Supply and Demand Comic

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This comic pokes fun at the idea of supply and demand and visualizes what could happen in the absence of our normal market situation.  If it is not already clear, a very thirsty man is crawling towards a lone beverage salesman in the middle of the desert.  Obviously the demand is very high for the lemonade and the vendor being unopposed leads to a low supply and also demonstrates price elasticity (percentage change in quantity demanded dived by percentage change in price).  Price elasticity measures how much the quantity demanded of a good changes when its price changes.  In this case the lemonade would not have “elastic” demand as it would normally have in everyday life.  In a normal situation, if you went to the convenience store and made your way to the drink cooler only to find the lemonade you wanted was $200 a bottle, you would likely swap the lemonade (substitution effect) for a more affordable beverage.  In this instance lemonade would have a very elastic demand because it has substitutes and is not a necessity.  In the world of this political cartoon, lemonade has suddenly became extremely inelastic because it is now a necessity for the consumer and therefore the demand will remain constant regardless of the exorbitantly high cost and is immune to the income effect.  The size of the population generally has an obvious effect on the market (i.e. California’s population is 40x larger than Rhode Island’s therefore the state has 40x the amount of automobile purchases.) but the curve in this situation is basically not existent since it is stuck at a 1:1 ratio.  One characteristic of supply and demand that this comic plainly illustrates is called “special influences.”  For example, the snow plow market in Utica, NY is probably rather strong (during the winter season so this is a special influence within a special influence), while in Miami, FL the snow plow market is not very strong and probably never will be.  The comic shows us a very special influence, a dying and dehydrated man will pay any price demanded to get his hands on the lemonade.  While it may not seem like it at first glance, this situation has perfect market equilibrium.  Every single consumer in this market and single is the key word…is demanding lemonade.  Since the lemonade man clearly has the supply needed and only a single jug of lemonade to sell, there is no extra pull on either side of supply or demand.  This situation goes to show that, there is a lot more to supply and demand than one may think and that we should be grateful to have the type of market we do where (generally) the items we need are always in high supply and luxury items are also readily available.  Moral of the story, if you decide to visit the desert, bring some cash.

--Adam Keith

Increase In Housing

Increase In Housing

According to an article from cnn.com, the building of new homes is finally on the rise. In March, for the first time since 2008 the housing starts have topped the one million annual rate.The housing starts annual rate was up 7% from February at 1.04 million annually, and up 47% from the past year. The reason for the increase in the building of homes has to do with more apartment and condominium complexes, which has five or more homes in them, being built. Units like that increased 27% in March from February and 82% from the previous year. With this increase in home building, there is also an increased desire for rental housing. The workers who were stuck living at home with their parents during the recession are now moving out in large numbers and looking to rent. Also, people who used to own homes before the recession that then got foreclosed are scared to buy again. Executive vice president of Resource Real Estate "said that even with a surge of multifamily construction, there is likely to be a shortage for years to come". With the almost record low mortgage rates, lower unemployment and a drop in foreclosures, home prices have increased. Because of the increase in sales and home values the overall economic growth has increased. Some concerns about the growth of housing are the rising prices of raw materials and shortages of construction workers. A lot of the builders are struggling with credit issues for lot development because of the rising construction cost and because of this fewer building permits are being filed even with the rise of the need for housing. A chief economist for the National Association of Home Builders, David Crowe, "estimates that the raw materials costs are up about 10% overall, and some key items are up much more than that". Plywood is twice as expensive, lumber is about 60% more, and drywall is up by 40%. The higher costs and labor shortages "are one of the reason single family starts are down. He estimates if builders were not facing those constraints, the annual rate of single-family starts would be about 100,000 higher". 

This article is showing that while there is a demand for increase in housing, the market can not meet the demand. Many factors are contributing to the problem, limiting the growth on housing which also limits the growth on our economy. 

Source:

Isidore, Chris. "Home Building Rises to Key Milestone." CNNMoney. Cable News Network, 16 Apr. 2013. Web. 18 Apr. 2013.

Job Growth Steady, but Unemployment Rises to 7.9%

http://www.nytimes.com/2013/02/02/business/economy/us-adds-157000-jobs-unemployment-rate-edges-up-to-7-9.html?pagewanted=2&_r=0

Unemployment at 7.9% is very high for our economy. As we talked about in class unemployment can be caused be a number of things. As well as different types of unemployment. Cyclical unemployment is when people lose their jobs due to insufficient aggregate demand. Structural unemployment is when people do not have the required skills to obtain or keep a job. Frictional unemployment occurs when workers lose their current job and are in the process of finding another one. Also when student are currently looking for a job after graduating. The natural rate of unemployment is defined as the rate of unemployment that still exists when the labor market it in equilibrium.

