Wednesday, February 18, 2009

Did markets perfectly clear?

I had one of the weirdest experiences of my life in the US today. My new basement apartment got too cold for comfort and I called Ali to take me to Walmart so I could buy a small space heater. Should have taken us about 45 minutes. We went to Best Buy, Walmart, Target the local Rite Aid and none of them had a space heater. Finally we went to Home Depot and they had the last 2 models (both without auto shut off and thermostat settings). It was extremely disappointing to not find the usual variety especially in a place like Walmart. Reminded me of my micro class from four years ago where we discussed that if markets were to clear completely then the shelves would be empty. I guess that is what happened in all these places. The market for space heaters probably cleared completely and that is why my demand was not met. 

Ali the constant contrarian argued that there would have been others like me who looked for a space heater and did not find it. That is a possibility as well. The sales guy in Target actually told me that they were getting ready for Spring supplies so they would not have space heaters again until next winter and that they had run out three weeks ago. Its still winter guys!! Some of us are still battling the cold in basements, and yes this morning it was below freezing and we had snow. Who is talking about Spring in mid February? 

Back to the original question. Did the market for space heaters clear perfectly? My guess is it was expensive to hold inventory for the stray purchasers like me. But really does the market for space heaters die out in the last week of January in this region? I find that strange to believe. I agree we have had a few warm spells but that does not make the cold go away completely until at least end March. What is happening to the market for space heaters?

Sunday, February 15, 2009

Family Planning Incentives

A couple of weeks ago, I heard someone on the radio talk about how depressing it was with this economy. He has lost his job and he was the sole provider of his family of 7 children and wife. He was angry that he was laid off and wanted the government to take some action against his former employer for firing him. As it is he was finding it very difficult to make ends meet even before he lost his job. I understand his frustration. I also understand that it would be difficult to find another job in this economy. What I fail to understand is how 7 children figured in his future plans. Children are expensive. Don't get me wrong, I love children, but they are just expensive. Baby food, diapers and supplies average about $8000 per kid for a year, or $56,000 for all 7 kids. Lets say the second year is half the expense of the first year, and that is about $28,000 for all 7 kids. Lets say after that their needs are pretty minimal; however once they finish high school even a most basic college education would cost them about $25000 (average four year private school) a year. That's about $700,000 for seven children. Lets even assume that these kids go to a public school at about $6500 a year. That is about $182,000 for seven kids. No offence meant to the guy who lost his job, but what made him not think about all these expenses? 

The median pre-tax adult male income in 2007 was about $50,000, and about $35000 for women. With seven kids I can reasonably assume that his wife is a homemaker. Lets say they pay no taxes, or that all their taxes are refunded. The monthly average income is about $4100, of which lets say they pay about $1600 towards their mortgage, about $1000 toward monthly food expenses (see here for estimates, I chose the thrifty plan and doubled the family size), and about $700 for Vehicle insurance, Gasoline expenses, electricity, and other utilities. This leaves about $800 every month to squirrel away towards retirement. This is a very conservative estimate and does not include other expenses on clothes etc. I still do not see how seven kids figure in this calculation. How do you ensure a quality life for them? With fewer children, you would have fewer basic expenses, which would mean you could live in a better neighbourhood and a better school district, have more quality time with each of them and maybe even have enough to pay for part of their college expenses. The wife would even have time to work and bring in more income to the family. The average salary lost due to a child for a woman is about $25,000 per year.

There is a simple question in intermediate micro texts: With rising incomes, individuals choose to have fewer children, does that mean children are inferior goods? The answer of course is no! They are normal goods but you choose to have better quality children. I still do not understand the logic of several children in the US. It makes some sense in rural India where more children means more hands in the family farm. Middle class urban Indian households have about 2 kids on an average. I refuse to believe that individuals are irrational either. There is some incentive to having more children in the US, and at this point I do not know what!!

Thursday, February 05, 2009

Is there a meaning to the area under the IDC?

I am teaching Intermediate Microeconomics this semester and yesterday in class we were talking about Indifference curves. While we wee discussing the different combinations of the two commodities along the same indifference curve, one of my students asked me if the area under the rectangle has any significance. To the best of my knowledge the area under the indifference curve which mathematically is the product of the quantities of the two commodities in utility space does not have a special significance. Do any of you know otherwise?

Sunday, February 01, 2009

Positive Vs Normative

I am teaching two classes this semester: Intermediate MicroEconomics and Economics of Developing Areas. We talked about the difference between Positive and Normative Economics in the first week of class. Of course, the question of the Economic Stimulus and the Bailout is not far away in Economics classes and it has been a challenge to keep my normative beliefs to myself and discuss only the factual in class. I am being careful in letting my students know when I make normative claims. I would say that I am very impressed with my class and how well they have understood the difference between Positive and Normative. However, right now some of the most common oppositions to the auto bailout is because they are private companies. While most people are convinced that bailing out the auto companies is not right, they are not as convinced when we talk about bailing out individuals through subsidies and import restrictions. I guess it is easier to hate the big industrialist while being emotionally attached to the small farmer. However, once students understand that the economic logic is the same they are able to make at least a cognitive distinction and understand that the clamour for subsidies is more for emotional than economic reasoning. I am proud of my students.