New York Manhole Covers, Forged Barefoot in India – New York Times

In the revealing story above, the NYT reports on the manufacture of the New York’s thousands of manhole covers, which it turns out come primarily from a foundry in the Indian state of West Bengal. An NYT photographer discovered the Indian factory, and his photos prompted the report here:

Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit.

In AP Economics, we have begun learning about resource markets, where firms hire the productive resources needed to produce their output. Land, labor, and capital are all needed to produce any output; the combination of these resources a firm will use depends on several factors, including the productivity and the prices of the resources. When the price of labor is low, firms tend to use more labor and less capital. In developing countries, especially those with a large, unskilled workforce (like India), firms are likely to specialize in the production of labor-intensive products, such as the manholes found in American cities like New York.

The scene at the Indian foundry sounds like something from the Middle Ages:

The temperature outside the factory yard was more than 100 degrees on a September visit. Several feet from where the metal was being poured, the area felt like an oven, and the workers were slick with sweat.

Often, sparks flew from pots of the molten metal. In one instance they ignited a worker’s lungi, a skirtlike cloth wrap that is common men’s wear in India. He quickly, reflexively, doused the flames by rubbing the burning part of the cloth against the rest of it with his hand, then continued to cart the metal to a nearby mold.

Once the metal solidified and cooled, workers removed the manhole cover casting from the mold and then, in the last step in the production process, ground and polished the rough edges. Finally, the men stacked the covers and bolted them together for shipping.

Why are New York’s manhole covers being made over 8,000 miles away, anyway? Wouldn’t it make more sense for American cities to buy such items from firms making them right here in the United States? To understand this question, we need to consider the principle of comparative advantage, which says that a nation should specialize in the production of the products for which it has the lowest opportunity costs.

Manhole covers manufactured in India can be anywhere from 20 to 60 percent cheaper than those made in the United States, said Alfred Spada, the editor and publisher of Modern Casting magazine and the spokesman for the American Foundry Society. Workers at foundries in India are paid the equivalent of a few dollars a day, while foundry workers in the United States earn about $25 an hour.

Bengali laborers working in India’s foundries most likely face the trade off of an agrarian existence or maybe another factory job in the pre-industrial economy of the impoverished region, alternatives presenting a much low opportunity cost than American workers whose alternatives include jobs offering much higher productivity. The productivity of a worker depends on the quality and quantity of capital available, the level of training and education of the worker himself. Clearly, Indian workers have less access to capital, lower quality capital, and much less training and education than their American counterparts.

The result is that jobs that require large inputs of low-skilled labor, such as the manufacture of manhole covers, end up being “off-shored” to remote corners of South Asia. The added cost of shipping thousands of ton of iron around the world is more than made up for by the lower resource prices (thus costs of production) in the West Bengali foundries.

Discussion Questions:

1. Why do the Indian foundries use such large inputs of labor, and relatively little machinery?
2. What factors might reduce the demand for labor in the Indian foundries?
3. How does a firm know if it’s using the right combination of capital and labor in its production?

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The following post was written by an AP Economics student at Zurich International School

We all know about market failure on the product side: A good or service is under or over produced in the free market because of externalities that cause the marginal social benefit (MSB) to no longer equal the marginal social cost (MSC). Instead, the good or service is at another equilibrium where the MSB is equal to the marginal private cost (MPC). In such a case, the government may intervene by either taxing or subsidizing the good or service, or even by taking control of production in order to bring the values to the social equilibrium point (MSB=MSC).

Now let’s take a look at how this plays out in the human resources market.

In the human resource market firms tend to pay close to the same salary to people of the same rank or position. This can lead to market failure. An employer might have positive or negative externalities. Their location may be near public transport and in a beautiful location. Or it might be situated right next to a sewage treatment plant. When firms offer the same salary for the same position, their externalities may lead to labor surpluses or demand". Occurs when the price is below the equilibrium level, for example, when a government imposes a price ceiling in a market.');" onmouseout="tooltip.hide();">shortages, i.e. to market failure.

