Tuesday, June 19, 2012

McSpicy Paneer (Even McDonalds has to regionalize their business model)

On my current vacation to India, I decided to indulge in some McDonalds with my cousins. As we pulled up to the drive-through, I couldn't help but smile as I saw the menu which was full of items such as the "McSpicy Paneer" and "McAloo Tikka Burger." The burgers are spicy and so is the ketchup!

It made me realize that even the extremely well-known McDonalds has to be sensitive to the region they are in to remain profitable. The majority of Indians simply won't buy the "Angus Bacon & Cheese Wrap" or "Quarter Pounder with Cheese." In general, Indian people don't like meat, and they prefer lighter burgers without lots cheese.

On the other hand, some McDonald items seem to appeal to the palates of both Indians and Americans (for example, The McFlurries and Filet-O-Fish)

It was the corporation's job to determine what to change and what to keep the same, and I'm sure those decisions came after much consideration.

If you're curious as to what the McDonalds menu looks like in other countries around the world, here's a wiki link where you can see some of the items on each menu internationally:


Monday, June 18, 2012

Wealth vs. Income: Two Different Conepts

If you and everybody who earns an income in your family were fired today, would your family still be able to sustain a quality of life somewhat comparable to the one you live today? (If your answer is yes, then your family is wealthy!)

I believe my aforementioned question is the best way to explain the difference between wealth and income. As far as wealth is concerned, earnings do not matter but investments do. As far as income is concerned, earnings do matter but investments do not.

To illustrate by example, let's say there's a girl named Maya who makes $200,000 a year (her income). This is definitely a very respectable income, however Maya may not necessarily be wealthy.

For example, let's say Maya may spend almost all of her income and lives a lavish life. Perhaps she never puts money in the bank and she decides not to think of the future. As a result, the amount of money she has at the end of the years may be equal to zero.

Maya is not wealthy. She may have a huge apartment and lots of things to fill it, however she would not be able to maintain her quality of life if she were fired at a moment's notice. Maya would still have to pay rent on a monthly basis, and she would still need to put food on the table. Without an income, Maya would be in trouble.

However, let's take case B. Let's say Maya now puts away 15% of her income every month and invests that money intelligently. Maya lives below her means. She buys used cars, lives in a modest home where she has payed off her mortgage and makes sure she pays the bills on time.

Maya is very wealthy!

If she were to be fired today, she could fall asleep knowing that her life is in order. She has already saved for retirement and she doesn't really need to worry about bills.

Applying this example to other cases, you can see how doctors can either be wealthy or not and people who make minimum wage can be wealthy or not.

In fact, this concept can be very interesting to keep in mind if applied to the Lorenz curve (which I intend on writing a post on very soon!)

Friday, June 15, 2012

Cartels: what are they and why do they fail? (I call it the Lemonade Effect)

A cartel is best defined as an agreement between competing firms in order to standardize features such as price and amount of output in order to increase each firm's profit. Why would competing firms be willing to sacrifice a potential area of interest or agree to limit the amount of products they sell? I always like to think of it as something I call the lemonade effect.

Imagine two people are selling lemonade at stands right next to each other. They both may set the price at a dollar and they would both get equal amounts of traffic for a while. After a few minutes though, one person realized they would get more traffic if they reduce the price to 75 cents. Well, the other person would too... and you can see how it would only go down-hill from there. Pretty soon, they would both end up either reducing the price to where they're making negligible profit OR, they would have to shut down. You can see why it would make sense, then, for the both to agree to take different zones. One person can take the north part of town and the other the south. Cartels also often include a production quota in order to ensure that prices stay up. Both parties selling lemonade may agree to only make 20 cups of lemonade a day.

Cartels, however, often fail long-term.

If you've kept up with my posts up until now, you can probably guess why! Game theory (prisoner's dilemma) suggests that there would be many incentives for a company (or in this case, a lemonade stand) to lower their prices. If it isn't clear to you as to why, here's a link back to the Prisoner's Dilemma explanation. :
One person may start to cheat and sell 30 glasses a day. The other person will notice and produce the same. Soon, the cartel is broken!

A real example of a cartel is OPEC (Organization of the Petroleum Exporting Countries) which influences aspects of oil production for all firms that produce oil. By this point, it must be evident that consumers benefit from the absence of cartels.

No cartel means cheaper lemonade!
In a future post, I will explain how OPEC has managed to remain successful.

Tuesday, June 12, 2012

What's the difference between a Recession and Depression?

In my last post, I explained that a business cycle's contraction phrase could either implicate a recession or implicate a depression. Today, I would like to explain the general differences between the two. [If anything I talk about doesn't make sense, refer back to my last post]

There are many definitions of a recession. Simply, the term implicates a market with a declining economy. Going back to my last post, I like to think of it as the part of the business cycle that follows the peak. However, different sources have defined it in other ways. For example, a 1975 New York Times article more specifically stated that a recession is a period of "two down consecutive quarters of GDP." In this definition, what follows a peak isn't necessarily a recession. Similarly, the Business Cycle Dating Committee of the National Bureau of Economic Research defines it as "a significant decline in economic activity spread across the economy, lasting more than a few months." .

