Class#42 12/11/11

 Rizzo started class by saying that Profit= the difference between total revenues and total costs.

Profit= total revenue – total costs.

Wage- a contractural agreement between worker and firm specifying what he should do and how he will be compensated. Worker knows in advance what he’ll earn if he does his job. The firm knows what they’ll pay if he does his job. WAGES ELIMINATE UNCERTANTY.

Rent- determined on a contractural agreement. You know how much you have to pay to get a good. They know how much they’re going to get.

Interest- a price. Prices came from supply and demand. Process in the market for loanable funds.

Demanders and suppliers in every type of government. Interest is to earn more money to get stuff you want but can’t afford yet. Were willing to pay a price to earn something today that was unearned. Price you have to pay someone to have purchasing power today.

Profits are not wages rents or interests. Useful, but not a profit.

Rachel earns $30,000 a year as a secretary, owns a building that rents for $6,000 a year, and owns a savings account at a bank with $23,000 a pays 10% interest.

Suppose she opens a pizza shop and works full time for herself, uses her own building and cashes savings account and borrows $20,000 for start up.

In the first year she plans to earn $80,000 in revenues for shop.

Total costs are 23,000+ 20,000 +(20,000 *.1)= $45,000

$85,000-$45,000= $40,000 a year in accounting sense= $40,000 in profits.

Economic way to solve- you also have to subtract implicit costs, lost, wages, money she’d get from building (opportunity cost)

$30,000+$6,000 + (23,000*.1)=$38,300

REAL ECONOMIC PRICE= TOTAL REVENUES- TOTAL IMPLICIT COSTS- TOTAL EXPLICIT COSTS

$85,000-45,000-38,300= $1,700 profit. Economic profit if entrepreneur to be pizza owner is $1,700. Richer than next best choice.

PROFITS ARE THE MOST IMPORTANT THING FOR ECONOMIC GROWTH

Profits exist only in a world with uncertainty.

If you made $50,000 instead of $85,000, the accountant profit is $10,000but the economic profit is negative. Giving up a lot of chances to make profit somewhere else. Necessary condition for profit has to do with UNCERTANTY. Not a good deal after people learn about it. If every one could guarantee profit, a lot of people would enter the industry. This would lower profits for everyone.

In the pizza market, shops would have to lower prices to get business. This lowers expected revenues from being in profit. To get more business you would have to either lower the costs or make really good pizza. This would force inefficient producers out of the market. Producers and consumers are better off, Rizzo’s wife might not be though. As new people enter the pizza market, it will also affect the cheese market where the price of cheese will rise from higher demand. This will increase worker’s wages.

The reason why profits still exist is that not everyone knows how to get in on the pie of profit. Entrepreneurs know how to cut themselves in on profit.

By restricting students from med school. It keeps wages high for doctors. Licenses restrict competition. We try to prevent competition. Losses also result from uncertainty. Needed in economics. It is a profit and loss system. The whole point is to make people pay for sucking by incurring losses.

When we eliminate profit and loss income. When profits occur, it is a sign that what we’re doing is valuable. Resources are drawn to those industries. A problem with eliminating people from losses is that losses destroy resources by the amount of loss. It takes resources from valuable resources and use them for destruction. Losses is a feedback loop. People take more risk in things if they are subsidized.

For profit companies people with decision making powers are at the head of the company. Non profits don’t lose or gain from bad or good decisions.

13% of fortune 500 companies from 1960 exist today. Government does things wrong by putting money into things that don’t work and taking money away from things that do work.

A congressman gets paid whether he makes the world better or not.

Large corporations are more vulnerable to small government than ever before. Companies have shorter half life than government. 50% of companies today didn’t exist in 1980.

Capitalism is based on individual decision making. Anticapitalist are uncomfortable with it because decisions and profits not made equally.

No system has ever empowered people and promoted economic activity as much as capitalism. “power to the people” approach. 

Class#41 12/9/11

 Rizzo started the class by writing PROFITS, LOSSES, AND ENTREPRENEUERS on the board. He then talked about Viktor Schregckengost. He was the inventor of the riding lawn mower as well as revolutionizing a lot of industries. Great entrepreneur. An interesting point that was brought up was that Ghandi starved and kept millions of Indians in poverty. They starved by being self sufficient and not trading between villages. It’s weird how we don’t celebrate the accumulation of wealth of bill gates, but we celebrate him giving it away.

