Monday, January 31, 2005

A New England Forest

A few years ago my sons and I joined my brother and his family at a time share condo in northern New Hampshire. The timeshare itself was located in a heavily forested area of the mountains of New Hampshire.

The countryside was mostly evergreen forest broken by the occasional small farm or town. But as we drove around I was perplexed by the seemingly endless rows of neatly piled rocks that separated the edge of the forest from the shoulder of the road. The rock fences were obviously man-made but did not seem to serve any purpose. Even more perplexing were the occasional additional rows that were perpendicular to the ones parallel to the road. These cut through the forest and served absolutely no purpose. I remembered from history books and old Robert Frost poems that the New England soil was rocky and farmers dug huge quantities of rock out of the ground in order to be able to plow and plant crops on it. They used these rocks to make fences.

But, what purpose was served by digging up rocks and building fences in the middle of a forest? My question was answered when my sister, who lived in neighboring Vermont, joined us for the weekend. The forest we were in was not some timeless entity – it was a relatively new forest. The rocks had been dug up and used to build fences by the farmers who once lived there. What is now forest was a few decades back, endless miles of neatly laid out fields. Until about fifty years ago or so this was farm country. However, New England farms were marginal at best and improvements in agricultural technology meant that we could now grow more food on less land. So farmers in New England abandoned their farms and took higher paying jobs in the manufacturing sector and the land reverted to forest.

Today, all over the eastern half of the United States, agriculture has declined to such an extent that much of the area has reverted to forest. In fact we now have more trees in the U.S. than we had when Columbus first arrived in the New World. Economic growth and advances in technology have not only provided us with more food, more wealth and more leisure time but has also resulted in more forests and wilderness despite the largest population concentration in the history of the area.

Wednesday, January 26, 2005

Economics 201 - WELCOME!

I would like to welcome the students in my independent study Economics 201 (Micro Economics) course for the Spring 2005 semester at the Pima Community College North East Learning Center.

Below you will find the take home tests and assignments for this course. Paper copies of these assignments and take home exams will be handed out at the orientation on Monday January 31, 2005. Exams 3 and 6 are the mid-term and final and are NOT included in the postings below. These will be closed book exams that MUST be taken at the test center at the Northeast Learning Center.

I will be at the Northeast Learning Center every Monday evening from 5:30 to 8:30 p.m. to review work and answer your questions. You are encouraged, but not required, to stop by on Monday evenings. This is a self paced course and the only requirment is that everything be completed and turned prior to Monday May 9, 2005.

You can find a copy of the syllabus posted as the entry for Tuesday January 11, 2005 on this blog. Throughout the semester I will be posting items of interest for students in this and my other two economics classes. I will try to post things of specific interest to this Economics 201 class on Wednesdays.

Please feel free to leave comments on this blog or email me at with questions. You can also meet with me in person at the NE Learning Center on Monday evenings.

Have a Good Semester!

Syllabus Quiz - FREE Points for YOU!

Name: _____________________________

Economics 201

Syllabus Quiz
January 31, 2005

Refer to your Syllabus for the answers. You will receive 2 points (for a total of 10 bonus points) for each correct answer. COMPLETED TEST MUST BE RECEIVED BY INSTRUCTOR NO LATER THAN 8:00 P.M. ON MONDAY FEBRUARY 7, 2005 IN ORDER TO RECEIVE THE BONUS CREDIT.

1 The minimum number of points needed to get an 'A' for this course is:

a. 895
b. 750
c. 100
d. 920

2 How much of the course work must you complete before you can request and receive an Incomplete (I) grade for the course.

a. 10%
b. ¾
c. ½
d. 100%

3 Exams numbered 3 and 6 are:

a. Multiple Choice only.
b. Are available on the course blog.
c. Are the Mid-Term and Final and, as such are closed book.
d. Are take home exams.

4 The course blog can be found at:

a. from a link at

5 What is the last day a student can withdraw from the class without instructor permission?

a. February 5, 2005
b. April 6, 2005
c. May 16, 2005
d. March 2, 2005

Tuesday, January 25, 2005

Political Economy: Logrolling and Pork Barrel Defined

Spring 05 Classes
Spring 05 Calendar

As a part of my preparation for the coming semester, I spent some time today reviewing public choice theory.* Logrolling and Pork Barrel were two of the terms that came up. These are colorful terms from the realm of every day politics that have long been used to describe the activities of our elected representatives.