As varied as the definition of a recession is, however, the definition of a depression is even more-so. Until economists can agree on a definition, let's say it occurs when there is a notable decline in GDP (10%) for over two consecutive quarters in two or more national economies. It's a vague definition, but you'll still find people who disagree with it.

Remember, recessions and depressions are both phases of declining growth in an economy. Recessions are most commonly defined as a period of "two down consecutive quarters of GDP," and Depressions are just more severe and globalized recessions (10% decline in GDP).

I know these definitions are vague (and I apologize), however there has been no organization who has had the ability to standardize the definition of a "recession" or "depression." I hope in the future this will be resolved and I can come back with a more clear post!


Business Cycle: The Four Phases

A business cycle has been defined as the tendency of economic activity to go oscillate between periods of expansion and contraction. Because the fluctuations are unpredictable however (as displayed in the graph above), many economists point out that “cycle” is a misleading term. In any case, the phrase is still used today.
Here are the four phrases of a business cycle (almost always in this order)

I. Contraction/Recession: Economic activity slows down. This period, if really bad, could even be a depression.
II. Trough: A turning point right after contraction. Economic activity rises and turns to the third step, expansion.
III. Expansion/Boom: Rise in economic activity
IV: Peak: A turning point right after expansion. Economic activity slows and returns back to contraction.

As you can see, although the amount to which an economy contracts or expands is not constant, the phases will occur in a repeating manner.

This concept isn't very difficult! However, you should understand that this is a short-term graph and in the long term, Real GDP (output) will look somewhat like this:

This is because in the long-term, our economy will generally grow stronger as a result of improving technologies, etc.
And that's all the basics of a business cycle!

Monday, June 11, 2012

Governor Whitman on Policies that Impact our Economy (Clean Energy Act)

A few weeks ago, three ex-governors of New Jersey (Governor Byrne, Whitman, and Kean) visited my school. Among the many topics they discussed, I thought it would be especially relevant to write about Governor Whitman's response to my question: "What is your opinion of the Clean Energy Act which invests billions of dollars into clean energy facilities?" Governor Whitman, who once served as an Administrator of the Environmental Protection Agency, said the following:

"My problem only with government investing in clean energy programs is we ought to let the private sectors figure out which ones work. To me, governments responsibility is setting out what we want to achieve. We don't have a national energy plan in this country but we desperately need one."

Governor Whitman seems to advocate a system under which the government sets a goal forth and the private sector then carries it out. Governor Whitman has far more expertise than me on this subject, but I do believe she is absolutely correct in stating that the government needs to take responsibility for regulations and enforcement.

There wasn't too much else directly relevant to economics, however listening to the governors speak and meeting them was still a very exciting experience. All three governors encouraged the future generation to get involved in our community and become well-informed individuals.

Governor Byrne, Whitman, and Kean- thank you for visiting our school and sharing your perspectives!

Sunday, June 10, 2012

Monopolistic Competition Explained (Long Run)

I decided it's time to face my biggest fear and the bane of my existence...Monopolistic competitions. This concept took me forever to understand and it was the source of much frustration when I first took an introductory Econ course.

If you're like I was, however, don't worry! I finally understand it and I'm about to explain everything in simple terms.

I) Definition: A monopolistic competition is a type of competition in which there are two or more firms which sell similar products that are not perfect substitutes. For example, consider the toothpaste industry. Each toothpaste company essentially sells a product that you use on a daily basis to clean your teeth. However, each product is slightly different (the features they offer, the color, the branding/marketing, the target consumer). For example, one company may focus on encouraging the consumer to avoid heart disease, another company may focus on creating a flashy product with celebrity endorsements.

As you can see, each company is somewhat of a monopoly because there is no exact substitute. However, there is also competition because there are similar products that exist.

Now to explain the graph...
Above (Image 1) shows a graph of the overall graph. However, I will now explain how this graph is derived.

Step One: Demand line. Simple. Here it is:

Keep in mind that the demand curve in a monopolistic competition should appear to have a more 'shallow' downward slope because buyers are sensitive to a change in price. If Toothpaste company A, for example, increases their price 2 dollars, you would quickly switch to Toothpaste company B.

Step Two: Marginal Revenue Curve.
Self-explanatory diminishing marginal revenue curve. Keep in mind that it touches the demand curve only at one point. If you don't understand any of the shapes, see my previous posts explaining them.

Step Three: Marginal Cost Curve.
Find the point where Marginal Revenue = Marginal Cost. then, Trace it up to the demand curve. This is the profit maximizing point.
Again, if you don't understand any of the shapes, see my previous posts.

Step Four: Average Cost.
It is tangent to the point of maximizing profit (mentioned in step three) It falls then rises.