Category Archives: Economics

eBay x Economics: Part II

From the following, you’ll see how eBay is both analogous and divergent to economics.

Consumer and Producer Surplus

These are very basic economic terms that ring true all throughout the world market, and for eBay, they are as applicable as ever.  Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (this is how the demand curve is formed).  Essentially, consumers and buyers on eBay have a predetermined price in mind that they are willing to pay for a certain item.  They place a bid or select the ‘Buy It Now’ option if the actual sale price is less than or equal to their desired price.  The surplus comes if the price the buyer actually paid is less than the predetermined price they originally desired before the transaction.  Whether you are aware of this phenomenon is a different conversation, but no one ever pays for something at a price they do not want or cannot afford, alluding to the notion that all consumers are rational.

On the contrary, producer surplus is the difference between what producers (eBay sellers) are willing and able to supply a good for and the price they actually receive (this is what shapes the supply curve).  As a seller, I certainly wanted to turn a profit, so the price I set was based on the retail price I, myself paid for the good, the research, and the fees that were incurred after each transaction.  From these criterion, I set a price that aligned with consumer preference and producer preference.  Surplus occured if the item sold went for more than had originally been intended, which is always a good sign!

Technology

The change in technology is also a cornerstone of economics.  New developments in technology generally lead to increased production levels, which generates more transactions and cash flow.  For example, Henry Ford’s implementation of the assembly line allowed for an increase in sheer volume of automobiles manufactured.  At first, our eBay business was antiquated: we went to the post office to buy postages, which meant standing in long lines; we did not have an up to date inventory list; and our funds for purchasing goods were not liquidable, as my brother and I often debated over who would buy what.  Not only does this create a messy operation, but its also not efficient.  To fix this, to alter the technology and processes used, we implemented an organized inventory via Excel that calculated the fees we would incur after each transaction, the profit margins, and the quantity of goods remaining.  Moreover, we began to use eBay’s automated shipping service.  This saved us countless trips to the post office and it made the postages much cheaper.  Lastly, and one of the most significant changes in technology, was our utilization of PayPal’s debit card.  Instead of using our own bank accounts to purchase goods, we used PayPal, which was tied to our eBay account, to buy the shoes, Starbucks mugs, etc.  This made the quick trips to stores much easier and it made our funds more liquidable.

For any enterprise, an increase in technology is vital.  Technology is what enables production to increase and its what fuels the increasing demand in our society.

Maxwell

eBay and Economics

My first job was definitely of the untraditional type.  I was having a conversation with my best friend and my father about our childhood jobs, and I remember listening to them talk about working for a catering service and grocery store while I tried my hand at eBay.  As we each shared our experiences, I found myself thinking about how eBay is pure economics.  Of course, that was an obvious thought, I mean, eBay is a marketplace that connects vendors and consumers of ‘stuff’ over the internet, but when I took a minute to let this thought percolate, it certainly upholds basic economic principles.

I had known about eBay for some time; my father was an intense Power Seller in the early 2000s when the unique auction house was in its prime, selling Ugg boots and Nike Shox at ridiculous profit margins.  I can recall those early Saturday morning runs to the shoe stores to purchase several pairs of the infamous boots and watching him meticulously write descriptions for each product.  I didn’t fully understand the total operation of being a seller until I re-opened my father’s account in my sophomore year of high school.  I realized my spending habits were greatly exceeding my allowance, but I didn’t want to have to work somewhere or for someone (its a millennial thing, I guess).  I didn’t know much, so I decided to sell what I knew would make money, which was what my dad sold.  I, along with my brother, sold newly released/limited edition  Nike shoes, backpacks, and Starbucks mugs.  We didn’t make a killing, like my dad, but we always managed to have a decent amount of cash in our pockets–and it definitely didn’t hurt my resume when applying to colleges.  Looking back on these experiences, with some acquired knowledge about economics and finance, I’m better understanding the principles with which my business functioned.

Over the next several days, I will be looking at eBay through an economic lens examining technology, incentives, rationales, and utility.