The term logrolling is used to describe the practice of one member of Congress or a legislature making a deal with another member of the same legislative body to vote for each other's pet bills. In other words, Congressman Jones from Smallsville, Maine agrees to vote for Congresswoman Smith's bill to appropriate a few million dollars to underwrite an experimental project to raise catfish in the Nevada desert in exchange for Congresswoman Smith agreeing to vote for his bill to spend a few million dollars on a project to test the feasibility of growing oranges in Maine. Both of these will be paid for by the taxpayers of the entire nation but only a few citizens of Jones' and Smith's districts will benefit. Opponents of Jones will criticize him for wasting taxpayer dollars on a project to raise fish in the desert but those residents of Smallsville who benefit from the new jobs and business associated with the experiment to grow oranges in frigid Maine will praise him for the economic benefit he has brought to the district. After all, a few million poured into his district is serious money to the residents compared to the cost of the catfish farm in Nevada which, when divided among the millions of taxpayers in the entire United States, works out to a few cents or less each in taxes.

The term logrolling refers to the old American frontier custom of neighbors getting together to help each other clear their land by cutting down the trees and rolling the logs out of the way. Each family could clear their land faster if all the neighbors pitched in and helped one another. Early in our history members of Congress realized that if they helped each other by voting for each other's special projects they could individually bring more projects home for their constituents and increase their individual chances of re-election. Critics saw through this scheme and named it logrolling, a term understood by everyone.

A second and related term is pork barrel which refers to giving voters in one's district projects that benefit them at the expense of the rest of the nation (or state). This is also a term from our early history and, like logrolling, the term pork barrel shows that the citizens were wise to this type of scheme from the start. The term pork barrel refers to the barrels in which smoked pork, a major food staple, were shipped. By referring to projects as pork barrel projects critics were associating the practice of taxpayer funded projects that benefited small constituencies as a group in exchange for their votes with the earlier practice in colonial times and early days of the Republic of buying votes by providing free drinks, at the candidate's expense, to the voters.

Both logrolling and pork barrel are pejorative terms describing practices that are condemned by most citizens. But they persist because they work. First of all, politicians want to keep their jobs and the only way to do that is to keep getting re-elected. Second, while people don't like to pay taxes, they do like things that benefit them so the efforts of a Congressman in getting a new road built in the district will be appreciated by drivers whose commute is made easier, construction workers who are employed to build it and construction companies who are paid to build it. These people will look favorably on the Congressman at election time. Finally, the cost of the new road to the residents of the district will be a tiny fraction of the benefits they receive from it. What is expensive and what gets voters mad is the wasteful pork barrel projects sponsored by the 434 Representatives and 98 Senators from other districts and states. A few million spent in our district is nothing compared to the billions of dollars that are the cumulative cost of all the other pork barrel projects outside our district. Unfortunately, we can only vote for our own Congressman and Senators, who bring good projects home for us, and have no way of voting against the scoundrels in other districts whose cumulative spending adds up to a hefty tax bite from us every April 15th. "All politics is local" said former House Speaker Sam Rayburn and so long as we can only vote for those who bring home projects whose benefits to us greatly exceed the cost to us while being unable to vote against those who sponsor projects that cost us money but yield no financial benefit to us, logrolling and pork barrel legislation will live on.

* I found a brief and very readable article about Public Choice theory by B. Venkatesh at a site called the Hindu Business Line

Thursday, January 13, 2005

Transaction Costs Explained

Spring 05 Classes
Spring 05 Calendar

Transaction costs refer to the extra costs associated with getting a finished good or service from the producer to the consumer. Transaction costs consist of things like the cost of physically moving the good or service from the seller to the consumer, commissions and fees to third parties who facilitate the sale, information cost, search costs, etc.

The services associated with transaction costs add value in the sense that, without the added value, the consumer could not utilize the product, but the added value is not needed in order to produce the good or service.