What does it mean to make too much money off of someone’s misfortunes. To say this is to say clothing companies make money off of nakedness, and locksmiths make money off of fear, house builders make money off of homelessness.

“greedy” insurance company profits- agrirgate profits of $10 billion. People spent $2.5 trillion in health care last year. This 10 billion won’t help anything when the number is as big as 2.5 trillion. Clothing companies make money by clothing people. Food companies make money by feeding people. Health care firms get money by keeping us well in health.

Rizzo would have died if he didn’t go to the hospital his illness. Doctors saved his life. They wouldn’t be there if they weren’t paid. Doctors made $1,200 that day. Large revenues they can earn by making new drugs motivates companies to make new drug discoveries. Polio vaccine made for profit opportunities.  When you really want something, you show it by paying more. How is it okay to sell clothes for money but not doctor services for money. What forces us to get business from one specific thing. To start a business, you need to understand the costs. Things called factors of production. If Rizzo wants to start a school on his land in Kentucky the costs are Land, Labor, and Capital. All of these have both explicit and implicit costs. The explicit costs from land are rent. The implicit costs are also rent.  The explicit costs of labor are wages. The implicit costs of labor are foregone wages. The explicit costs of capital are rent. The implicit costs of capital are foregone rent. THE SUM OF ALL EXPLICIT AND IMPLICIT COSTS ETERMINE IF HE SHOULD DO SOMETHING.

BY USING LAND TO BUILD THE SCHOOL, IT IS AN OPPORTUNITY COST. LOSING THE CHANCE OF USING IT FOR SOMETHING ELSE, OR RENT LAND TO SOMEONE ELSE.

To tell if something is profitable of whether you should rent or buy it you use the equation

PROFITABILITY= RENTAL RATE + (APPRECIATION RATE- INTEREST COST)

The rental rate is (ANUUAL RENTAL PAYMENT/ PRICE OF GOOD) appreciation rate is (CHANGE IN ASSET PRICE/ PRICE) interest cost is the interest rate that you pay. Whether you can a loan out or pay out of pocket you are paying interest due to the opportunity cost of not using the money out of pocket of investing.

Rizzo showed us an example of this. If you lease a Mazda for 1 year it costs $12,000 a year. If you buy one, it costs $32,000. You think you can sell it the next year at $24,000. The interest rate on a loan is 10%. The equation would be

(12,000/32,000) – (8,000/32,000) – (10%)= 37.5%-25%-10%= 2.5%

This positive 2.5% tells Rizzo that he should buy his car. It means that he is 2.5% richer each year owning the car compared to leasing it. If Rizzo financed it himself, he is still paying interest because of foregone chance to invest it elsewhere. It is an opportunity cost.

4% of a building value is needed to maintain it each year. If you want 0 cost, you would have to raise double the money. A $100,000 house costs $4,000 a year to maintain. 

class#40 12/7/11

Rizzo put up the same graph as last class regarding the bubble gum market. The only difference is that this time, the buyer is taxed the dollar rather than the seller. When you work it out, you see that it makes no difference in the burden that occurs for each party.

	Buyers	Sellers
Initial P	$3.00	#3.00
Final P	$2.75	$2.75
Tax Paid	$1.00	--------
Burden (real cost)	$0.75	$0.25

Of the $1.00 tax imposed, the buyer is affected by 75 cents and the seller is affected by 25 cents.

Before the tax, the equilibrium price was $3.00. After the tax, the new equilibrium price is $2.75

New Qt= 2.75 million. Before the tax it was 3 million. The new Pb= $3.75 before the tax it was $3.00. The new Ps= $2.75. Before the tax it was $3.00

An excise tax puts the legal liability on the seller meaning that the firm has the legal liability to write the check.

The equilibrium will change from this. Also the tax generated raises $2.75 million in revenue instead of $3 million from a reduction of quantity bought. Taxes are distortionary. They prevent better transactions from happening.

Over $1 trillion is destroyed a year from these effects. If 100,000 people worked in renewable energy instead of the IRS which produces nothing of value, it would be more beneficial for our economy.