A firm with negative externalities will have a shortage of workers since the qualified workers can work elsewhere for the same amount. A firm with positive externalities will have a surplus of applicants. The number of people will want to work at such firm will exceed the positions available. The firm could profit from this situation by becoming more selective, accepting only those candidates of superior quality. However, there can also be additional costs to the company if its externalities attract a surplus of applicants. There would be additional costs for processing and reviewing the many applications received. In a world of perfect competition where employee qualifications would be the same, the firm with positive externalities would reduce the wages it offers. This would reduce labor costs and decrease the number of applicants, reducing thus administration costs too. A firm with the negative externalities would have to do the inverse: raise wages in order to increase the number of workers. In reality of course, employee qualifications differ and the firm with positive externalities may get a flood of applications from candidates even those with insufficient qualifications.

There are many examples of positive and negative externalities, not only location. These can range from a positive (or negative) brand to a positive (or negative) reputation in how the company treats employees, such as by having flexible hours or supplying recreational or sporting facilities. When a person is looking for a job, externalities can play a decisive role.

Case Study: John the Consultant

Let us look at John the Consultant as an example. Like most applicants, John is looking for a good salary but he also wants to enjoy his work environment.

John gets three job offers: One from a fairly standard consulting firm, one from a tobacco company, and another from a sports TV network (with great offices with fabulous views).

When he was originally applying, John thought he would jump at opportunity to work at the sports network. The network had been his favorite since he was a child. He loved the thought of working in sports and television.

But then he took a closer look at the actual offers. The sports network offered him a salary that did not even come close to his expectations. The consulting firm’s offer was like its offices: just the standard fare. On the other hand, the tobacco company’s financial offer was mind-blowing.

Why is this so?

The tobacco company’s labor market might look like this:

Here, due to ethical concerns with the product, too few people would be interested in working at the tobacco company if it paid the average wage. Its cost to hire an additional worker (let’s call it the Private Marginal Resource Cost (PMRC)), is higher than the market average (AMRC). This is why it is necessary for the firm to increase wages in order to increase the quantity of labor to the optimal level. To be noticed is that their new quantity of labor is still below the market average. If the firm wanted to raise labor up to the market average, it would have to further increase wages, which would be extremely inefficient since there will be a point at which the cost of the additional workers will outweigh the value they represent.

A sports network company might look like this:

The sports network company, if it offered average wages, would have a surplus of workers. Here the AMRC is higher than the PMRC. In such case, the economically wise action is to decrease wages, thereby decreasing the quantity of labor to the optimal amount. To be noticed again is that its optimal amount is still higher than the market average. If it further decreased wages to reach Q_A there would be a dead weight loss. (Pragmatically speaking, the firm would not hire a surplus of workers; it would stick to Q₂, but even then normal wages would be inefficient, since it could get the exact same quantity of labor at lower wages.)

Now John has the choice of taking less money along with the positive externalities, or more money when there are negative externalities. The externalities turn into opportunity costs. And this creates a dilemma.

Firms have long known the gist of this concept. Most large corporate firms have made serious efforts to increase employee satisfaction in the hope that it will become a positive externality. Yet since the vast majority of employers have done similarly, various types of extra benefits have become standard for the market. However there are still companies that stand out from the rest. For example Google has placed a high priority on creatively generating employee satisfaction and creating a work environment conducive to cooperation and innovation. It has excelled in these domains by so much that their employees are glad to take a lower paycheck than the market average for the privilege of working there.*

Now all this is a prime example of how externalities are corrected through the profit incentive. In contrast to the product market (where a company may not bear the full cost of a negative externality it causes, such as pollution, and government intervention can become necessary), no government interference is usually necessary in the human resource market. There it is the firm that notices and corrects the difference in employee wages in relation to externalities. Most companies have learned to put a price on externalities, and equilibrium is restored.

*As an example, according to the Financial Times Feb 7, 2011, Google now receives an astonishing 75,000 applications a week.