I remember taking a Spanish class while in graduate school and listening one day to the instructor lament about the injustice of the large price difference between what a coffee grower in Venezuela received for a pound of freshly harvested coffee beans and what a consumer in Milwaukee paid for a pound of coffee in the store. I quickly pointed out to him that pound of green coffee beans sitting on a farm in Venezuela did nothing for a consumer in Milwaukee wishing to have a cup of coffee in the morning for breakfast. He acknowledged that roasting, grinding and packaging was necessary and would add to the price but it was those other things like “shipping, insurance, commissions to coffee brokers, etc.” that drove the price up unnecessarily.

Shipping, insurance, commissions to brokers, etc. are examples of transaction costs. They are not a part of the production process as the Venezulean farmer could roast, grind and package the coffee grown on his farm. But a can of ready to use coffee in Venezuela is still of no use to a consumer in America. Think about how much time and money you, a coffee drinking consumer, would have to spend trying to find tropical farmers with coffee which they have grown, roasted, ground and packaged or small companies in the tropics who have purchased, roasted, ground and packaged the coffee. Conversely, think about how much time and expense these tropical farmers or small local coffee processors would have to go to in order to find you.

Enter the wholesalers (both in the tropics and here in America), shippers, business and customs brokers, insurers, bankers, etc. who provide the services that enable the coffee growers to concentrate on growing coffee and getting paid as soon as the harvest is in and, at the same time enable you and me to acquire all of the ready to brew coffee we want with a simple trip to the nearest grocery store. Wholesalers buy the freshly harvested coffee and arrange for transport to the nearest port. Business brokers find the best prices and line up wholesale buyers in the consuming countries while shippers transport the coffee from the producing to the consuming country. Customs brokers at each end facilitate the paper work needed to move the coffee between nations while wholesalers in the consuming nation arrange for distribution to stores conveniently located near coffee drinking consumers. Meanwhile, bankers provide the financing that enables entities at each stage of the process to be paid immediately and not wait for purchase by the final consumer while insurers insure against the financial loss that would result if the product were damaged, distroyed or stolen during its long journey from producer to final consumer.

Transaction costs add value to the final product and they are the price we pay for the high degree of specialization that enables our economy to produce the vast array of affordable goods for us.

Tuesday, January 11, 2005

Syllabus - Economics 201 Spring 2005

Spring 05 Classes
Spring 05 Calendar

Northeast Learning Center

Economics 201 Syllabus

Course Information:
Course Prefix/Number: ECN 201 Course Title: Microeconomic Principles
Semester: 200520 (Spring 2005) CRN (Section Code): 26575
Prerequisites: MAT 092 Estimated Study Time: 120 hours/semester
Day/Time: M 5:30-8:30 p.m Location: NELC
Teaching Format: Self Pace
Course Web Pages: (Blog for Course) (Instructor's Web Site) (Calendar)

Instructor Information:
Name: Chuck Nugent
U.S. Mail: Pima Community College
Northeast Community Learning Center
Catalina Village Shopping Center
7816 E. Wrightstown Rd.
Tucson, AZ 85709-5800
Phone/Voice Mail: (520) 544-4870
Availability: M 5:30 – 8:30 p.m. or by appointment

Instructional Materials:
Required Text: Arnold, Roger A., Microeconomics (6th Edition)
ISBN: 0-324-16356-8
Assignment Packet: Available from Instructor at first Class.
Note: Textbooks are available at the East Campus Bookstore (ask for Northeast Learning Center books) and other academic bookstores in town. The PCC Bookstore can be accessed and books ordered via the Internet at

Course Description: Economic theory as applied to individual decision-making units. Includes economic decision making, economic systems, consumer demand, producer supply, price determination, elasticity, cost-benefit analysis and utility and profit maximization. Also includes production functions and costs, competition and market structures, government in the market economy, labor markets, and income distribution.