Problem with the 51 page tax report that Rizzo got is that a ton of time is spent doing taxes. Rizzo spent 15 hours last year doing them. $400 billion a year is lost in the US by people’s efforts to get their taxes ready. This is an opportunity cost.

General Electric made $3 billion in taxes last year instead of losing money in paying taxes. They had a 57,000 page tax return.  Taxes can produce large social value. They can be very good. Many times we do dumb things with tax revenues. We spend more than we tax, so we have to tax more. Sales tax is pair for by the company in advance so that the buyer doesn’t have to pay them for every product that they buy. In the above example, If the buyer is taxed a dollar. They get $2 of value from the gum instead of $3. The reason why the price drops to $2.75 if the buyer is taxed is that there is less demand for the pack of gum. Regardless of who sends the check, the burdens will be the same for both parties. Economic incidence of a tax is the same as the legal incidence of a tax. Buyers pay more of the tax than the servers.

Payroll taxes will hit us hard. We say firms and workers split tax. This is very burdensome. Both now have to send checks.

The labor demand elasticity is very high. The opposite is true as well. It has an elasticity factor of 3. For every 1% that firms are charged more. They change their labor workers by 3%.

Rizzo pays $37,800 in taxes a year. This is equivalent to $19.00 an hour to the government. What determines who pays is the relative elasticity of supply and demand. (shape of supply and demand curve). When we tax something, we get less. When buyers are incentivised to change and sellers are sensitive, buyers are hit harder by the tax.

The things that we should tax are things that are inelastic. Ex. Food, property, death, head tax, addictive goods.

SUBSIDIES

An increase in the supply and demand curve does not only benefit 1 side. The government gave a 53 cent subsidy per gallon to the refiner for ethanol usage. Subsidy for producer, this doesn’t allow foreign companies to come in and trade. The supply curve shifts out. Instead of $3.00 a gallon, gas stations will charge $2.90 but they will receive a total of $3.43 per gallon since the government will give them 53 cents per gallon. The supplier gets 80% of the benefit (43/53=80%) the buyer will get 20% of the benefit (10/53=20%ish). Subsidies relate to the supply and demand elasticity rather than subsidies. Both the buyers and sellers are better off from it. 

HW# 14 Econ 108

A.

For this week's reading assignment, I read the Sumptuary Manifesto article. The last sentence of the first paragraph I found very interesting when it said, "Freedom is not much concerned with tail fins or even automobiles. those who argue that it is identified with the greatest possible range of choice of consumers' goods are only confessing their exceedingly simple-minded and mechanical view of man and his liberties." I interpreted this as freedom has a much bigger meaning than just the right to choose. I agree with this. The right of not being supressed by a dictator also is something that is related to freedom. I was confused when it said that it is a capital offense to "live in a dwelling unit of more than 400 square feet." there are millions of people today that live in an area bigger than 400 square feet. Does this make it wrong of them? I think not. Moving to a bigger living space is one of the many incentives driving people to be more productive and make more money. The more money one has, the bigger living space that they can afford and the more comfort they can have. There are many other rules that the SS made that I do not agree with. The rules that it lays down seem as if it is either a utopian or communist society. Obviously both of these are horrific for the economic well being of a country. All of these rules have to do with not wasting. As we learned in class, there is no right way to consume things. By consuming it, we make people produce more of it which creates and keeps jobs because they need more people to get more resources. Every one has different preferences on how to use things. 

The ideas of this are very wrong. There is a ton of regulation hampering the freedom of people to make choices as well as taking away products that might help them a lot. It is a very central run system. 

B.

1. How will this price ceiling on products affect both the buyer and seller?

2. How will this society most likely fair compared to other societies in the world based on their economic policies?

C. 

This article talks about how a Sumptuary Society was made to combat the idea of comfort and "wasting" excess products that are not of absolute necessity to people. They say how they would make all of these rules in order to prevent it and regulate everything that goes on including prices. The luxuries of man kind are a waste to the world and do no beneficial good for consumers are producers. The article talks about how the world is a greedy place that without regulation will run rampant and destroy the earth. People need to be told how to live their lives if they want to help the world. Otherwise, they do not have the knowledge to know how they should act. They try to make everyone do what they feel is the best thing for the economy as central planners. The things that they valued were education, god health, a clean countryside, good government, and orchestras. Though these are all good things to value. The SS puts the wrong ideas into each of these and does not help to maximize the effect that each one has.

