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n the graph of an indicator of average bond prices which shot up just after 2pm eastern time when the federal reserve made its september 18 th announcement click image to enlarge because the effective interest rates paid by bonds decrease when bond prices increase check your textbook or watch this video from the khan academy for an explanation of the inverse relationship between bond prices and interest rates the yield on longer term us treasury bonds declined on sept 18 as can be seen in the screenshot below click image to enlarge also notice how low the short term interest rate is one hundredth of 1 for 1 month u s treasury bills this extremely low rate is another sign of the federal reserve s desire to stimulate the economy in fact if it could set short term interest rates lower it probably would instead since nominal interest rates cannot go below 0 if they did you would be paying banks to keep your money with them the federal reserve purchases longer term bonds in an attempt to give the economy extra stimulus beyond extremely low short term interest rates if the fed is unable to reverse it later this extra monetary stimulus will lead to higher inflation since gold is traditionally a hedge against inflation that is an asset that maintains its real value when prices increase fears of higher inflation tend to increase the price of gold as a result the spike in bond prices due to the fed s announcement was accompanied by a spike in gold prices note the difference in timing on the horizontal axes of the graphs is due to differences in time zone and how often data on prices is collected in an upcoming post i ll look at how the fed s decision to extend quantitative easing changed foreign exchange rates which was actually how i was alerted that the fed had made a surprise announcement in the first place discussion questions how do you think the fed s decision to extend quantitative easing affected the foreign exchange market did the us dollar appreciate or depreciate what other markets might have seen dramatic changes due to the fed s decision ben bernanke the chairman of the federal reserve has stated that he wants monetary policy to be more transparent what does the financial market s reaction to the federal reserve s announcement suggest about the transparency of monetary policy labels finance interest rate monetary policy 3 24 pm permalink comments assign aplia reading tuesday september 03 2013 finally something positive from the cubs by ben resnick the chicago cubs hold the record for the longest championship drought in the four major us sports not giving their fans a world series victory since 1908 but for as much heartache and disappointment the team has given its fans over the years it also offers the local community something uniquely positive what economists call a positive externality the cubs have played their home games in wrigley field since 1916 two years after the iconic ballpark was built the stadium sits right across the street from apartment buildings that rise above the outfield bleachers residents high enough up in the buildings or people on the roof can see into the ballpark and watch the game as it s being played that unique view of the ballpark action led some entrepreneurial building owners to put bleachers on their roofs and sell tickets economically the good the cubs produce the entertainment provided from watching baseball games is non excludable because the private firm the cubs cannot prevent some people from consuming the good without paying when people other than the consumers that purchase any good gain something from the good s production economists call that a positive externality firms that produce goods that give positive externalities do not receive the full economic reward associated with producing the good because they are not paid by everyone who uses it those firms can increase profits if they can find a way to make their good excludable and thus deny the free use of their good as of the start of this season it appears the cubs might be trying to do just that as a part of a planned stadium renovation the cubs have proposed building a large scoreboard that will block the views from neighboring rooftops aside from increased advertising that the new scoreboard would bring it should also help to make their good scarcer and increase demand for tickets driving prices up where does the story go from here the team hopes to begin construction this fall but owners of neighboring buildings have threatened legal action saying a new scoreboard will drive them out of business though it s possible that an agreement which benefits all the firms involved can be reached either privately or with the help of local government before the issue goes to court discussion questions suppose that the cubs could determine the number of home games they play based solely on attendance rather than by a schedule set by major league baseball 1 in this scenario if the team does not get paid when people watch the game from rooftop seats will the number of games played be socially optimal what if the team does collect money from rooftop viewers explain why 2 when the outcome is not optimal will there be too many games played or too few 3 propose a policy that the local government could implement to fix the inefficiency and get the team to produce the socially optimal number of games 4 economists say a good is rivalrous if one person s consumption of the good prevents another person from enjoying it for example you and i cannot eat the same hamburger would you consider the good the cubs produce to be rivalrous does the way a fan sees the game influence your answer labels baseball excludable goods externalities 3 26 pm permalink comments assign aplia reading monday june 24 2013 paper or plastic by eugenia belova recently several california towns and counties introduced new rules concerning single use grocery bags in an attempt to reduce the harmful effects of paper and plastic refuse on the environment plastic bags are banned completely while stores are required to charge 10 cents for each recyclable paper bag the customer wants to use proponents of the new policy argue it will reduce harm to marine life damage to utility systems reduce litter and waste and conserve natural resources the opponents however maintain that single use bags are not only convenient for shoppers but actually serve multiple purposes after the initial usage ranging from waste basket and cat litter containers liners to bike seat covers the opponents also argue that the ban on plastic bags will boost consumption of a variety of plastic products to substitute for plastic grocery bags which is not only costlier at the individual level but also might inflict more harm on the environment the research on both sides of the argument is still inconclusive and lacks hard evidence however economic theory might yield some insights and help us see the much needed middle ground what we know with certainty is that at the individual level people benefit from using single use grocery bags we also know that prior to the ordinance s passage the bags were given indiscriminately and for free but the bags are also arguably bad for the environment and require recycling and thus are costly to society in economic terms this means the bags create a negative externality a cost that is not born by the consumers who enjoy the benefits of this product but by society at large this cost likely