The article talks about fiscal policy hurting our economy, when it’s supposed to be helping it. The government budget cuts and tax rate uncertainty is problem a big still but the job growth increase at the end of 2012 was a lot higher then estimated. Employers added 157,000 payroll positions. With all these new jobs the unemployment rate is still at a high 7.9 percent.

However the increase in jobs is a great for everyone especially Wall Street.  “The economy, sales, employment and the stock market are all higher in spite of the bickering and rancor in Washington,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group.

People are dropping out of the labor market or not even entering it. Millions of people have used up all their unemployment benefits, and are now helpless. With families to take care of it’s very hard to be unemployed in this economy.

Job growth is still slow compared to previous recession recoveries, and the unemployment rate stuck just below 8 percent lets us know that it takes time for unemployment to go back to its natural rate. The fiscal policy are useful in the long run, but not in short run. Those who are you are working and paying taxes are hurt most by fiscal policy. The problem is fiscal policy rises taxes, prices and the cost of living goes up.

Still, hiring growth has not been enough to decrease unemployment rate. There is still 12.3 million workers remaining. The average unemployed worker has been unemployed for about 35 weeks like the article tells us.

The problem is not who doesn’t have a job but more who wants one. The unemployment rate depends on the number of workers want to join the labor force. Right now, labor force participation is only 63.6 percent. The unemployment rate is calculated with people who are still actively looking for a job but are unemployed. With slow labor force participation the unemployment rate will not increase, and stay just where it is.

Rampell, Catherine. "Job Growth Still Steady, But Rate Rises to 7.9%." The New York Times. The New York Times, 02 Feb. 2013. Web. 18 Apr. 2013.

Is the Inflation rate to low?

The recent CNN news article about the inflation rate being too low, interviews James Bullard the president of the ST. Louis FED. The national inflation rate was 1.3 according to the FED’s report in February. According to Bullard the rate is to low and is currently still going down. He said, “If it doesn't start to turn around soon, I think we'll have to rethink where we stand on our policy.” Without taking Macro, I would have no clue that he was talking about. However I now know that there is a strong correlation between inflation and unemployment. As inflation goes down unemployment goes up. So what Bullard is saying makes sense because our economy is currently trying to recover from the last recession and our unemployment rate is above 7%, which is considered very high. With the inflation rate continuing to drop that means the unemployment rate will continue to go up which is the opposite of what the economy needs right now to get us out of the recession.

            According to Bullard in the article the FED aims to keep the inflation rate at roughly 2% each year, but because of the economy he has proposed raising it to 2.5% which would in turn lead to lowering the unemployment rate. In the article they talk about how the FED has the power to increase and decrease their spending based on the economy. Currently the FED buys “$85 Billion in treasury and mortgaged-backed securities, in an attempt to lower long-term interest rates and stimulate more spending.” Bullard backs his proposal of increasing the inflation rate if it becomes dangerously low. His policy has no end date, which shows that this is not just a simple fix to the problem. It will take time and other factors to rebuild the economy and lower unemployment. Since the economy can easily be altered by different policies and in some cases without knowing how much it will be affected, officials have to be careful before they implement their policies. Bullard has even said that it is getting so low that the economy may be on a path to deflation, which may put us, right back into another recession.

However I can see where critics of his plan have a problem. According to the LRPC when inflation increase the unemployment rate decreases, however over time the unemployment rate will return to the natural rate of unemployment and the inflation rate will stay at the higher percent. Which means that if the FED increases the yearly inflation rate from 2% to 2.5% the prices of items will increase that much. Since I’m no economist I do not know how much that will affect our economy or our/my daily life. What I do know however is that if the inflation rate continues to fall, which Bullard predicts. The unemployment rate will only further increase which is not good news for college graduates across the country.  It will also propel the country into another recession.

Source:

Kurtz, Annalyn. "The Fed's Bullard thinks inflation is dangerously low." CNNmoney.com. CNN, 17 Apr.

     2013. Web. 17 Apr. 2013. <http://economy.money.cnn.com/2013/04/17/

     the-feds-bullard-thinks-inflation-is-dangerously-low/?iid=SF_E_River>.

Inflation diving to dangerous lows

Inflation diving to dangerous lows

            According to the article on CNN, talking with “James Bullard, president of the St. Louis FED, is worried inflation may be getting too low”. The FED aims to keep inflation around 2% a year but is considering raising this to combat the high levels of unemployment that has been stuck around 7% for several years. (The FED)

            As we have recently been discussing in class, the unemployment rate and inflation rate are inversely related. Balancing the economy is a difficult operation that I did not fully understand at all until taking this course, and I still do not understand how the FED manages it so well. With the struggling economy in the process of recovery the FED has to tweak policy and make changes correctly to avoid another slip into a recession.