Maxwell

Young Economics’ Take on Minimum Wage (In Its Entirety)

The topic of minimum wage has been under discussion for quite some time.  It is one of the United States’ most controversial political issues because there are many different ideologies surrounding the proper value of the minimum wage floor.  Over the past several months it has received much more attention due to President Obama’s State of the Union declaration of raising the minimum wage for all new federal contracts to $10.10.  This comes just one year after he urged Congress to raise the minimum wage to $9 per hour in his 2013 State of the Union.  Currently, the minimum wage stands at $7.25.  The present-day wage contributes to about 49 million Americans (14.5% of the U.S. population) living impoverished.

Minimum wage is such a debated issue because of the paradigm it creates for unskilled laborers.  Economists and politicians often argue that the wage levels should differ because unskilled workers are earning more money than they should.  We have this predicament because it is difficult to place a value on labor in the first place.  On the other hand though, skilled workers who may have been unemployed before taking a minimum wage paying job are now working for pay that correlates to living below the poverty line (a full-time employee earning $7.25/hour will make $15,000 a year, which is below the poverty level for a family of three).  Moreover, other analysts and politicians (Republicans) argue that raising the minimum wage will result in less job creation and more unemployment.  On a strictly economic and financial basis, I can understand this point of view.  Logically speaking, why would business owners offer more jobs to prospective employees if they must allocate more money for wages?  Economics is based on the belief that all decisions are made rationally, and rationally speaking, I would not provide job opportunities for people if it were more expensive for my business.

As an attempt to improve our nation’s current economic situation, President Obama has signed an executive order that will raise the wages of all new federal contracts to $10.10 per hour.  Notice, this executive order only affects all new contracts, so, unless restructured, all old contracts will remain at $7.25 an hour.  While this only makes a dent in the overall conversation of minimum wages, it is expected to affect more than 2 million employees.  Furthermore, it will hopefully spark an initiative by our legislative branch to pass the Fair Minimum Wage Act, which will effectively raise the minimum wage to $10.10 for all laborers across the country by July 1, 2015.

In an attempt to understand minimum wage from all sides of the argument, I would like to outline three popular theories about the benefits minimum wage:

Stimulating the Economy

The argument can be made that raising the minim wage to $10.10 would stimulate the economy due to more money spent on goods and services.  President Obama and additional researchers argue that lower-income workers, or those who depend on minimum wage, spend their earnings more quickly and locally than do higher-income workers.  In fact, the Federal Reserve Bank of Chicago noted that every $1.00 increase in the minimum wage would increase the spending of a low-wage worker’s household by $2,800 yearly.  This provides the local, small businesses with the customers and demand they need to maintain and expand their own labor forces.  As a result, we would see a reduction in the nation’s unemployment rate.  More specifically, our nation could be looking at 85,000 new jobs, which is 9,000 more than the job creation between November and December that yielded a .3% reduction in the unemployment rate.  These small, yet impactful resultants of an appreciation in minimum wage would also affect the U.S. GDP by $22 billion.  This stimulation is three fold.  As the minimum wage increases, our blue-collar labor force is injecting our economy with discretionary income expenditures, which then fuels our local shops, and by reaction, our shop owners can begin to hire more laborers.

Reducing Poverty

At the current wage rate, there are nearly 8 million workers who work full-time, yet they continue to live below poverty levels.  These hard-working Americans, who rely on government subsidies, are struggling to provide basic necessities for their families.  Not only would raising the minimum wage help these workers and their families, but it would also alleviate some of the pressures on the government to support such people.  According to a study by the University of Massachusetts’s Arindrajit Dube, an Amherst Economist, the poverty rate would reduce by 1.7%, which would also erase more than half of the increase in poverty caused by the recession.  This translates to almost 5 million people being lifted out of poverty.  An increase in minimum wage would directly affect the wellbeing of millions of Americans who, at the current wage-floor, struggle day-in-and-day-out to supply the goods, which many of us take for granted.

