Irony: quitters are making tobacco companies rich

   ANALYSIS from the Economist:

When lots of people smoked, there were many “price-elastic” consumers. In plain English, they were sensitive to increases in the cost of a cigarette. As more people have quit, however, only the most committed smokers are still puffing. Companies have responded by raising prices at an ever-quicker pace.

MY COMMENT:  In chapter Chapter 6, the simple linear demand curves get more price elastic as price increases. But for cigarettes, higher prices make the more-price-elastic consumers stop smoking. The remaining smokers have less elastic demand, so demand becomes less elastic as price increases. This allows tobacco firms to raise price more--and earn higher profit--than they other otherwise would.

You can also understand this using the language of Chapter 14 (indirect price discrimination), with two groups of consumers with different elasticities of demand. At lower prices, both groups consume, but at higher prices, only the less-price-elastic group consumes. Firms optimally raise price and earn higher profit by serving only the less price-elastic group.

An obvious question raised by this interpretation is why didn't firms simply raise price so that the less elastic consumers quit and then reap higher profit from the higher prices. One possible answer is that the tobacco companies didn't know. It was only when so many snokers quit that they realized the remaining ones had much less elastic demands.

Condos vs. Houses: months of supply

WSJ:   In Chapter 8, we teach that prices are set when the number of buyers (demand) equals the number of sellers (supply).  When there are too many sellers (buyers), prices fall (rise).  However, it may take a while for prices to "clear" the market.  

For condos and single family homes, one measure of whether there are more buyers or sellers is the "months of supply," calculated as the number of units on the market divided by the selling rate.  For example, if there are 1 million units on the market, selling at 20,000/month, it would take 5 months to sell the current inventory.  

in the second graph, you see the annual price change:  prices of condos began falling when supply hit 4 months.  

Polymarket odds of a 2025 US Recession

Are we in a stock market bubble?

NYTimes:

Preview of 7th edition: As of late 2025, the U.S. stock market’s cyclically adjusted price-to-earnings (CAPE) ratio has climbed above 40—its highest level since 2000. The CAPE compares stock prices to a decade of inflation-adjusted earnings. In principle, valuations should mirror the present value of expected future profits. High CAPEs can be justified if productivity and earnings growth from artificial intelligence and other innovations materialize—but if those expectations falter, prices tend to revert toward long-run earnings. As of October 2025, the CAPE stands near 39.5, more than double its historical average of 17.

Gamification of Hiring

A primary role of HR is to screen job applicants to address adverse selection in hiring. Now they can automate much of this with apps like HireVue. This platform performs virtual video interviews that include various tasks to assess skills. Candidates perform 'gamified' tasks that are linked to various applicant traits. Not surprisingly, influencers have developed content helping applicants prepare for these games.

 

Nobel Prize: How to Grow

From MarginalRevolution:

Economic growth is not just about new ideas but about how well an economy can reallocate production to the firms using the new ideas

...growth requires that some firms fail and that labor be displaced so resources can flow to new, more productive uses. ... Business dynamism has declined in Europe relative to the United States, a worrying fact given that business dynamism has also declined in the United States. Nevertheless, the US has a more flexible labor market and appears more open to both the birth of new firms (venture capital) and the deaths of older firms.

...Yet, in both the United States and around the the world the differences between high productivity and low productivity firms appears to be growing, ... which means that the good ideas are not spreading as quickly as they once did.

Previous posts on Dynamism

HT:  Mike

Winners' curse in real estate auctions

Fortune:

The real-estate 'winner's curse': Study of nearly 14 million home sales over 20 years shows you don't want to win that bidding war

In today’s hot housing market, winning a bidding war can feel like a triumph. But my research shows it often comes with a catch: Homebuyers who win bidding wars tend to experience a “winner’s curse,” systematically overpaying for their new homes.

Note: the winners' curse is a form of adverse seleccton (ch19) HT: Justin

EU Labor Laws crush innovation.

Economist:

...the sheer difficulty of shedding staff en masse—a reality of corporate life—steers Europe’s biggest companies away from making risky bets in innovative fields.

BOTTOM LINE: Look ahead and reason back: if you cannot fire workers, no company wants to hire.

Are CA and NY acupuncturists evil or stupid?

CHATGPT:

Dry needling by Physical Therapists (PTs) is designed to “reset” knotted or overactive muscle tissue by causing it to spasm, bleed a little, and then relax. This usually decreases pain and improves mobility — at least temporarily — and can help jumpstart rehab when combined with other therapies.

EVIL: By preventing PT's from dry needling, acupuncturists in CA, NY, HI, OR, WA prevent residents from accessing a proven therapy: 

STUPID: From a patient's perspective, they don’t compete, so how can acupuncturists profit from eliminating a non-competitor?

• Dry needling is invasive, uncomfortable, and deliberately traumatic to the muscle — the goal is to provoke a twitch, bleeding, and ultimately a release of the knot. 
• Acupuncture is usually gentle, often painless, and oriented toward restoring balance, calming the nervous system, or addressing systemic issues. 
• So functionally, they look different to consumers — one is painful but targeted to fix a muscle problem, the other is soothing and holistic.

Getting rid of subidies creates wealth

REASON:

Starting Today, Electric Vehicle Buyers No Longer Get a Federal Tax Credit. It's bad news for upper-income motorists wanting a deal, but good news for taxpayers.

In 2022, then-President Joe Biden signed the Inflation Reduction Act (IRA) into law...,[awarding] up to $7,500 for purchasing an electric vehicle. ...Donald Trump [terminated the subsidy] on September 30, 2025.

...each credit cost U.S. taxpayers around $32,000 [for each extra vehicle purchased], because around 75 percent of them went to people who would have bought an E.V. anyway.

...Tax credits can also artificially inflate prices, since sellers can charge more if the government will shoulder a portion of the bill. Under the previous version of the program, when Tesla and General Motors hit the sales cap and their E.V.s were no longer eligible for the credits, each company lowered prices.