Course Objectives: Upon completion of the course, the student will be able to:
1. Define scarcity, microeconomics and macroeconomics, economic theory and economic policy, factors of production, production possibilities model, and opportunity cost.
2. Explain a market and the Invisible Hand Doctrine, society's basic economic decisions, the market economy as compared and contrasted with the planned economy.
3. State and illustrate the law of demand, law of supply, equilibrium price and quantity, shift variables for demand and supply, price elasticity of demand and supply and circular flow model.
4. Discuss the economic objectives of households and businesses and maximization of utility and profit.
5. Describe two approaches for determining profit maximization, explicit and implicit costs, as well as accounting and economic profit.
6. Explain cost-benefit analysis as it applies to households and to businesses, and to society including its relationship to externalities.
7. Give examples of production functions, short and long run as applied to economics, fixed and variable costs, average and marginal costs, and economies and diseconomies of scale.
8. Compare and contrast the four basic market structures (competition, monopolistic competition, oligopoly, and monopoly): basic characteristics, long run profitability, efficiency, impact on the consumer, and determination of profit-maximizing level of output.
9. Explain why and how government intervenes in the market economy with particular reference to antitrust law and governmental regulatory agencies.
10. Discuss wage rate changes, income distribution, and poverty as defined and addressed by the government.

Course Outline:

I Introduction

A. What is Economics about
B. Economic Activities: Producing and Trading
C. Supply and Demand: Theory
D. Supply and Demand: Practice

II Microeconmic Fundamentals

A. Elasticity
B Consumer Choice: Maximizing Utility and Behavioral Economics
C The Firm
D Production and Costs

III Product Markets and Policies

A. Perfect Competition
B. Monopoly
C Monopolistic Competition, Oligopoly, and Game Theory
D Government and Product Markets: Antitrust and Regulation

IV Factor Markets and Related Issues

A. Factor Markets with emphasis on the Labor Market
B Wages, Unions, and Labor
C The Distribution of Income and Poverty
D. Interest, Rent and Profit

V Market Failure and Public Choice

A. Market Failure: Externalities, Public Goods, and Asymmetric Information
B. Public Choice: Economic Theory Applied to Politics

VI International Economic: Theory and Policy

A International Trade
B International Finance

Course Requirements: To complete the course successfully, students must do the following:

1. Complete and submit the five (6) assignments (one for each unit)
2. Complete and submit take home tests for units 1, 2, 4 and 5
3. Take midterm exam at Test Center (closed book)
4. Take final exam at Test Center (closed book)

Attendance: This course is self paced and students are only required to attend the first class. The instructor will be available during scheduled class times for assistance and to collect written assignments from students.

Academic Integrity: All work done for this class must be your own. While you may discuss assignments with other class members, all work MUST be your own. You may use work from books and other materials if it is properly cited. Copying from a book or other print or electronic media without proper reference will result in a zero (0) score for the assignment. Submitting work done by another person/entity (published or unpublished) as your own will result in an F for the course. Students are expected to abide by the Student Code of Conduct and the Scholastic Code of Conduct found in the Pima Community College Student Handbook. Copies are available at PCC campus libraries and at

ADA Compliance: Pima County Community College District strives to comply with the provisions of the Americans with Disabilities Act and Section 504 of the Rehabilitation Act. Students with disabilities requiring special accommodations must notify the instructor of this need or directly contact the Disabled Student Resources Office on your campus at the beginning of the semester.

Course Feedback: In order to increase interaction between instructor and students, students are encouraged (but not required) to submit written work via e-mail. Assignments may be submitted as part of body of e-mail text itself or as an ASCII or Ms-Word (version 2000 or lower) email attachment. Using e-mail for this purpose will increase the speed at which your instructor can return assignments with grades and comments. Students are also encouraged to submit questions about course content via e-mail and the instructor will reply to questions via e-mail to all students on e-mail list (presence on this list is optional). Students may also submit assignments via the U.S. Postal Service (see address on first page) or deliver it to NELC in person.

Exams: One exam will be given for each of the six units (see outline above or the "Brief Contents" on page iii of your book). The exams for units 1, 2, 4 and 5 will be open book take home exams. The exams for units 3 and 6 will be closed book, proctored exams taken at the college.

Problems: If you have problems with the course, make arrangements to see me or call me through voicemail. Do not wait to ask for help.