That’s right, February 2007 marked the beginning of this great experiment in “learning the wiki way”. If all you’ve ever known is this blog, then you probably don’t know why it’s called “Wikinomics”. Before the blog was born, this project consisted only of a Wiki where my AP Economics students shared their understanding of the subjects we studied. Not long after the wiki got started, I created this blog, where in the last four years I, along with several guest authors, have written countless posts covering every topic from introductory Economics course imaginable!

Now on our fourth anniversary, I thought I’d take a moment to look back at where Welker’s Wikinomics has come from and then give you a brief idea of where it will go in the future.

First, as an Econ teacher, I love stats, so I thought I’d share some here.

The wiki, which eventually gave birth to this blog, has actually had more visits over the last four years than the blog has, and continues to turn up near the top in Google search results for countless economics terms.

Where Welker’s Wikinomics has come from:

Here’s the latest data on the wiki:

• Total visits since February, 2007: 545,468
• Average number of visits per day over the last four years: 944
• Number of subscribed users: 1092

And for the blog:

• Total visits since February, 2007: 388,207
• Most visitors on a single day ( March 1, 2011!): 1,013
• Number of posts: 550
• Number of reader comments: 6,275
• Number of categories: 193
• Number of registered users: 1,369
• Number of people subscribed to the weekly email newsletter: 298

All told, the eyes of nearly 1 million economics students, teachers, and others interested in the subject have have scanned the content posted on this blog and on the accompanying wiki!

What the future holds for Welker’s Wikinomics

For those of you who visit this site regularly, you will have noticed that over the last year, I have written far less frequently than I did in the past. I do have a good excuse for this, however, as I have been consumed with writing my soon to be released IB Economics textbook for Pearson. But as that project winds down, I plan to once again turn my attention to the resources offered by Welker’s Wikinomics. Some of the projects I plan to embark on in the next year include:

• A complete re-design of this blog
• Updating the “brand image” of all of Welker’s Wikinomics resources (wiki, universe, etc…)
• Re-designing and updating Welker’s Wikinomics Lecture Notes and Study Guides for use with the new IB Economic syllabus (to begin in August 2011)
• Designing and releasing in the iTunes Store a digital, iPhone ready study guide for AP and IB Economic students

This last goal is one I have had in the back of my mind for quite some time. It has gotten the thumbs up from my tech-equipped students here in Zurich, and once I have the time, it is something I seriously want to pursue. Don’t worry Android users, I myself have switched to the Google platform, and any app I develop for the iPhone will be made available for the Android as well!

Thanks to all you loyal readers and contributors who have kept coming back to the blog, wiki and other resources offered by Welker’s Wikinomics over the last four years! I will always remember how excited I was the day so long ago I got my 1,000th visitor on this blog! (I am pretty sure it took about three months to reach 1,000 visitors). Now, four years and almost one million visitors later, I am still as passionate as ever about creating and sharing great content for the high school economics student and teacher.

As always, if you like what you read here, and think you have something to contribute, add your comments or contact me at welkerswikinomics@gmail.com if you wish to become a contributing author!

So, thanks to you all for everything!

-Jason

Objective: To understand how productive resources, goods and services and money flow from households to firms and from firms to households through voluntary exchanges in a nation’s product and resource markets.

Introduction: This lesson simulates the circular flow of resources, goods and services in a nation with a closed economy and no government sector. The simple circular flow model re-created through this simulation can be graphically represented as follows:

Instructions: The teacher will need to prepare several resources before beginning the simulation. These include:

• Money certificates: These should be printed on green paper (perhaps four certificates per page), then cut into strips approximately the size of a dollar bill. I recommend four “bills” from each sheet of paper. You’ll need a paper cutter to quarter the photocopied sheets once they’re printed. You should print at least 50 sheets of money, creating a total of 200 money certificates. On each certificate should be printed the words:

“This certificate is a money payment for a good or service or a productive resource. In the resource market it represents the wages, interest, rent and profits households receive as income for their resources. In the product market it represents the expenditures households make for goods and services.”