Ripple Effect

Lastly, the council of Economic Advisers estimates that, when fully phased in, 28 million workers would see a raise in wages.  According to the Fair Minimum Wage Act, the entire wage scale would appreciate due to inflation rates.  This suggests that even those who are currently earning more than $7.25 an hour, such as $8.25 or $9.00, would also see their pay rise past the $10.10 mark.  Although the nation’s inflation rate has been relatively steady (between 1.5% and 1.7% from 2012 through 2014) it is important that our laborers are able to keep up with the rising costs of goods and services.

What if a spike in minimum wage wasn’t as beneficial as politicians and economic analysts make it out to be?  What if, from a callous business perspective, an increase in wages was completely impractical?  By examining a simple supply-demand graph regarding wage floors and those employed, we can hypothetically observe what would happen if minimum wage rises to $10.10.

*Disclaimer: All values, except for the minimum wage prices, were arbitrarily chosen for the sake of simplicity and illustration.

Young Economics Solution Session: Minimum Wage
Young Economics Solution Session: Minimum Wage

In a perfect world, where micro/macroeconomic principles are fully applicable (never going to happen), all decisions are rational and based at the margin where marginal benefit equals marginal cost.  In such a theoretical world, there is an equilibrium minimum wage value that would accommodate all perspective employees and all business owners looking to hire.  On the graph, this quantity demanded and supplied is 150.  The problem with this idea though, is that (A) unemployment will always be present in an economy, as there are frictional and cyclical unemployment levels that arise due to the ebb and flow of an economy, and (B) this ambiguous wage would be so low for the employees that they would not be able to support themselves or their families.  This, I believe, is the general predicament with minimum wage.  Employers believe the wages of unskilled labor should be lower than they actually are, and employees feel as though they have the right to higher wages so that they may live affordably.

Looking at the graph, we can see that at the current minimum wage of $7.25 an hour, the number of laborers employed is 100.  This is because of the quantity demanded, or the number of workers that business owners are willing to hire, is 100.  Contrastingly, the number of workers unemployed is 100 (quantity supplied minus quantity demanded at the intersection points of the minimum wage rate).  If the national minimum wage were to rise, what would happen? According to the graph, the quantity of labor demanded would actually decrease to 30 and the quantity of labor supplied would increase  to 300 (just think about it, a lot more people would now be searching for jobs if they discovered the new minimum wage to be $10.10).  As a result, the number of those unemployed is more than double the unemployment value at $7.25.

Imagine yourself as a small business owner and think about the consequences of such a spike in wages.  At a higher minimum wage price, you would have to allocate more funds for paying your employees.  Where does this money come from, you ask?  It could be taken from the wages of your veteran workers, which means they would be taking pay-cuts to help fund the pay of new, lower-level employees (not to mention their incentive to work efficiently and productively is probably gone).  The money could also come from the manufacturing budget, which results in less production.  If the company is producing fewer goods and services, the firm does not need as many employees, which, or course, leads to people being laid-off and increasing the levels of unemployment.  Moreover, the most important facet of your company that could lose money is your profits!  I’m certain this would not fly with you considering you opened the business to make money.

chris rock

For sake of argument, let’s say the minimum wage appreciated and stimulated the economy, like some economists believe would happen.  If you read my last post , you understand that stimulation would increase the number of jobs available.  The issue that may arise through this theory though, is the law of diminishing returns.  This law states that in all productive processes, such as the work of a frier at McDonald’s or of a shelf-stocker at a grocery store, adding more of one factor of production (an employee) will eventually yield lower per unit returns.  In plainer terms, this suggests that adding more and more employees results in decreased marginal production.  Why reduce this factor of production when firms could maximize production until marginal benefit equals marginal cost?

Lastly, it is feasible that by raising the minimum wage we reduce the chances of unskilled laborers (e.g. people who did not finish high school or people who only have a high school diploma/GED) receiving job offers.  The graph already indicates a shortage of 270 jobs at a wage rate of $10.10, so when firms do hire people they are probably choosing the best possible applicants who have the best chance of improving their skills, making it that much more difficult for unskilled workers to find jobs.