Submissions: Please clearly mark all assignments with the following: NUGENT:ECN201. Include full name on both e-mail and regular submissions. Submissions other than via e-mail are to be typed.

Withdrawals: Students may withdraw from class any time during the first 2/3 of the semester (through April 6, 2005) without instructor permission and without incurring any grade penalty. Students not active after this date will receive an "F" grade at the end of the semester. Please be sure to withdraw yourself by April 6, 2005, if you do not expect to complete the course.

Your instructor will make every attempt to follow the above procedures and schedules, but they may be changed in the event of extenuating circumstances.

Students submitting assignments through the mail are advised to make copies for their own protection.

Because so much of our contact with you is through the U.S. Postal Service, it is vital that we have your correct address. If you change your address during the semester, fill out a change of address form at any campus registration office and call our office at 206-6454 to keep our staff up to date.

ECN 201 Grading Policies

Students’ grades will be based upon scores received on exams and assignments. Exams and assignments together total 1,050 points. The student’s final grade for the course will be based upon the total points earned divided by 1,000 and curved as follows:

920 to 1000 points A
820 to 919 points B
740 to 819 points C
650 to 739 points D
Below 650 points F

Point values for assignments and exams:

Unit 1 Assignment 50 points
Unit 1 Take Home Exam (Chaps 1 – 4) 125 points
Unit 2 Assignment 50 points
Unit 2 Take Home Exam (Chaps 5 - 6) 125 points
Unit 3 Assignment 50 points
Unit 3 Proctored Exam (Chaps 7 - 11) 125 points
Unit 4 Assignment 50 points
Unit 4 Take Home Exam (Chaps 12 - 15) 125 points
Unit 5 Assignment 50 points
Unit 5 Take Home Exam (Chaps 16 – 17) 125 points
Unit 6 Assignment 50 points
Unit 6 Proctored Exam (Chaps 18 – 19) 125 points

Incomplete (I) grade:
If you find that you cannot complete the course during the regular semester, you must request an “I” (incomplete grade) in writing. This must be done before the final review session. You must state your reasons for the request. In order to be considered for an “I” grade, you must have successfully completed three-quarters of the course. YOU MUST THEN COMPLETE THE MISSING WORK WITHIN THE TIME AGREED UPON WITH THE INSTRUCTOR . AT THE END OF THE AGREED UPON TIME, THE INSTRUCTOR WILL CHANGE THE “I” GRADE TO THE LETTER GRADE EARNED FOR THE COURSE AT THAT POINT WHETHER YOU HAVE COMPLETED THE WORK OR NOT.

Special Withdrawal (Y) grade:
Students desiring to withdraw from the class must do so prior to April 6, 2005, which is the last day allowed for withdrawals. THE INSTRUCTOR WILL NOT ISSUE “Y” GRADES.

Midterm and Final Exams the "Unit 3 Proctored Exam" and "Unit 6 Proctored Exam" (see Point Values for Assignments and Exams above) will constitute the Midterm and Final exams for this course.

Other Assignments and Exams:
All assignments and exams other than the mid-term and final will be done by the students at their homes. Books and may be used as aids to complete these exams and assignments which are available from the NELC or from the course web page located at:

Final Grades:
Students will receive a semester grade report from the college when all grades have been recorded. For privacy and security reasons, instructors may not post grades and are advised NOT to give grades over the telephone. Students who wish to check grades may call MAX 2000 at 206-4880.

Note: To help your instructor to improve this course, a variety of classroom assessment techniques may be used to determine if this course is meeting its stated objectives. Such techniques may include but are not limited to, short answers regarding comprehension of the material presented, pre- and post-tests, student interviews, self-evaluations, portfolio, journal and/or capstone experience. Because this course fulfills a general education requirement, you will also be assessed on whether student skills have improved in any of the following areas: oral and written communication, critical inquiry, cultural diversity, and global awareness.

Syllabus Acknowledgment Form

ECN 201 – Economic Principles - CRN 26575

Please sign and return the following acknowledgment to me at the following address:

Chuck Nugent
Pima Community College
Northeast Community Learning Center
Catalina Village Shopping Center
7816 E. Wrightstown Rd.
Tucson, AZ 85709-5800


Student Number:

E-mail Address (optional):

Please add me to the Class E-Mail list. I understand that this will involve broadcasting any course content questions that I submit along with the instructor’s answer to all other class members on the list.