• Resource certificates: On a different color sheet of paper, make approximately 40 copies of a page with the three resources on it, separated vertically: “Land, Labor, Capital”. Each resource should be on its own strip of paper. Make sure you create the same number of each of the three resources. For a class of 20 students, I would recommend making at least 50 copies of each resource (50 lands, 50 capitals, 50 labors, totaling 150 resources in total).
• Product certificates: On yet a different color sheet of paper, print and make approximately 15 copies of a page with the words “Goods and Services” on it four times from top to bottom, so you have a total of 60 “Goods and Services” certificates. Again, use the paper cutter to quarter the pages so you have 60 strips with the words “Goods and Services” on them.

For a class of 20 students, you must create 20 different paper clipped bundles ahead of time. 10 of your students will be “FIRMS” and 10 will be “HOUSEHOLDS”. Each of the households will receive a bundle of resource certificates. Each firm will receive a bundle of money certificates.

• 10 Household bundles: Prepare 10 bundles of resources. Each bundle can contain a random combination of land, capital,and  labor. It is important that some households receive far more productive resources at the start of the simulation than others. For example, you may give one student a bundle with 5 labors, 7 capitals and 8 lands. Another student may receive a bundle with 2 labors, 1 land and 1 capital. This may seem “unfair”, but will play an important role in your post-simulation debrief. Be sure to use ALL of the resources you printed out, so you are sure there is an even number of land, capital, and labor.
• 10 Firm bundles: Each firm is run by an entrepreneur. The entrepreneurs who manage each firm start with a different quantity of financial capital. Divide your 200 money certificates into 10 different bundles, some containing larger amounts of money than others. The “average” entrepreneur will have 20 money certificates to start, but be sure to give some firms far more than this and other firms far less.

The simulation: For the simulation, you will need a large open space. I recommend going outside where there are some trees you can tape signs to, or in a gym or a classroom with the desks moved to the center of the room.

1. Begin by asking students “Who are the two ‘stakeholders’ in a nation’s economy portrayed in the circular flow model?” Once they’ve identified “Firms” and “Households”, have a volunteer tape two signs on walls opposite from one another in your teaching area.
2. Next ask students to identify what it is that firms demand from households, and what it is that households demand from firms. Once they’ve identified “Resources” and “Products”, have a volunteer tape the signs for “Resource Market” and “Product Market” opposite each other in your area. You now have four signs taped to the wall: “Households” and “Firms” are across from one another, and “Resource Market” and “Product Market” are across from one another.
3. Next assign roles: Give each student a letter, either and “H” or an “F”. Half the class will become Households and will re-group at their sign, the other half of the class will be come Firms and meet at their sign. Explain to the Firms that they are entrepreneurs who want to start a business that will produce a good or service. As entrepreneurs, they are putting their own creative ideas towards a business venture, but must acquire land, capital and labor in order to begin producing their good or service.
4. Ask the Households what they want, and where they will get it. They’ll say “Products” and they’ll get them in the “Product Market”. Ask firms what they want and where they’ll get them. They should say “resources” and they’ll get them in the “Resource Market”.
5. Next discuss the motives of firms and households. The entrepreneurs and their firms are seeking to maximize profits in the Product Market, which they will do by minimizing their costs in the Resource Market. Therefore firms must try to acquire the land, labor and capital at the lowest cost possible and then sell their goods and services for the highest price possible. Households are seeking to maximize their incomes in the resource market in order to maximize their consumption of goods and services in the product market. Therefore households should try to sell their resources for the highest price possible and buy their products at the lowest price possible.
6. Ask the students: “Now we’re ready to begin our circular flow, but something is missing. What is it?”. They will know right away that “MONEY” is missing. At this time, distribute the different sized bundles of money to the entrepreneurs. Make each entrepreneur count his or her money so it knows how much it started with. This way each firm will know whether it earns a profit or a loss during the simulation.

Time to FLOW! First comes the RESOURCE MARKET. In order to produce one product, business owners must acquire three resources: one land, one capital and one labor. Make sure they know that they must have one of each to produce one good or service, so that firms do not go out an buy nothing but labor or nothing but capital.