They try to protect consumers with tariffs, taxes, and price ceilings. In reality this will hurt the consumers. Clearly this article is completely wrong, and any society that follows these rules sucks. 

EWOT#14

   I came across this article today listing the 10 most charitable companies. Many of them are companies that are under scrutiny from the public including Wal-Mart, Bank of America, Wells Fargo, Exxon Mobil, Morgan Stanley, and Goldman Sachs.  

 http://finance.yahoo.com/news/the-10-most-charitable-companies-in-america.html

My comments on this is that these huge donations from these companies may be okay because most likely they got publicity out of their donations. This would make the public view them as a caring company leading to consumers wanting to use their products over other non charitable companies. Also, many of these companies are under current scrutiny from either the occupy protesters regarding the banks listed on here as well as the thousands of Wal-Mart protesters.This could be a way for the companies to convince these protesters that they are doing their social justice so that the protesters stop their attempts to ruin these companies image.

In a contrasting view, it may be better for these businesses if they used this money to make their products and services better and cheaper for everyone. For example, instead of Bank of America giving away $207,000,000, they keep most of that money and can use it to offer higher interest rates on CD's and take away ATM fees. Or Wal-Mart could offer lower prices that they already do. In class, Rizzo said that from the competition that Wal-Mart creates in the market, it saves consumers $263 billion a year. This would create even more competition leading competitors to lower their prices and find more efficient ways to produce their products so that they can continue to compete with Wal-Mart leading to a much bigger savings for consumers. Wal-Mart could also use this money to start giving out benefits to workers which would remove a major reason why people are so against them. .

Class#39 12/5/11

Rizzo started class by putting up a few things on the board. One was a graph of the bubble gum market and how it is affected by taxes.  Before the tax on bubble gum, the equilibrium proce was $3 at which 3 million packs of gum were sold. After the $1 tax, buyers had to pay $3.75 for gum and Sellers only gained $2.75 from it. The quantity demanded at this new price was 2.75 million packs of gum. From this, $2.75 million dollars of tax revenue was produced.

	Buyers	Sellers
Initial P	$3.00	$3.00
Final P	$3.75	$3.75	+$1= $2.75
Tax Paid	------	$1.00
Economic Burden	75 cents	25 cents

Rizzo told us that TAXES ARE ONLY A TRANSFER OF MONEY, NOT A COST

When we make things illegal, we change the incentives of people who supply it. Becomes more inelastic. The cost of production increases more rapidly with more produced. The buyers curve is inelastic.

3 results come from this

1.     Higher price causing more people to end up in the selling market

2.     More violence

3.     Increase in the strength of the drug sold. Ex. Hard liquor over beer during prohibition

When it becomes illegal, we have to enforce the law. Two costs come from this. 1. Is raising taxes (act of enforcing is costly) More money spent for prisons, courts, ect. It is also an opportunity cost to cops. They could use their time to do more productive things, (build bridges ect)

The US imprisons more people per capita than any other country. This won’t change because it will cause a huge job loss. 35 billion a year is spent to directly enforce drug prohibition. 350,000 people are currently behind bars. 1.2 million possession rests occur every year. 

Because things are illegal, the costs of producing it go down. There is no OSHA, or taxes that have to be paid by the producers. These costs exceed production costs. This shifts the supply curve out. The price of obtaining drugs has fallen from this.

More violent crimes and homicides occur from drugs being illegal. In California they have the 3 strike rule. This causes more violence because the marginal cost of having a bad 3^rd crime has dropped.  It doesn’t matter what the third crime is so once you commit the third crime, you can do another one because either way your going to jail for 15-20 years.

Global warming is no longer an issue. We repeal prohibition when the economy sucks. Liquor taxation prior to 1913 was 1/3 of taxation revenue. Prohibition was ended to raise revenues during WW2.

In the graph of the bubble gum market, the excise tax is a legal liability of tax on the seller. The seller needs to write the check to the government.

Taxes on suppliers affect the supply curve.  Supplier is willing to sell gum for $4. Shifts up by the amount of tax. A new equilibrium is made.

This tax prevented a lot of other transactions from occurring. The tax is greater than the value of the transaction that occurs so less transactions occur. The world would have been richer without the tax.

