name rather than the name of the actual producer. So, you may buy a Maytag washer under the Sears brand for less. Someone who goes to a Maytag outlet will pay a higher price because Maytag's name is on the product. This occurs as well with airline fares.