Monday, July 12, 2010

This BBQ Sauce Rules, A Tasty Consumer Surplus

There is nothing better than firing up the old grill on a cool summer evening. Sometimes I cook with gas, other days I opt for charcoal, and on special days I'll have both grills smoking the yard.

When it comes to using barbecue sauce on the meat, no serious griller would be caught dead with a brand sauce found at the food store. However when I don't have enough time to make my own, I usually buy Bull's-Eye Hickory Smoke, which is now known as Bull's-Eye BBQ Sauce Kansas City Style.

The new name presented itself several months ago. Nothing has changed about the sauce except the packaging. The ingredients and nutritional information are nearly identical, but I prefer the sauce that comes from the newer packaging. Why does the Kansas City Style bottle taste better to me than the same sauce from the Hickory Smoke bottle?



Perhaps I am a victim of virtual ownership. As soon as you slap "Kansas City" on the bottle, I am immediately whisked away to a mystical land renowned for its excellent barbecue---Missouri. It's a great marketing strategy. Think about all of those toy commercials you saw growing up; kids like you on magical adventures, having the best time ever (Beer ads are infamous for this).

When a product image improves from better advertising or word-of-mouth, we as consumers tend to enjoy it better. Improved marketing and advertising campaigns can increase product demand. In this case, my consumer taste (a non-price determinant) for this BBQ sauce has increased.

At the moment, I am willing and able to pay a higher price than the $4.50 price tag at the food store. In fact, I would pay up to $6 for one bottle. That is a consumer surplus of $1.50. How awesome is that? I have $1.50 of additional income that I can use towards a spare bottle for the pantry, or even put it towards my Iron Maiden ticket at Madison Square Garden.

For the record, I was only willing to pay $4.75 tops for the BBQ sauce with the old bottle design---a measly 25 cent surplus.

Markets create consumer surpluses all the time. Make sure you seize yours when making your economic choices, even if you are only a sucker of a perceived change in a product that you already enjoyed. But beware, producers are constantly seeking ways to take it all away to keep for themselves.

Sunday, July 11, 2010

AP Macroeconomics Review, Graphing



The video above contains every graph that students need to know for the multiple choice and free-response sections of the AP Macroeconomics test in only 4 minutes 32 seconds.

I created this video last summer out of boredom and it turned out to be very helpful to many students beyond my classroom.

It contains the production possibilities curve, supply and demand, circular flow model, aggregate expenditures, aggregate supply and aggregate demand, money market, investment demand, loanable funds market, Phillips curve, Laffer curve, and Lorenz curve.

Saturday, July 10, 2010

Foreign Exchange Market, Yuan on Air

Several months ago, I was asked to call in to morning radio program "The Takeaway" to explain how a change in China's currency policy could potentially affect foreign exchange markets, the balance of trade, and unemployment in the U.S.

The producers of the show were curious as to how this news might be presented in a high school economics classroom since very few adults seem to understand how basic economic principles apply to international economics.

Without getting too political, I concluded, "American goods might look more attractive to the Chinese if the Yuan appreciates against the dollar…and that greater demand for US goods would increase demand for US dollars and demand for American jobs."

Here is a link to my simplified explanation of the foreign exchange market on "The Takeaway."

http://www.thetakeaway.org/2010/apr/09/the-yuan-also-rises/

Friday, July 9, 2010

Law of Diminishing Marginal Utility, Puppy Edition

I have an adorable and playful Wheaten terrier puppy that is just about 12 weeks old now. She is a spoiled little girl as my wife and I have purchased about 18 toys for her over the last few weeks.

When she gets her teeth into the newest toy, she carries it everywhere; brings it to get a drink of water, eat dinner, downstairs to watch TV, and into her crate during bed time. However for each new favorite toy, this only lasts for a few days.

In economics we say that the value of a good, or a squeaky puppy toy, lies at the margin. The first day of seeing her latest stuffed bear, her satisfaction or utility is very high. On day two, she is still happy and her total satisfaction rises, but the additional (marginal) satisfaction is not as great as day one. Day three, four, and five also see an increase in total satisfaction but for each day the additional satisfaction continues to decline.

Another way to look at this situation is to consider that my puppy's current favorite toy is really her 18th favorite toy. It is her flavor of the week, however, the additional satisfaction from the 18th puppy toy is less than the additional satisfaction she experienced from the 17th puppy toy. The 16th puppy toy yielded higher additional satisfaction than the 17th, and so on.

The decline of additional satisfaction is known in basic economics as diminishing marginal utility. It applies to absolutely everything, from the downward sloping market demand curve to consuming a bucket of french fries at your favorite fast food joint. Under this law, we are only willing to buy more of a good at lower prices.

The most famous application is the diamonds-water paradox. The amount of water consumed throughout one's life results in greater total satisfaction than the diamonds one consumes. Then why in the world are diamonds so expensive while water is so dirt cheap?

Well, for one, diamonds are scarce, but most importantly, the additional satisfaction of the last diamond consumed is far greater than the last bottle of water you drank. Where can you find the value? Always at the margin.

Saturday, January 10, 2009

Is Sanjay Gupta An Appropriate Choice For Surgeon General?

Paul Krugman writes:
You don’t have to like Moore [Michael] or his film [Sicko]; but Gupta specifically claimed that Moore “fudged his facts,” when the truth was that on every one of the allegedly fudged facts, Moore was actually right and CNN was wrong.
Source: Krugman's Blog

Friday, January 9, 2009

BlackBerry Gets A Free Plug

President-elect Barack Obama
"I'm still clinging to my BlackBerry...They're going to pry it out of my hands."
Source: nytimes.com

Thursday, January 8, 2009

India's Enron

Ramalinga Raju [Former CEO of Satyam Computer Services] on disgracing his company in the style of Enron

"It was like riding a tiger, not knowing how to get off without being eaten."

Source: nytimes.com

Tuesday, October 7, 2008

McCain + Sunoco + Earnhardt = Prius?

Here is the day's enigma I saw while driving home from work:

A Toyota Prius with a John McCain, Sunoco Gas, and Dale Earnhardt Jr. bumper stickers.

Source: My own two eyes, not making this up.

Sunday, September 21, 2008

My Grade Support Yields a Surplus

Every year I create an effective grade floor [minimum wage] in my AP Economics classes. Basically, I view homework as a way to support low grade producing students.

For example, while grading a detailed supply and demand homework assignment, the average grade given was a 7 out of 10 possible points. In some cases, students that received a 7 out of 10 actually got less than 70% of the questions correct. The equilibrium average grade probably would have been a 5.5 or so without my sympathy.

Every grading period yields a surplus of points due to my grading policies. I have effectively stripped the grading market of its rationing function.

Friday, September 19, 2008

My Favorite Quote On The Financial Mess

From Steven D. Levitt:
As an economist, I am supposed to have something intelligent to say about the current financial crisis. To be honest, however, I haven’t got the foggiest idea what this all means.