Separate signature required.__________________________________________

____ I hereby acknowledge that I have read and understand the ECN 201(Macro Economic Principles) course syllabus which includes objectives, policies and class schedule.

____I have no objection to receiving an occasional call from the instructor at the number given with my
registration materials.

____I prefer that the instructor not call or contact me by phone anytime during the semester.

____I would like to be contacted by the instructor regarding the following concerns:

Signature ________________________ Phone #_____________________________

Date ____________________________ Student ID # ________________________

Monday, January 10, 2005

Buying Textbooks On-Line

Spring 05 Classes
Spring 05 Calendar

I have always known that textbooks were expensive but, except for my years as a graduate student, I have never had to buy my own textbooks. In the public grade school and high schools that I attended as a child the schools provided our textbooks for a small rental fee of about five dollars per year. As an undergraduate I attended Wisconsin State University at Superior (now University of Wisconsin-Superior) a relatively small public liberal arts college which, at that time, also had a rental system where we paid a rental fee of about $25 per semester for our books. As long as we returned our books in good condition at the end of the term there were no extra charges for books.

In graduate school at the University of Wisconsin -Milwaukee I did have to buy my own books. As a part-time student taking one or two courses per semester I found that my textbook cost were about equal to my in state tuition costs.

Now, as the father of a Pima Community College student I am very much aware of costs of the textbooks needed by my daughter.

Fortunately, a student in one of my spring 2004 classes showed me how to drastically reduce my daughter's textbook expenses. On the first evening of class I showed the students the text and told them where they could find it in the bookstore. A couple of students said that the bookstore at one campus was out of the books and another stated that the book cost $135 new and $95 used at the bookstore. At this point a young woman raised her hand and said that she had gone to eBay and purchased the book new and her total cost, including two day shipping, came to about $55.

So, this past fall I made it a point to go on line for my daughter's books. The Pima College bookstore (the URL is an on-line ordering system that works as follows – you go on to the site, enter your classes, click on the books you want to order on-line, pay by credit card and pick up your books at the campus bookstore of your choice . This on-line service offers a convenience but no break on price. To save money I now have my daughter visit the bookstore, note the title, author, edition and ISBN number of each required text, and then I do an on-line search for the vendor with the lowest price.

Where do you go to find textbooks on-line? One way is to go to Google, type textbooks and hit the search button – you will come up with thousands of places selling new and used textbooks (you can also look at the top of this page as Google's search engine has probably read this page and placed ads for textbook companies in the ad bar). In addition to sites selling books, I have seen sites that will search, at no cost to you, sales sites to find the lowest prices for you. When you get to a site selling books simply enter the book's ISBN number in the search box and it will bring up all of the offerings for the exact book you need (ISBN stands for International Standards Book Number and is an internationally recoginzed unique identifier for each title in print – each edition of each book has its own unique ten – and soon to be 13 – digit number). If you do not have an ISBN number for the book you can search by title and/or author but be careful to get the same edition as required for the class.

Last semester I searched and purchased from a number of different sites with good results. This semester I spent less time and limited my search to two sites Half.Com and Half.Com is a division of eBay and any searches on that site also include books on the eBay part of the site (NOTE: in the interest of full disclosure, I do sell some books, including some economics textbooks, on Half.Com and eBay, however, I do not have any for sale that are required for any of my courses). I searched each book on both sites and purchased the one that best suited my needs with the main criteria being price but I also considered factors like the seller's location, seller's reputation (both Amazon and Half.Com/eBay have customer ratings and comments for each seller) and the condition of the book. When you decide which book to purchase click on the "buy" button and proceed to the checkout. At this point if you are not already registered you have to register with the site and give them your credit card information. After the purchase you can go back and remove your credit card information or leave it in to expedite your next purchase. Because I have never had problems with either of these two sites, I often leave my credit card information on file unless I don't plan to buy again for a while. On other sites I am not that familiar with, I always remove my credit card information immediately after the sale but keep a record of my username and password for future reference. This semester I estimated that my daughter's books, if purchased new from the bookstore, would have cost me about $500 or more. With shipping, I ended up paying about $180 for books for five classes.

