Comment Cards

October 3 - October 21

Q1: What do other economists think profit is in payment for? (Second question: What's your favorite Wu-Tang Clan song?)

R: Some economists argue that profit is a risk premium, a payment for deferred consumption (i.e. a capitalist gives up the access to money when it's invested) or a payment for ownership of the means of production (i.e. you have to pay at the gate to gain access to a livelihood -- that payment is profit) or (as David Ricardo and Karl Marx believed) derived from the surplus over the wages of the workers, which was payment for the subsistence of the worker. Before Ricardo and Marx, economists believed that profit came from "buying cheap and selling dear". Ricardo (a contemporary of Marx) argued that this was really "profit by alienation" -- somebody is a loser, somebody a winner -- and could not be sustained in a market economy, i.e. profit had to be a part of value production rather than derived from the exchange sphere. (Second question ~ honestly, I don't own a Wu-Tang Clan CD. Ever since Master Killa punched Cheo Coker because of his cartoons in The Source I've been down on those guys. I gotta tell you though Goodie Mob got it right -- the new world order ushered in school closures, rising college tuition, youth curfews, urban zero tolerance campaigns, racial profiling and a prison-building boom: "Time is getting shorter," Cee-Lo warned. "People, If we don't get prepared it's gon' be a slaughter." [Jeff Chang, Can't Stop, Won't Stop (2005), 438] What does New Orleans mean for race relations? This is serious.)

Q2: Is normal profit only present in perfect competition?

R: Any firm regardless of the market structure could be earning zero economic profits, it's just less likely than in perfect competition.

Q3: Exactly what is perfect competition?

R: It is a market structure in which there are many small firms. No single firm controls price. The price is set by the collective supply and demand in the market and each firm takes that price as given. Each firm sells a product that is exactly the same as every other firm's product. There are no barriers to entry into the market -- any other capitalist can set up a competing business relatively easily. Because of free entry, firms will continue to enter until prices fall to a level where they are just equal to the minimum point of average cost. This supposedly produces the most efficient outcome. Consumers get the product at the lowest price possible.

Q4: If these models, such as perfect competition, are strictly hypothetical and have no practical application, how are they deemed relevant and warranting discussion?

R: It is like a standard against which everything else is judged. Court cases in which a firm is accused of anti-trust violations are determined in part by the effect of the infraction on the degree of competitiveness. We have to have some competitive ideal on which to base such decisions. Also, it is useful to exam how a market would operate even if perfect competition prevailed. The tendencies of a capitalist market economy can be understood when we see that competition tends to self-destruct under the pressure of profit-maximizing motives.

Q5: Whatever happened with the issue of the Far East owning most of our U.S. bonds & debt? Has any of this situation been resolved or is our fate still up in the air?

R: The latter. China is one of the fastest growing economies in the world. We just have to figure out what they want that we have and start producing it. Otherwise, the only way the accumulation of dollars in Chinese banks will come back to us is as demand for our assets (bonds, stock, real estate et al).

October 5

Q1: Is there a formula to use instead of a straight-edge to find the point that is lowest on the total cost curve?

R: Yes, there is a formula. When the slope of the total cost curve is equal to the slope of the total revenue curve then MC = MR. MC is equal by definition to the slope of the total cost curve (chg tc/chg q) and MR is by definition is equal to the total revenue curve (chg tr/chg q).

Q2: Related to the class exercise on October 5, "How did you get $13?"

R: Price was given at $13, so in perfect competition we know that profits are maximized when the added revenue from selling another unit ($13 in this case) is just equal to the added cost of producing another unit (MC). To find marginal cost we subtract successive levels of total cost for each additional unit of output. When we subtract $44 from $31 (total cost figures for, respectively, the 3rd and 4th unit of output) we get $13. We know we have squeezed every bit of profit out of the market that we can. So, production is stopped at 4 units.

October 7

Q1: Would any company actually evaluate or use a shutdown point if they had the option to look for outside loans etc?

R: Yes. For example, if you could sell the assets of the firm and invest the proceeds in a risk-free government bond and make more money each year than if you continued to produce then you wouldn't go looking for more loans that would require annual interest payments. You would be just adding to your losses.

October 12

Q1: Are rent controls related to leasing commercial property as well? Are controls set and prices established accordingly?

R: No. Rent control has only been applied to residential property. The purpose of rent control was to stabilize the cost of apartments so the poorest residents would not be priced out of the market. Many other schemes came into practice that undermined this original intent. Sometimes property management companies would demand "key" money by which you would have to pay say $5,000 to get the key. Other practices were instituted by property owners such as harassing tenants, not making repairs and other methods to get them to move out. The apartments would then be sold as cooperatives. There are currently very few rent controlled apartments relative to the whole housing stock in Manhattan.

Q2: Could you explain the concepts of elasticity and deadweight loss?

R: Diagram A below has a relatively more elastic demand than that of diagram B. The per unit tax is approximately the same (my drawing skills, please!) in both cases. Notice that the deadweight loss area (the reduction in revenues going to anybody -- consumer, producer or the government) is much less in diagram B. This is because the consumers in diagram B are reluctant to discontinue purchasing the commodity as the price is raised by the tax. In fact, you can see if they were unwilling to change the quantity they purchased at any price (a perfectly vertical demand curve -- perfect inelasticity), then there would be no deadweight loss. You can also see that government gets more revenue for the same per unit tax in diagram B for the same reason -- consumer's reluctance to change the amount they buy as price rises. That's why a cigarette tax brings in more revenue than would a tax on chewing gum -- people would just stop buying chewing gum.

Q3: How sweet was the White Sox's win against Boston? Also, how sweet was the Angels win against the Yankees?

R: Okay, I can't breathe here.

Q4: Is a consumer goods tax (sales tax, value-added tax) more preferable to taxpayers than other forms of taxation?

R: It would be more preferable to the rich because they subject a smaller percentage of their incomes to a sales tax than do people of low income (rich folk can save, poor folk cannot). A sales tax would tend to fall more heavily on middle and lower income families.

October 14

Q1: What was the main point behind the movie we were supposed to watch about the "Cola Conquest"?

R: That branding is a form of market barrier, a tool of oligopolistic power. Coca Cola spends billions to market and protect its brand image. The film lets you hear the C.E.O. of Coke telling the shareholders that "One day Coca-Cola will be more popular than water."

Q2: Can you give more examples of monopolies and oligopolies?

R: Examples of monopolies are AT&T,  U.S. Steel, ALCOA Aluminum, Microsoft (Windows OS used on 95% of personal computers), local cable companies after the 1984 Cable Television Act deregulated cable t.v. (Viacom and TCI became huge conglomerates after feeding at the trough of local cable monopolies) -- In 1992 Congress repealed the act over the veto of President George H.W. Bush (the only veto of his administration) because of the price gouging.  The cable industry was a classic natural monopoly and would have once been regulated as AT&T was before they were broken up into baby Bells. Oligopolies include the automobile industry, the tobacco industry, the petroleum industry (really the energy industry), the entertainment industry, professional sports (local monopolies in most cases -- only three cities have two major league baseball teams and only one city has two professional basketball teams), the pharmaceutical industry and so on.

October 21

Q1: What do "discouraged workers" do if they aren't searching for a job?

R: Go back to school, move in with their parents or another relative, join the military (they aren't counted as part of the labor force), get some job training, become homeless and so on. As in the case of the musical chairs skit, when the jobs aren't there (it's not quite a net loss of jobs when companies move off-shore because the economy is still growing but it's more of a dislocation in which many more people are in between jobs) you simply cannot find work.