Averages don’t matter

Here’s a link to a discussion on statistics.  If you did some thinking, many things you don’t see have a powerful story.  Bastiat is famous for the cases of the unseen.

Hat tip to Don Boudreaux.


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HW for EC 11 – Macroeconomics and Unemployment

For readings, please refer to my lecture notes on macroeconomics, and to Mankiw’s chapter on the natural rate of unemployment. For extra-credit questions, you may have to do further research or readings.

Please answer the following questions, and submit your answers by email by March 2, 2016.

  1. What is the most important difference between microeconomics and macroeconomics?
  2. Explain Say’s Law. Why is it important for an understanding of macroeconomics?
  3. How does Mankiw define the natural rate of unemployment?
  4. According to Mankiw, what are the four reasons why the natural rate of unemployment is not zero? Are these reasons important in the context of the Philippine economy?
  5. It is said that macroeconomics is essentially the economics of unemployment and inflation. Why, in your opinion (based on your readings or research), do policy-makers not aim for zero unemployment and zero inflation?
  6. Extra credit: What is the Okun Index of Misery? Can it be improved by including a poverty index?
  7. Even more extra credit: Construct an Okun Misery Index for the Philippine economy. How far back in time could you go? (Hint: data may be available in the websites of BSP and IMF.) Is it affected by the prevailing economic policies of various Presidents? (Anyone – even a group of up to three – answering this question well will be exempted from taking a final exam.)
  8. Extra credit: Explain in your own words the Neoclassical Synthesis (this is from previous studies in EC 12, History of Economic Thought).
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EC 11 HW – Market Structure (wrap-up)

There is no need to submit your answers.  We will discuss them in class.

  1. Classify the following markets as competitive (C), oligopolistic (O), monopoly (M), monopolistic competition (MC) or none of the preceding (N). In your answer, include the possibility of illegal producers or consumers. You should answer N, if the demand side of the market is not competitive, but the supply side is. [6 pts.]

_____ (a) law enforcement services

_____ (b) cell phone service

_____ (c) wives or husbands (aka the marriage market)

_____ (d) kangkong, tomatoes, onions

_____ (e) Nokia cell phones

_____ (f) security guard services

  1. The main difference between perfect competitors and monopolistic competitors is: [choose one only – 3 pts.]

____ (a) There are many perfect competitors, while there are usually only a handful of monopolistic competitors.

____ (b) Product innovation is not important for perfect competitors, whereas monopolistic competition would not exist unless sellers can produce “branded” products by using or adapting new technology.

____ (c) In the long run, there is zero profit in perfect competition, while there is a small positive profit for monopolistic competitors.

  1. Match the concept with the appropriate statement: [4 pts.]
Price leadership, or a market dominated by a large firm A. An agreement to collude, allocating market shares and setting prices.
Contestable market B. Ease of entry or exit
One firm is the only seller C. Small firms behave like perfect competitors because they cannot control the price.
Cartel D. Monopoly
  1. In terms of how they deal with consumer demand, the main difference between oligopoly and monopolistic competition is: [choose one only; 3 pts.]

____ (a) Oligopolists set the price by conspiring with each other to form a cartel, whereas monopolistic competitors do not engage in overt conspiracy (i.e. they set the price by secret means).

____ (b) Oligopolists tend to engage in advertising to steal market share, whereas a monopolistic competitor does not bother to differentiate his product from that of his competitor.

____ (c) Oligopolists face a downward sloping demand curve, whereas monopolistic competitors face a slightly downward sloping demand curve. As a result, monopolistic competitors set price without worrying about the prices set by others, whereas oligopolists cannot set the price independently of each other.

  1. Which of the following are valid justifications for monopoly? [Check as many as there are – 4 pts.]

______Where there are economies of scale (there is a natural monopoly), society is better off because production is at the lowest resource cost.

______Monopoly from patents given to investors encourage innovation that benefits mankind.

______Where there are few barriers to entry, and more-or-less constant-average-cost to produce the given product, the result is a contestable monopoly, and here, the monopolist sets prices as though it was producing in a perfectly competitive market in order not to lose his monopolist status.

______Where there is extreme income inequality, and a generally perceived need to provide low-cost access to the given product, a legislated monopoly through licenses (such as for lawyers, doctors, etc.), makes it possible to provide for mandated low prices for a target group of “needy” consumers.



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How are money and inflation institutions?

The macro textbooks usually say that inflation comes from the supply of money. In a regime of fiat monies, central banks “compete” at providing stable money. However, some central banks’ hands are tied by their governments’ desire to use the inflation tax. If you don’t trust the local money, you can always switch to foreign exchange, gold, or even Bitcoin.

But if money is what folks accept as such, its devaluation must also come from folks collectively thinking that the central bank intends to print more.  Its rise in purchasing power can also come from holders thinking of it as a “safe” money.

Veblen once defined institutions as collective habits of thought (at p.107).  That means that to predict inflation, one must anticipate the price expectations and strategies of buyers and sellers of money. Today, cash is king, so that it makes sense to see low or even negative inflation and interest rates.

This means that the macro textbooks don’t have the full story. Inflation is also a story of institutions in the sense of Veblen.

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How to let big banks fail

The idea of “too big to fail” comes from the experience of bank runs in the early 20th century.  The answer then and now is deposit insurance. But such insurance has its limits, just like any insurance contract.

Lawrence White suggests that bank runs can be prevented if we redesign the banking system.  He suggests a money substitute that just might work, except that the big banks will have, perhaps, a hard time making money on fees.

It seems that the idea can be integrated with the emerging market for cryptocurrencies.  How?


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Living the lousy life of a telecom consumer

Remedies against monopoly

You can almost see  the present system of announced prices, with unannounced promos maintained by the telecoms, as a form of price discrimination, a concept familiar to students of economics.

The two aren’t quite monopolies. But for the sake of discussion only, imagine that they are a two-piece cartel, a bikini in nosebleed-speak.

What can consumers do to foil a price-discriminating monopolist/cartel?

Any interesting answers out there?

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EC 11. Special HW on the stock market

Imagine that your grandparent willed you P1 million. You have decided to invest this inheritance in the Philippine stock market, specifically in only one company.

Your homework assignment is to choose that one company, and report at how much you acquired the stock (any price at which it traded in the PSE will do) in an email, and to give a short explanation for your choice.

A second part of this assignment is to report at the end of the semester how your investment did, and to give a brief explanation of how or why the outcome came about. Try to answer the following questions, based on your readings and your experience in this imaginary experiment: Are stock market investors who win just lucky? To what extent do diligence and smarts matter?

The first part is due by Friday, February 5, 2016. The second part is due on March 20.

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