Taxes prevent socially beneficial transactions from occurring. A DEAD WEIGHT LOSS is a transaction that would have happened had there not been a tax.  30% value of things lost from taxes. The government has 4 trillion in tax revenues. 1.2 trillion of transactions don’t occur because of poor taxations. As the economy grows, this number gets bigger.

It costs resources to collect and monitor taxes. Cost of IRS is $11 billion every year. 4 cents of tax collected to pay the IRS. Employ as much as Ford motor vehicles but produce nothing of value. Won’t change because of built in beurocracy.

When tax fraud happens, we spend resources to fraud the IRS. Tax rates go up for people who don’t fraud the government.

Class#38 12/2/11

Rizzo started class by putt up 2 charts on the board. 1 was the rent control demand and supply chart from last class. He also put up the market for apple pricing market. (aka minimum wage) in this the supply is the workers and the demand is the firms. He wrote under it that the New EQ= W*=$7.25, Qs=90k, Qd=50k making an unemployment number of 40k.

Talking about the first graph, when rent control is put in a market, rent control created a shortage of 4,000 apartments. To make people go away, the actual cost of getting an apartment is $1,200 through other fees. Since there are less apartments available, it reduces the quality of the product. Also people who aren’t fortunate still don’t get it. Landlords try to keep people out of the apartment so that they can jack up the price based on the price ceiling rules.

Cities are the most productive and expensive places to be. More productive in cities so poor should be there because they earn more. If a person from Africa making $1,000 a year moved to New York, his pay would instantly rise 20x to $20,000 a year. The increased salary increases real estate. Vouchers used for rent money would be the best way to keep the poor in the city. An increase in prices for housing is what kicks the extra people out. San Diego houses cost more than Dallas with very similar salaries and living conditions because it’s costlier to build things in Southern California.

When talking about the second graph, Rizzo said what determines wages in a market is a person’s productivity. In the apple market,  the workers ability to pick apples plus our value as consumers of apples determines their wages and employment numbers.

If you want to get someone’s yearly salary, multiply their wage by 2,000.

If things become costlier, companies hire less. The market forces would push it back towards equilibrium by paying more.

The minimum wage causes more unemployment by trying to raise employment.

Companies take away their workers benefits if they are forced to pay more. Since it is now more expensive to hire workers, it incentivizes companies to get machinery to replace them. An example of this is the saw machine in a bagel place to cut bagels. One less worker is employed because the machine was bought.

An interesting fact is that in WWII they had a maximum wage limit because there was so much competition since there were more workers needed than available in the US.

Firms adjust to increased costs in many ways. It is not always less workers. It could be no heat in the winters, no benefits for workers. The minimum wage ruins other markets. The minimum wage creates unemployment.

Who makes the minimum wage? 4.4 million Americans. If every one of these workers were poor, then it is Ok to have higher wages, but very little who make the minimum wage are poor. Half are under 24, 40% are married. Over 70% make over 2x the poverty line. Not the people we want making the minimum wage.

The difference between rarity and scarcity is that scarcity is when more people want a product than is available. Oil is abundant but scarce. Rare means that there is not a lot of it. Doesn’t always mean scarce. Rizzo’s wedding ring is rare but not scarce. No one else wants it.

Supply of labor is inelastic. Demand elasticity of labor is 3 meaning that a 1% increase in firm costs, result in a 3% decrease in workers.

*Apple pickers are not scarce. Scarcity means that we have to make a trade off to get good. Still have to do a trade off when there is a surplus. Doesn’t say anything about scarcity.

Rizzo then talked about illegal drugs and the supply and demand curve of it. When things are illegal, that product is inelastic. The supply curve gets steeper when we make things illegal. If everything is legal, when the price of the drug increases, the producer plants another bush. When illegal, extra costs are incurred to ship goods. This increases the amount of drugs and costs because makers now have to avoid being detected. Rather than growing just a small plant where no security is needed, if you grow a lot you need more things to protect your project.

The more we grow, the more protection we need. Bigger costs. Price goes up from this. This creates large profit opportunities. Change in composition in who’s producing it when price goes up.

*When you produce more, hiring costs go up because more security and products are needed. When illegal, more powerful drugs are made. The probability of getting caught is the same if it is the same amount produced of two different drugs. People take bigger risks in what they produce because of this.