I’m personally not sure if a spike in the national minimum wage floor is a good idea for the U.S., for there are factors on both sides of the argument that are swaying me in every direction.  From a purely financial lens, it seems like raising wages does not bode well for a firm.  At the same time though, I do not think its acceptable for some of our nation’s hardest workers to live below the poverty line.  Especially when thinking about out larger corporations, like Wal-Mart and McDonald’s, I do not think it would be an extreme burden or great loss of profit to pay their employees above the minimum wage.  Not only would their employees be able to live more comfortably, but the corporations would probably see increased production due to the whole efficiency wage principle…just a thought.  This issue is so intriguing because economic theory is not the end-all-be-all.  People across the country will be affected by whatever decision is made regardless of an appreciation.  Emotions, rationalities, and the viewpoints of business owners throughout our nation are involved.  I’m not sure we even know exactly what would happen with a wage increase, but hopefully this post made the topic clearer so you can arrive at your own conclusions.

Maxwell

Everything You Need to Know About Minimum Wage: Part III

What if a spike in minimum wage wasn’t as beneficial as politicians and economic analysts make it out to be?  What if, from a callous business perspective, an increase in wages was completely impractical?  By examining a simple supply-demand graph regarding wage floors and those employed, we can hypothetically observe what would happen if minimum wage rises to $10.10.

*Disclaimer: All values, except for the minimum wage prices, were arbitrarily chosen for the sake of simplicity and illustration.

Young Economics Solution Session: Minimum Wage
Young Economics Solution Session: Minimum Wage

In a perfect world, where micro/macroeconomic principles are fully applicable (never going to happen), all decisions are rational and based at the margin where marginal benefit equals marginal cost.  In such a theoretical world, there is an equilibrium minimum wage value that would accommodate all perspective employees and all business owners looking to hire.  On the graph, this quantity demanded and supplied is 150.  The problem with this idea though, is that (A) unemployment will always be present in an economy, as there are frictional and cyclical unemployment levels that arise due to the ebb and flow of an economy, and (B) this ambiguous wage would be so low for the employees that they would not be able to support themselves or their families.  This, I believe, is the general predicament with minimum wage.  Employers believe the wages of unskilled labor should be lower than they actually are, and employees feel as though they have the right to higher wages so that they may live affordably.

Looking at the graph, we can see that at the current minimum wage of $7.25 an hour, the number of laborers employed is 100.  This is because of the quantity demanded, or the number of workers that business owners are willing to hire, is 100.  Contrastingly, the number of workers unemployed is 100 (quantity supplied minus quantity demanded at the intersection points of the minimum wage rate).  If the national minimum wage were to rise, what would happen?According to the graph, the quantity of labor demanded would actually decrease to 30 and the quantity of labor supplied would increase  to 300 (just think about it, a lot more people would now be searching for jobs if they discovered the new minimum wage to be $10.10).  As a result, the number of those unemployed is more than double the unemployment value at $7.25.

Imagine yourself as a small business owner and think about the consequences of such a spike in wages.  At a higher minimum wage price, you would have to allocate more funds for paying your employees.  Where does this money come from, you ask?  It could be taken from the wages of your veteran workers, which means they would be taking pay-cuts to help fund the pay of new, lower-level employees (not to mention their incentive to work efficiently and productively is probably gone).  The money could also come from the manufacturing budget, which results in less production.  If the company is producing fewer goods and services, the firm does not need as many employees, which, or course, leads to people being laid-off and increasing the levels of unemployment.  Moreover, the most important facet of your company that could lose money is your profits!  I’m certain this would not fly with you considering you opened the business to make money.

chris rock

For sake of argument, let’s say the minimum wage appreciated and stimulated the economy, like some economists believe would happen.  If you read my last post , you understand that stimulation would increase the number of jobs available.  The issue that may arise through this theory though, is the law of diminishing returns.  This law states that in all productive processes, such as the work of a frier at McDonald’s or of a shelf-stocker at a grocery store, adding more of one factor of production (an employee) will eventually yield lower per unit returns.  In plainer terms, this suggests that adding more and more employees results in decreased marginal production.  Why reduce this factor of production when firm’s could maximize production until marginal benefit equals marginal cost?