exceeds the benefit from using them the graph shows marginal social cost of and demand or marginal private benefit for single use bags in the economy suppose that the quantity demanded is 100 billion shopping bags every year when they are given away for free i e when price equals zero according to some research this might not be far from the truth for the united states suppose that at this quantity the marginal social cost is 20c per bag which exceeds the marginal benefit and is therefore not optimal the law of demand dictates that charging for the bags will reduce consumption suppose that a fee of 10c per bag reduces consumption to 50 billion bags equating the social costs and private benefits of single use bags the 10c fee per paper bag is nothing but a pigovian tax named after the english economist arthur pigou as it counteracts the negative externality if the amount of the tax is set equal to the cost brought about by the negative externality it will produce an efficient outcome only those who value the convenience of having grocery bags ready at the checkout enough to pay for the harm the bags cause will purchase them so where does the 10c fee come from and why ban plastic bags completely instead of charging a fee for them as well for one thing the negative externality created by a paper bag is relatively easy to calculate since paper decomposes quickly without producing lasting damage to the environment its harm equals the cost of recycling so there is a good reason to believe that the 10c tax is efficient enough unfortunately plastic is another matter the negative externality from plastic bags exceeds the cost of recycling as it also includes the damage to the environment done by discarded plastic bags which is difficult to estimate accurately in the absence of reliable cost information it is hard to calculate an optimal pigovian tax therefore it seems reasonable to ban free plastic at the stores and let the market decide the price for substitute products discussion questions 1 are single use grocery bags normal goods 2 what if the actual negative externality from a paper bag is less than 10c 3 could the single use bags ordinance affect retail grocery sales labels economics of pollution negative externality pigovian tax plastic bag ban 1 46 pm permalink comments assign aplia reading wednesday may 22 2013 got lobster by kasie r jean it s a good thing i don t have to watch my cholesterol because after moving to the maine seacoast last july i simply cannot get enough lobster though i haven t had to worry about the health cost of consuming lobster i have been paying attention to changes in the dollar cost over the course of the season monitoring prices doesn t get any easier for this lobster loving mainer because every day on the way to my son s school i drive by a sign advertising the current price the start of the lobster season coincides with an increase in the demand for lobster as summer vacationers head to the maine beaches in york maine alone the population triples during peak season then drops back down again once the school year begins an increase in demand means upward pressure on price while an increase in supply means downward pressure on price as lobster season came to a close in the summer of 2012 however word on the street was that there was a surplus of lobsters with quantity supplied larger than quantity demanded downward pressure dropped lobster prices to an astonishingly low 2 99 pound for chix lobsters weighing between 1 and 1 24 pounds making lobster in southern maine cheaper than a good steak at the time as lobster season ended and the bitter winter set in the per pound price of lobster started to tick upward this is consistent with the basic model of supply and demand once lobster season was over supply decreased which put upward pressure on prices and demand decreased which put downward pressure on prices over the last year it appears that supply changes have been more drastic than demand ones thus the same good that had cost roughly 3 per pound in the summer cost nearly 10 per pound by march 2013 simply because of changes in supply and demand between summer and winter supply changes outweighed demand effects in the market for maine lobsters as evident in the large increase in price so i am hopeful that lobster prices will drop in the coming months as supply increases so that i can enjoy my favorite butter conduit once more discussion questions 1 using a supply and demand diagram illustrate the shifts in demand and supply after the lobster season ends be sure to pay attention to the magnitudes of your shifts so that the equilibrium price rises as described in the article 2 if lobster fishermen have a bad catch this summer what would you expect to happen to the price of lobster in maine in july 3 how do fluctuations in the market price for lobster affect other markets for food products such as steak and chicken labels costs of production demand economics of search shortage supply and demand 2 30 pm permalink comments assign aplia reading wednesday may 01 2013 time is money by chrissie deist the other day i took my car to the mechanic for what i thought would be a quick maintenance appointment however i was sadly mistaken when my bill came in at a whopping 800 because my knowledge of cars is pretty much limited to things that can be done from the driver s seat whatever fluid replacement alignment adjustment or component repair the mechanic recommends i usually pay for with resignation after reviewing my itemized bill i wondered whether it really should have cost 30 in labor to replace my windshield wipers whether my something or other belt really needed to be replaced or whether i could have perhaps gotten a cheaper set of new tires at costco it s possible if not quite likely that a more informed consumer could have saved hundreds of dollars on the same transaction and yet it s unlikely that i ll do anything differently the next time i go in for repairs in many aspects of life there are ways to save money by becoming more informed about what we re buying or by learning how to do something ourselves rather than paying for the good or service for example a friend of mine learned how to fix guitars because as a musician this will save him from having to pay for a lifetime of professional repairs personally i like to cook and thus i save money by preparing my lunch at home rather than buying it at work however my musician friend doesn t like to cook and therefore spends more money on pre made lunches than i do and uses the time he saves by not cooking to engage in activities more valuable to him this illustrates one of the fundamental principles of economics we gain from specialization in the face of scarcity because everything has an opportunity cost in this case the opportunity cost of becoming more informed about cars is the time i spend learning about cars rather than doing other activities i enjoy given the limitations of time and money no one can become an expert in everything to be truly self sufficient would require a return to our hunter gather roots when we spent the majority of the day finding food and even then you might want to assign someone to gather the berries someone else to prepare the meal another to build shelter etc a common misperception is that economics is aimed solely at maximizing profit however a classic application of economics is the study of how people choose to spend their money and time given the limitations they face in order ...