1. The firms and the households must now meet in the resource market.
2. Give the firms five minutes to bargain for and acquire as many resources as they can from household with their limited financial capital.
3. Encourage firms to  ”shop around” until they find a household willing to sell its resources for the lowest cost, or until households find a firm offering the highest income.
4. Once a firm runs out of money, have the entrepreneur come to the “FACTORY” (this is you, the teacher) where the firm will exchange the resources it acquired in the resource market for “Goods and Services” certificates. Remember, one product (G&S certificate) costs three resource certificate, one of each of Land, Labor and Capital.
5. After 5 minutes the resource market is closed and firms must report to the teacher’s “factory” to turn their newly acquired resources into Goods and Services. Give each entrepreneur one “G&S certificate” for each bundle of land, labor and capital the entrepreneur acquired in the resource market. Households should return to their sign and count their money incomes and drool in anticipation as the firms produce their goods and services. Any resources unsold by households or unused by firms must be put aside, these may not be exchanged in the product market.

Time for the PRODUCT MARKET.

1. Remind the households what their motive is in the product market: to acquire the MOST goods and services possible, therefore spend all their money but try to get the lowest price possible.
2. Remind firms what their motive is. EARN A PROFIT! To do this they must now sell their products at the highest price possible.
3. Give the students five minutes to buy and sell goods and services. Encourage the households to “shop around” for bargains. Observe what prices products are selling for between different buyers and sellers.
4. At the end of five minutes, the product market is closed. Send firms back to their sign and households back to their sign.

Analyzing the results:

1. First ask the firms to count their earnings. Determine which firms earned profits and which firms earned losses.
2. Determine how many resourced went unsold in the resource market or were bought by firms and then were unable to be used to produce goods and services.
3. Determine how many goods and services went unsold in the product market. If all goods and services were sold, then determine how much money households had left over and were unable to spend.

Simulation debrief – Economic concepts to discuss: The following are just some of the economic concepts that you can discuss following your circular flow simulation. There may be others, but these are some of the most interesting and important.

• The Circular Flow: Ask students what, exactly, was “flowing” in the circular flow.
  • Resources flowed from households to firms, were turned into goods and services, which then flowed from firms to households.
  • Money flowed in the opposite direction; first from households to firms in the form of Wages, Interest, Rent and Profit (the income payments for the four resources households owned), then from households to firms in the form of expenditures on goods and services, which translate to revenues from firms.

• Efficiency and the PPC: Were there resources that households had in the beginning but were unable to sell in the resource market or resources that firms bought but were unable to use? The existence of unused resources is evidence that our “economy” was producing below its PPC.
  • Discuss with the class how the “unemployed or underemployed resources” represent an “excess supply” of productive capacity in the economy. The existence of unused resources is evidence that the price in the resource market was too high! If the price had been lower, then firms would have demanded a greater quantity of resources and this “excess supply” would have been eliminated.
  • The unused resources represent the inefficiency of the nation’s economy. If the market had been more efficient, then more resources would have been employed by firms and more goods and services could have been produced, meaning the economy would have been producing closer to its PPC.
  • Households with unemployed resources represent unemployment in the economy. There were mismatches in the resource market between firms and households, and the prevailing income level was too high, resulting in an excess supply of resources, i.e. a surplus of land, labor and capital.
• Equilibrium price in the product market: It is possible that following the product market round, some households will have money left to spend yet firms will be sold out of goods and services. This is evidence that the price goods were going for was too low.
  • If households were willing and able to buy, but there was not enough product to sell, then we had excess demand in the product market. The quantity demanded exceeded the quantity supplied.
  • The price in the product market was too low. A price below equilibrium leads to demand". Occurs when the price is below the equilibrium level, for example, when a government imposes a price ceiling in a market.');" onmouseout="tooltip.hide();">shortages. If firms had known there would be households willing to buy, then they would have charged a higher price and the shortage would have been eliminated.
• Inequalities in the distribution of income: Ask students why some households ended up with more goods and services in the end than others? Also, why did some firms end up with greater revenues than others?
  • Some households had higher incomes and thus enjoyed greater levels of consumption because they were endowed with higher quality and a greater quantity of resources to begin with. This is representative of the real world in which not all households have the same education levels, own the same amount of land or have the same amount of financial capital as others. Those with the greatest quality and quantity of resources earn higher incomes in the form of wages, rent and interest and therefore enjoy a higher level of consumption.
  • Some firms ended up with higher revenues than others, which is probably because they started with greater financial capital. The entrepreneurs with access to more financial capital  when starting their business were able to produce more products and earn higher revenues. But an entrepreneur’s having access to more money in the beginning did not guarantee he or she would earn profits! It’s likely that even the smallest firms were able to earn profits, if they were good at negotiating their costs down and their prices up.
• Competition and “creative destruction”: Some firms will make losses while others make profits.
  • Firms that earn big losses will be forced to shut down or become smaller, because they’ll be unable to buy as many resources nor produce as much output in the next round of the circular flow.
  • Firms that earn larger profits will be able to expand and grow since they can reinvest their profits into more inputs and greater output in the future.
  • Competition forces firms to be as efficient as possible. Only firms that produce in the lowest cost manner can survive in a market economy. This is good because it assures that resources will not be wasted and output will be maximized as firms pursue their ultimate motive of profit maximization. I call this Economic Darwinism: “survival of the most efficient”, a key characteristic of market economies.