Lastly, it is feasible that by raising the minimum wage we reduce the chances of unskilled laborers (e.g.  people who did not finish high school or people who only have a high school diploma/GED) receiving job offers.  The graph already indicates a shortage of 270 jobs at a wage rate of $10.10, so when firms do hire people they are probably choosing the best possible applicants who have the best chance of improving their skills, making it that much more difficult for unskilled workers to find jobs.

I’m personally not sure if a spike in the national minimum wage floor is a good idea for the U.S., for there are factors on both sides of the argument that are swaying me in every direction.  From a purely financial lens, it seems like raising wages does not bode well for a firm.  At the same time though, I do not think its acceptable for some of our nation’s hardest workers to live below the poverty line.  Especially when thinking about out larger corporations, like Walmart and McDonald’s, I do not think it would be an extreme burden or great loss of profit to pay their employees above the minimum wage.  Not only would their employees be able to live more comfortably, but the corporations would probably see increased production due to the whole efficiency wage principle…just a thought.  This issue is so intriguing because economic theory is not the end-all-be-all.  People across the country will be affected by whatever decision is made regardless of an appreciation.  Emotions, rationalities, and the view points of business owners throughout our nation are involved.  I’m not sure we even know exactly what would happen with a wage increase, but hopefully this post made the topic clearer so you can arrive at your own conclusions.

Maxwell

Everything You Need to Know About Minimum Wage: Part II

Stimulating the Economy

The argument can be made that raising the minim wage to $10.10 would stimulate the economy due to more money spent on goods and services.  President Obama and additional researchers argue that lower-income workers, or those who depend on minimum wage, spend their earnings more quickly and locally than do higher-income workers.  In fact, the Federal Reserve Bank of Chicago noted that every $1.00 increase in the minimum wage would increase the spending of a low-wage worker’s household by $2,800 yearly.  This provides the local, small businesses with the customers and demand they need to maintain and expand their own labor forces.  As a result, we would see a reduction in the nation’s unemployment rate.  More specifically, our nation could be looking at 85,000 new jobs, which is 9,000 more than the job creation between November and December that yielded a .3% reduction in the unemployment rate.  These small, yet impactful resultants of an appreciation in minimum wage would also affect the U.S. GDP by $22 billion.  This stimulation is three fold.  As the minimum wage increases, our blue-collar labor force is injecting our economy with discretionary income expenditures, which then fuels our local shops, and by reaction, our shop owners can begin to hire more laborers.

Reducing Poverty

At the current wage rate, there are nearly 8 million workers who work full-time, yet they continue to live below poverty levels.  These hard-working Americans, who rely on government subsidies, are struggling to provide basic necessities for their families.  Not only would raising the minimum wage help these workers and their families, but it would also alleviate some of the pressures on the government to support such people.  According to a study by the University of Massachusetts’s Arindrajit Dube, an Amherst Economist, the poverty rate would reduce by 1.7%, which would also erase more than half of the increase in poverty caused by the recession.  This translates to almost 5 million people being lifted out of poverty.  An increase in minimum wage would directly affect the wellbeing of millions of Americans who, at the current wage-floor, struggle day-in-and-day-out to supply the goods, which many of us take for granted.

Ripple Effect

Lastly, the council of Economic Advisers estimates that, when fully phased in, 28 million workers would see a raise in wages.  According to the Fair Minimum Wage Act, the entire wage scale would appreciate due to inflation rates.  This suggests that even those who are currently earning more than $7.25 an hour, such as $8.25 or $9.00, would also see their pay rise past the $10.10 mark.  Although the nation’s inflation rate has been relatively steady (between 1.5% and 1.7% from 2012 through 2014) it is important that our laborers are able to keep up with the rising costs of goods and services.

Tomorrow in part three, I will examine minimum wage graphically and also talk about the law of diminishing labor.