Why the big savings? Competition. As with many other products and services, the Internet has created a huge, world-wide, textbook market with numerous buyers and sellers. This is in contrast to the off-line market in which each college bookstore has a near monopoly on the local textbook market. The vast majority of textbook buyers are students attending the college where the bookstore is located and about the only place they can purchase the required texts are from the bookstore. Competition does exist between publishers as they compete to get professors to use their textbooks but this is very limited.* Under this system it is often difficult to reduce costs through economies of scale since the bookstore has to stock rather limited quantities of different books for numerous classes and once the registered students have purchased their books it is very difficult to sell the remainder by discounting the price since there is no one to purchase them and this involves extra storage costs (if they save the extra for the next semester) or shipping costs if they ship them back to the publisher. There is also some competition from used books as students sell their books to those taking the class the next semester – companies try minimize this by frequently updating the books and trying to get professors to use the latest edition but this frequent updating also adds to costs. As in any market of this nature, these higher costs are passed on to the buyers. Layered on top of this are the economic profits that the publishers and bookstores are able to obtain as a result of their near monopoly position.

The Internet, on the other hand, is not limited by the choices of individual professors. If a professor at one college decides to change the textbook for next semester, students in the current semester can now sell their used books to a student at another college. Meanwhile, students taking the class with the new book next semester are not limited to purchasing that book new from the bookstore as in the past but can go on-line and buy it used from somewhere else in the world. Similarly, when bookstores have a surplus of new books at the end of the semester they can cut the price significantly and sell them to enterprising students, staff or resale companies which can now resell them worldwide. Numerous opportunities now exist for arbitrage as college bookstores in certain areas have surplus stocks of books with zero demand due to the college changing texts while the books may be in great demand at other colleges where that particular book and edition are still in use. With a small investment, entrepreneurs can now buy these books at bargain prices and sell them at a higher price (but still considerably lower than those offered by the publishers) elsewhere with minimal transaction costs.

*NOTE: It is interesting to note that the Internet is changing this as well – professors used to be able to get textbooks for free by simply requesting them from the publisher. Publishers also used to send free copies of their books to professors unsolicited. Even I, as a part-time instructor, used to receive occasional unsolicited books from publishers for free. Now days professors can obtain copies of books and publishers still market extensively to professors but books, solicited and unsolicited, usually come with an invoice and a note to review the book and either return it or pay for it within thirty days.

Saturday, January 08, 2005

Opportunity Cost

Spring 05 Classes
Spring 05 Calendar

Usually when we think about the term costs we think of money. However, in economics we use the word opportunity costs to consider costs in a larger sense.

Normally when we purchase something we give up money in exchange for a good or service we want. But the true cost, or opportunity cost, is usually more than this. If my wife and I decide to go to a movie and pay $20 for tickets we are giving up not only something else that we could purchase with the $20 but also something else that we could have done with the time spent in the theater viewing the movie. It is the other thing that we could have brought with the money as well as the other thing that we could have done with the time that is the true, or opportunity cost. Everything we do involves a choice and when we make a choice the cost of that choice is the other things we could have had or done if we had not made this particular choice.

Now, as rational economic beings we choose that which will give us the greatest satisfaction at that particular moment. The opportunity cost of a particular choice is the next best alternative that you would have chosen. This is the thing you give up in order to obtain the thing you choose.

I may not agree with your choice and, later today or tomorrow you may regret having chosen option 'A' over option 'B'. But this does not invalidate the concept of opportunity cost. You choose what is most important to you at the time based upon the best information available and your desires at that moment. As we grow and mature we should be acquiring the experience and knowledge to enable us to make better decisions and look at choices from a broader perspective.