            To avoid deflation that would cause our economy to possibly fall into another recession, the FED may need to make policy changes soon. Including the possibility of allowing inflation to rise and even go past the normal yearly level of two percent. Although this may seem bad it is a measure that may need to be made to attempt to lower our level of unemployment, which have been above the levels the FED is comfortable with since our recession began. The natural level of unemployment and inflation is the optimal condition for our economy to function and is what the FED strives to get to.

            Currently the FED is purchasing “$85 billion a month in Treasuries and mortgage-backed securities” to try and increase spending by lowering long-term interest rates. These measures have not set end date, and according to Bullard more purchases are a possibility with interest rates becoming drastically low. The economy cannot be fixed overnight and measures like this will take time to come into effect but hopefully our interest rates will stable out. With interest rates at a stable point, our economy could begin to try and recover, hopefully lowering the unemployment rate.

            The inflation rate depends on whether or not the FED tries to make any more changes to policy to try and stabilize our economy. If the inflation rate continues to decrease, our government will take measures to avoid another recession. As mentioned before the FED attempts to encourage spending by lowering long-term interest rates, and if this does not help the lowering interest rate will require more policy change.

        Although it may not seem like it would be dangerous, the inflation rate becoming as low as it is terrifies economists. Economists want to try to stimulate the decreasing inflation rate and the lurking unemployment rate. To cause some change in our current economy the inflation rate needs to return to normal levels and hopefully bring down the unemployment rate.

Source: 

     "The Fed's Bullard Thinks Inflation Is Dangerously Low." Economy RSS. N.p., n.d. Web. 18 Apr. 2013.

The new Fiscal Policy? It is now.

I saw this cartoon and just had to use it in this blog. This cartoon of President Obama and his political followers spending what seems to be unlimited amount of money and thinking that it will somehow reduce the about of debt this country has, is a far stretch of the fiscal policy that they are trying to achieve.

            First let’s define what fiscal policy is. Fiscal policy is the plan by which the government adjusts its levels of spending in order to monitor and influence our nation's economy. It can also denote the use of taxes and government expenditures to control the economy as well. There are two types of government expenditures used in fiscal policy. Government purchases, explains itself. It is all of the things the government purchases into order to keep its self-running, from defense spending, construction of interstate highways, and all of the salaries of federal employees. Government transfer payments are the other type of expenditure the government uses in fiscal policy. These payments in include everything from Social Security and Medicare to unemployment benefits. The second tool the government has for deploying fiscal policy is the use of taxes. This includes all the income and goods taxes the government wages on its patrons.
        
           The government can use these two tools to try and control the economy, mainly unemployment and inflation, the twin evils. If inflation is increasing rapidly the government can enact a contracting fiscal policy by decreasing the amount of government expenditures and increasing taxes. This would pull money out of the system, reducing GDP and slowing/stopping inflation.  When a contracting policy is needed most likely unemployment is very low. You can say this because the large amounts of money in the system have to come from individuals working and spending the wages that they are earning and/or government spending.

            The other type of fiscal policy the government can use to control the economy is called the expansionary policy. An expansionary policy is used when GDP is very low and unemployment is high, much like what we have been experiencing over the past 4 years since the financial crisis and the start of the Great Recession. With an expansionary policy, the government increases its expenditures and reducing taxes. By doing this, they are trying to push money into the economy in order to increase GDP and reduce unemployment.

                There is an underlying problem that looms with these two types of fiscal policies. That is the amount of debt the government can create with the use of them. When contracting policy is used, there is no major worry about rising government debt because it reduces government expenditures and increases taxes (government revenue). Now with expansionary policy, that is an entirely different thing. Once that policy is enacted, it is sometimes hard if not impossible to stop or change some of the expenditures put in place. As expenditures increase to help curve with the lower GDP, higher unemployment and reduction in taxes the amount of debt begins to accumulate. This is the problem that the above cartoon shows. The current administration is deeply involved with using government expenditures to try and fix the slow economy. If they continue to use such measures, the amount of debt the country will have will become unbearable for current and future patrons. At some point in the near future, the government needs to find an even ground with expenditure reductions because continuous spending is not the answer to reducing the amount of debt the country has.

Work Cited:

 "Obama Diet." Cartoon. The Economist: KAL's Cartoon. Web. 18 Apr. 2013. http://www.economist.com/node/13185173.