Maxwell

Everything You Need to Know About Minimum Wage: Part I

The topic of minimum wage has been under discussion for quite some time.  It is one of the United States’ most controversial political issues because there are many different ideologies surrounding the proper value of the minimum wage floor.  Over the past several months it has received much more attention due to President Obama’s State of the Union declaration of raising the minimum wage for all new federal contracts to $10.10.  This comes just one year after he urged Congress to raise the minimum wage to $9 per hour in his 2013 State of the Union.  Currently, the minimum wage stands at $7.25.  The present-day wage contributes to about 49 million Americans (14.5% of the U.S. population) living impoverished.

Minimum wage is such a debated issue because of the paradigm it creates for unskilled laborers.  Economists and politicians often argue that the wage levels should differ because unskilled workers are earning more money than they should.  We have this predicament because it is difficult to place a value on labor in the first place.  On the other hand though, skilled workers who may have been unemployed before taking a minimum wage paying job are now working for pay that correlates to living below the poverty line (a full-time employee earning $7.25/hour will make $15,000 a year, which is below the poverty level for a family of three).  Moreover, other analysts and politicians (Republicans) argue that raising the minimum wage will result in less job creation and more unemployment.  On a strictly economic and financial basis, I can understand this point of view.  Logically speaking, why would business owners offer more jobs to prospective employees if they must allocate more money for wages?  Economics is based on the belief that all decisions are made rationally, and rationally speaking, I would not provide job opportunities for people if it were more expensive for my business.  I will look more in-depth at this scenario in part three of my series.

As an attempt to improve our nation’s current economic situation, President Obama has signed an executive order that will raise the wages of all new federal contracts to $10.10 per hour.  Notice, this executive order only affects all new contracts, so, unless restructured, all old contracts will remain at $7.25 an hour.  While this only makes a dent in the overall conversation of minimum wages, it is expected to affect more than 2 million employees.  Furthermore, it will hopefully spark an initiative by our legislative branch to pass the Fair Minimum Wage Act, which will effectively raise the minimum wage to $10.10 for all laborers across the country by July 1, 2015.

In part two of my series, I will focus on three principle ideas regarding the potential increase of minimum wage, all of which are positive and outline the possible benefits of such an appreciation.  In the meantime, read up on the Fair Minimum Wage Act and it’s economic implications.

Maxwell

Quick Digestibles: Rival and Excludable Goods

Welcome back to another installment of Young Economics.  Today, I break down the differences between rivalrous and excludable goods with perhaps the savior of online education, Khan Academy.

Rivalry occurs in an economy when one person’s consumption of one unit of a good or service means no one else is able to consume it. Contrastingly, nonrival suggests that one person’s consumption of a good does not interfere with another’s consumption.

Excludability is defined as the inability to a consume a good so long as it is not paid for.  Therefore, a nonexcludable good constitutes as something that is consumed whether the good is paid for, as it is impossible to be prevented.

There are many scenarios in which a good may be any combination of both rival and excludable, rival and non excludable, non rival and non excludable, etc.  For example, private goods, such as my Oreos, which I refuse to share with anyone, are both rival and excludable.  My consumption of America’s favorite cookie directly inhibits my roommate or brother from coming along and trying to consume my delectable cookies.  Moreover, there is no legal way for me to eat Oreos unless I pay for them…I wonder how much money I spend a year on this Kryptonite.  Other private goods include, clothing (attention sneakerheads), haircuts, and even the laundry at college.

Then there are public goods, or non rival and non excludable goods, enter Khan Academy.  In a lot of cases, public goods are supplied by the government, like national defense and public schooling, but in this situation a public good, such as education, is being supplied by the super teacher, Salman Khan.  Khan Academy is a non-profit educational website that was created to provide “a free, world-class education for anyone, anywhere.”  My use of Khan Academy on their website or on YouTube, while I’m cramming for finals has no baring on the eighth grader in Texas trying to learn pre-Algebra.  You see, Khan Academy is so innovative and revolutionary because it has completely altered the perception of public education.  We all know that the public educational system in the United States needs reform, but with this website everyone of all ages can receive a free, world-class education without even leaving their home.  I guess that’s why Google and the Gates Foundation have each donated over $1 million dollars to the organization.  Avail yourself to the website , don’t you have some studying to do?

Maxwell