Other possible questions for discussion: The following questions can be distributed to students following the simulation and assigned as a reflection for the next class period, or put on the board and discussed as a class.

Final thoughts: I have done this circular flow activity countless times with both AP and IB Econ students. Over the years it has evolved each time I’ve done it. I recommend you try it with your students and make small changes where you see they’re needed. Throughout the AP or IB course, however, I always find myself re-visiting our circular flow simulation in lectures, and students always recall immediately what I am referring to since they themselves were the households and firms engaging in voluntary exchanges motivated by their own pursuit of self-interest.

Additional note (and an acknowledgement): My teaching partner and occasional contributor to this blog, Joe Hauet, had the idea of giving the Firm owners the “entrepreneur” badge. My original simulation had “entrepreneurship” as one of the four resources owned by households and sold to firms in the resource market. But Joe keenly pointed out that in fact all firms are ultimately owned by households, and that it is the entrepreneurs who start the firms and then must acquire additional land, labor and capital from households to produce their product. So thanks to Joe for helping make this simulation better!

YouTube - ACDCLeadership’s Channel

More econ review videos from my new favorite YouTube channel, Jacob Clifford’s Econ Concepts in 60 Seconds.

To review for the upcoming test, you will join a small group and watch one of the four videos on the Perfect Competition. After watching and discussing one video with your group, you will be re-assigned to another group with students who watched a different video. You will then lead a short discussion on your original video with your new group.

With your first group – 15 minutes: As your group watches its assigned video, have your notes open in front of you and draw the graphs Mr. Clifford draws along with him. Pause the video where necessary to have time to draw graphs. Take notes while watching the video so you can teach it to another group. With your group, prepare a short discussion of the video’s main points, including:

• What rule or lesson about Perfect Competition does the video focus on?
• What did you already know that this video reminded you of or reinforced your understanding of?
• What did this video introduce that was new to you?
• How were graphs used to teach the concepts?

With your second group – 20 minutes: For the second part of this assignment, there should be four new groups, each including one member of the four original groups.

• Each group member should lead a 2-3 minute discussion of the video he or she watched in the first group.
• Go over each of the discussion points from above.
• Answer any questions your new group members have about video you watched.

Group 1 - The Profit Maximization Rule – MR=MC:

Group 2 - Perfect Competition in the short-run:

Group 3 - Perfect Competition in the long-run:

Group 4 - The Shut-Down Rule in Perfect Competition:

h

AP Question of the week:

Refer to the graph to answer the questions that follow:

1. The graph above shows the (In macroeconomics): The period of time over which wages and prices are relatively inflexible. A fall in aggregate demand will lead to unemployment and recession in the short-run. Due to the inability of the nation's producers to reduce wages paid to worker, they must lay workers off to reduce costs as demand falls.');" onmouseout="tooltip.hide();">short-run costs faced by a firm in a perfectly competitive industry. Identify the cost curves that are denoted by each of the following:
   1. Curve 1
   2. Curve 2
   3. Curve 3
2. Explain why Curve 1 intersects Curves 2 and 3 at the precise points that it does.
3. Identify and explain the economic “law” that determines and HOW it determines the shape of Curve 1.
4. At which price(s) would this firm be earning economic profits when producing at quantity Q1? Explain.
5. At which price(s) would this firm shut down when producing at Q1? Explain

IB Question of the week:

1. Explain how, in theory, a flexible exchange rate system should lead to the automatic stabilization of a nation’s current account balance. Use supply and demand diagrams to illustrate your answer
2. Referencing the Marshal Lerner Condition, explain the possible effects of a depreciation of a nation’s currency on its current account balance.

Greg Mankiw’s Blog: Take Out Your Pencils 2

Harvard’s Greg Mankiw just keep them coming! Here’s another micro problem from the esteemed professor and textbook author’s blog. Several readers enjoyed challenging themselves with his last Micro problem, so I will re-publish Mankiw’s test question here to see if people can solve it in the comment section on this blog (sorry Professor Mankiw, you have comments turned off on your blog, so how are your readers to know if they have solved it correctly?)

The town of Wiknam has 5 residents whose only activity is producing and consuming fish. They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in the town lake catches X fish per day. X depends on N, the number of residents fishing in the lake. In particular,

X = 6 – N.

Each resident is attracted to the job that pays more fish.

a. Why do you suppose that X, the productivity of each fisherman, falls as N, the number of fishermen, rises? What economic term would you use to describe the fish in the town lake? Would the same description apply to the fish from the farms? Explain.

b. The town’s Freedom Party thinks every individual should have the right to choose between fishing in the lake and farming without government interference. Under its policy, how many of the residents would fish in the lake and how many would work on fish farms? How many fish are produced?

c. The town’s Efficiency Party thinks Wiknam should produce as many fish as it can. To achieve this goal, how many of the residents should fish in the lake and how many should work on the farms? (Hint: Create a table that shows the number of fish produced—on farms, from the lake, and in total—for each N from 0 to 5.)

d. The Efficiency Party proposes achieving its goal by taxing each person fishing in the lake by an amount equal to T fish per day and distributing the proceeds equally among all Wiknam residents. Calculate the value of T that would yield the outcome you derived in part (c).

e. Compared with the Freedom Party’s hands-off policy, who benefits and who loses from the imposition of the Efficiency Party’s fishing tax?

Greg Mankiws Blog: Take Out Your Pencils

I love that Harvard Economics professor Gregory Mankiw blogs, but I hate that has de-activated the comments on his blog. Yesterday he posted a question from his own Harvard introductory economics class.  Since he doesn’t allow comments though, I cannot tell if I’m solving it correctly. So I will re-publish it here and ask my readers to solve the problem in the comment section.

IB and AP students who have studied microeconomic should be able to put some of their basic algebra skills to work to solve this one.

Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins, international trade in soccer balls is prohibited. The following equations describe the monopolist’s demand, marginal revenue, total cost, and marginal cost:

Demand: P = 10 – Q
Marginal Revenue: MR = 10 – 2Q
Total Cost: TC = 3 + Q + 0.5 Q^2
Marginal Cost: MC = 1 + Q

where Q is quantity and P is the price measured in Wiknamian dollars.

a. How many soccer balls does the monopolist produce? At what price are they sold? What is the monopolist’s profit?

b. One day, the King of Wiknam decrees that henceforth there will be free trade—either imports or exports— of soccer balls at the world price of $6. The firm is now a price taker. What happens to domestic production of soccer balls? To domestic consumption? Does Wiknam export or import soccer balls?

c. In our analysis of international trade in Chapter 9, a country becomes an exporter when the price without trade is below the world price and an importer when the price without trade is above the world price. Does that conclusion hold in your answers to parts (a) and (b)? Explain.

d. Suppose that the world price was not $6 but, instead, happened to be exactly the same as the domestic price without trade as determined in part (a). Would anything have changed when trade was permitted? Explain.

