How do you align the incentives of sea captains transporting criminals to Australia with those of British public (1800's)?

By paying them for the number who arrive alive--instead for number who board the ship--death rates dropped from 30% to 1%.

This anecdote is taken from the introductory lecture from our friends at George Mason University, who had put their Microeconomics class online:

Introduction to Microeconomics

INSTRUCTOR: Tyler Cowen, George Mason University

How many economists does it take to deliver roses on Valentine's Day?

None, the market will do it.

But it takes at least two to explain how it all happens:

From:  the Microeconomics course at MRUniversity.com

Have you ever wondered how we have access to fresh roses each Valentine's Day in chilly cities where roses couldn't possibly grow?
In a new video (I, Rose) from MRUniversity’s Microeconomics course, we’ll take you around the world for a glimpse at the rose growers and distributors who bring us affordable roses every February.
The second video in this section (A Price is a Signal Wrapped up in an Incentive) shows the invisible hand at work as we discuss how the flower industry responded to the 1970s oil crisis.
We'll also address questions such as:

• How does the price of oil affect the price of candy bars?

• What is the "great economic problem" and which is better at solving it -- central planning or the price system?

• Is speculation actually useful to the market process?

• What are prediction markets? Can they be useful in predicting elections? What about predicting the popularity of Hollywood films?

Who pays a tax? Spaniards seem confused

Very funny post over at Marginal Revolution documenting the political unrest about who should pay a tax? When their Supreme Court ruled that borrowers instead of banks should pay a mortgage tax, it resulted in street protests:

Alberto Garzón, head of the United Left coalition, went even further: “Private banks are thieves, they are the main enemy of democracy and they are responsible for gutting our economies. A majority of the Supreme Court sides with them, ratifying that justice has a price and that the system is rotten and spent,” he tweeted.

Of course, as every economics student knows, a tax drives a wedge between what a seller receives and what a buyer pays, regardless of who nominally pays the tax. In other words, the protest in Spain reflects ignorance, and I blame economists (including myself) for not being able to communicate this better.

Anyone who knows Mr Garzón, please send him this video from MR University on exactly this topic:  who pays a tax?  It is part of a great collection of short videos designed to teach principles of Microeconomics.

Minimum Advertised Prices as a form of price discrimination

Saw an interesting explanation for Minimum Advertised Prices at the FTC's annual Microeconomics Conference (my old employer).  Many manufacturers adopt these "MAP" policies which prevent retailers from advertising a price below the manufacturers recommended price.  If a retailer wants to sell at a lower price, it has to "hide" the lower price from online search engines.  The lower prices are revealed only after a shopper "clicks through" several levels.

A numerical illustration illustrates how it works.  Imagine that there are 50 low-value shoppers willing to pay $5 and 50 high-value shoppers willing to pay $10.  A traditional posted-price offers a retailer the choice between selling to only half the consumers at a price of $10 or all of the consumers at a price of $5.  Both strategies would earn the retailer $500=50*($10)=100*($5).

A minimum advertised price allows the manufacturer to price discriminate if the low-value shoppers search for a lower price and the high-value shoppers won't, e.g., because the high-value shoppers have a higher opportunity cost of time.

Imagine that half of the consumers go to the websites of each retailer, one of whom posts (advertises) a price of $10, while the other allows shoppers who click through several layers to buy at a price of $5.  Each retailer receives a even mix of high and low-value shoppers.

For the consumers who go to the high-priced retailer, only the high-value shoppers purchase, which results in revenue of 25*($10)=$250.

For the consumers who go to the low-priced retailer, all of the shoppers purchase. In addition, the low-value consumers who did not purchase from the high-priced retailer will search and find the lower price and purchase.  Revenue at the low-price retailer is 50*($5)+25*($5)=$375

Total revenue from the minimum advertised price strategy is $625=$250+$375 which is bigger than the $500 from a single posted price. 

China liquidates US treasuries to support yuan

Running a trade surplus makes your currency stronger, and in the graph below, we see the yuan appreciating relative to the dollar, from rom over 8 to the dollar, to only 6.5.  It would have appreciated faster, but the Chinese government has been buying buying treasuries to slow appreciation, which makes their exports cheaper than they would have been, which helps Chinese companies and employment (but hurts Chinese consumers).

A few weeks ago, the Chinese government's decided on a sudden depreciation the yuan (back down to 6.5 to the dollar) to stimulate their domestic economy.  You can see this in the small spike at the far right of the graph.  But now the Chinese government has decided that the currency fell too far, and has been selling treasuries to support the yuan.

The clear takeaway is that there's a substantial amount of upward pressure building for UST (US Treasury) yields and that is a decisively undesirable situation for the Fed [Federal Reserve] to find itself in going into September.

If the Chinese sell treasuries (borrowing by the US government), this puts downward pressure on treasury prices, and upward pressure on yields.  If US treasury yields rise, the cost of borrowing increases, and the government (and private borrowers) will face a higher cost of capital.  The dollar will also appreciate.  All of these effects will hurt US companies (and employment).

The interactions between markets (foreign exchange, domestic unemployment, domestic interest rates) is the hallmark of macroeconomics.  Microeconomics typically focusses on only one market at a time.

How did Larry Summers correctly predict inflation?

... I thought if you were filling a $30 billion hole [the insufficient aggregate demand necessary to get the US economy to full employment] with $200 billion of spending, there was likely to be some overflow and that overflow would translate into inflation. I did the same calculation essentially, looking at GDP, and I saw a 2% or 3% GDP gap, met with about 15% of stimulus. (LINK)

A lot of macroeconomics uses microeconomics tools like demand and supply.

Short videos on Demand/Supply and Elasticity

Short Microeconomics Videos from MarginalRevolution U.

Supply, Demand, and Equilibrium

• The Demand Curve
• The Supply Curve
• The Equilibrium Price and Quantity
• Does the Equilibrium Model Work?
• Supply and Demand Terminology

Elasticity and Its Applications

• Elasticity of Demand
• Calculating the Elasticity of Demand

The Price System

• I, Rose
• A Price Is a Signal Wrapped up in an Incentive

Price Ceilings and Price Floors

• Price Ceilings
• Rent Control in Mumbai

New Stossel video: "Stupid in America"

[40 minutes long] John Stossel takes a look at America's public schools. Regardless of whether you agree with his libertarian sensibilities, these make good teaching tools. I show Stossel's "Microeconomics" and "Macroeconomics" videos to break up my classes. Good at generating discussion.

The management problem is how to measure school performance when so much depends on the student's background. Vouchers put parents in the role of evaluator, who vote with their feet if they think the school is not serving their children well. Vouchers would likely give rise to school "brands" or certification services to help parents evaluate school performance.

Micro econ videos from Marginal Revolution University

Course Outline

1 Introduction

• Introduction to Microeconomics

2 Supply, Demand, and Equilibrium

3 Elasticity and Its Applications

4 Taxes and Subsidies

5 The Price System

6 Price Ceilings and Price Floors

7 Trade

8 Externalities

9 Costs and Profit Maximization Under Competition

10 Competition and the Invisible Hand

11 Monopoly

12 Price Discrimination

13 Labor Markets

14 Public Goods and the Tragedy of the Commons

15 Asymmetric Information

16 Consumer Choice

17 Exam