Post your solutions below, I really want to know if I have solved it correctly!

I’ve recently added two new great tools for Econ teachers to this blog that I think can really benefit teachers who decide to use them. Both of the following resources can be found in the sidebar to the right of this blog.

First, I have created a Diigo Group for Econ Teachers that is open for anyone to join. A Diigo group essentially is a social network for people with shared interests. The Econ Teacher group will be a place where Econ teachers can share bookmarks to online resources for use in the classroom. More than just a bookmarking site, however, Diigo allows users to annotate, highlight and leave sticky notes on articles, blogs, and other websites posted to the group, which can then be seen by group members, and further annotated. A website such as the CIA World Factbook, the BLS, or BEA, or an article from the Financial Times or Wall Street Journal thus becomes a shared document for discussion and reflection amongst any and all teachers who find it useful.

Diigo groups also have discussion forum features, so the Econ Teacher Group will become a forum for sharing collective research and resource ideas, as well as a forum for discussing how technology and the web can be used to enrich economics education. Join the Econ Teacher Diigo Group now to help grow this new social network for Econ teachers! (Once you’ve joined Diigo, I recommend adding the Diigo toolbar to your browser to make bookmarking and annotating sites to the group easy!)

Secondly, I am happy to endorse my friend and colleague Mike Fladien’s entrepreneurial endeavor aimed at helping high school Economics students prepare for their exams, “EconExamCram”. EconExamCram is an iPhone or iTouch App for sale in the iTunes store for $1.99. From the app’s description:

This app is available for download on iTunes. I intended this to aid students in preparing for tests in microeconomics. It’s a comprehensive review of 80% of the concepts covered in a micro class.

I believe that students today want to learn using today’s technology. Today’s technology is iPods, Smart Boards, audience response systems, flash animation and more. When I developed this app, I developed it for the on-the-go student who values appearance too. The student I envisioned was one who had a challenging schedule and one or more after school activities. They will carry an iPod with them, but not a five pound textbook. The student I envisioned was one who studied in “micro sessions” of 10 or 15 minutes. The touch was a natural tool for these students.

Congratulations to Mike on developing this app and making it available to us and our students to help prepare for the AP and IB Exams. Do your kids a favor and give them all the link to this app so they can start reviewing for your tests on their phones today!

The last great resource I have added to my sidebar this week is an RSS feed to a YouTube channel I’ve recently discovered. Jacob Clifford, an AP Economics teacher in San Diego, has recently begun producing and publishing a series of review videos for the AP Economics student. He calls them “Economic Concepts in 60 Seconds”.

Jacob is an enthusiastic, energetic young Econ teacher whose lecture style is fast paced and easy to follow. An since the lectures are on YouTube, students (and teachers!) can watch them over and over until his explanations of econ concepts is clear. In each video, he illustrates the concepts on a whiteboard while clearly (and quickly) explaining them in a fun and entertaining way. So far he has only produced videos up through perfect competition in the AP Micro course, but he promises to keep adding more throughout the school year.

You’ll be able to follow Jacob’s latest video posts by checking the RSS feed on my sidebar when visiting the blog. I’m hoping to team up with Jacob somehow in the future to get his videos a wider audience through this blog or in some other collaborative way.

YouTube – jodiecongirl’s Channel.

Jodi Beggs, aka “econgirl” is a PhD candidate at Harvard where she teaches introductory Microeconomics to Masters students. She has a great blog written for econ students and casual readers called Economists do it with Models. She also produces a series of mini-lectures on topics from Greg Mankiw’s textbook Principles of Economics (a text widely used by AP Econ teachers).

In Jodi’s own words,

I’m offering up these lectures either as a complement to your current economics course or as a substitute for what you didn’t learn the first time you took economics

Another great resource for high school economics teachers! I had my students watch the videos on the Demand Curve and the Determinants of Demand today, while jotting down in their notes the topics they already knew, did not yet know, and the questions they had based on Jodi’s videos.

Thanks, Jodi! I hope more econ teachers like myself find ways to put your great resource to use in our classes!