Advances in technology have done much to reduce opportunity costs but, in a world of unlimited wants and limited resources, opportunity cost still exists. As recently as two hundred years ago shoes (actually boots) were so expensive that most people, if they could afford boots at all, could afford no more than one pair and that pair had to last for years. In England at that time stealing a man's* boots was such a serious crime that the penalty was death (since walking was the main mode of transportation and most work was done outdoors, stealing a man's boots was the equivalent of taking away his ability to support himself and his family). Thanks to advances in technology, shoes today are so inexpensive that even the poorest people can usually afford more than one pair. But while an average person may be able to afford as many pairs of shoes as they want and still have plenty of money left over for other things, opportunity cost is still present. While money may not be the major constraint, space is. Where do you store the shoes? Despite the relative affluence of the average contemporary American, most of us can't afford mansions with unlimited rooms. So the more shoes one acquires and stores by stacking them from floor to ceiling in the closet the less space there is for clothes. With closet space as the scarce resource the opportunity cost of more shoes is fewer clothes.

*NOTE: I am not being sexist here by using the term man. In the era before day care, schools, household appliances, automobiles, etc. women had their hands full working at home and did not have as great a need for shoes. As a result they went barefoot or wore clogs or other cheap foot coverings of some kind.

Monday, January 03, 2005

Lean Manufacturing

My Spring 05 Classes
Course Calendar

The term "Lean Manufacturing" is becoming quite common now days in manufacturing circles. Not having a manufacturing background and seeing that most of the people involved in lean manufacturing projects were engineers, I was a little apprehensive a year ago when the topic was first brought up at the college's Center for Business Solutions where I work.

However, after attending an all morning workshop on lean manufacturing basics, I came away confident that this was well within my area of expertise. Basically, it is Economics 200 in action. Instead of "widgets" and a theoretical business, lean focuses on how to better utilize scarce resources to produce more of a real product at a lower cost. I not only felt very comfortable with lean manufacturing but discovered that, without knowing it, and 25 years before the term "lean manufacturing" was coined, I had been utilizing lean principles when I set up and ran an operation to automate mortgage loan document production at the savings and loan where I worked back in the 1970s.

Lean Manufacturing involves continually studying production processes within an organization with the objective of eliminating waste. Time is an area that is closely studied. Every step of a particular production process is closely studied to identify steps which consume production time but add no value to the final product. For instance, on a shop floor, tools are stored on one side of the room and the workbenches on the other. Every time a worker needs a new tool a trip has to be made across the room. Taking 30 seconds to walk across the room to change tools does not seem like much, but, if a worker has to change tools twice an hour during an eight hour day this adds up to eight minutes per day. This does not appear to be much.

However, if it takes four minutes to assemble the part being produced, the eight minutes lost to walking between the workbench and tool bin comes out to two fewer parts per day being produced. Again, this may not seem like much, but, multiply this times 200 employees and we have 400 additional units that could be produced each day. At four minutes per unit, each employee can produce 120 units in an eight hour day. Now, when multiplied by 200 employees, the eight minutes wasted by each as they walk back and forth to the tool bin is the equivalent of 3+ employees not working at all each day.

Assuming there are sufficient tools for each employee and that there is room for a full set of tools at each workbench, we can eliminate the wasted time. In this case, eliminating the wasted time is the same as hiring 3+ additional employees at zero pay. This would obviously have a very positive impact on the firm's bottom line.

In addition to time, lean manufacturing seeks to eliminate other forms of waste such as inefficient use of raw materials (i.e., using raw materials in a manner in which large amounts end up as scrap) and processes that result in large numbers of finished product having to be discarded due to poor quality.

American manufacturing has become so good at using lean processes that, coupled with our extensive use of capital, our workers have become the most productive in the world. True, American workers are the highest paid in the world but the value of the product they produce is also the highest in the world and this is how American manufacturers are able to remain profitable despite having to pay the highest wages in the world.

Sunday, January 02, 2005

Web Site and Calendar Now Available

Spring 05 Classes

I would like to announce the launching of my new website No Free Lunch for the class. This replaces previous sites which have outlived their usefulness. In the next few days I expect to have an XML feed to the website to display each day's blog entry directly on the web site.

In addition to the website I also have an on-line calendar with date information relating to my classes. Students will now be able to check this calendar for class dates, assignment due dates, optional meeting dates for the Telecourse students.

These two new tools, along with this blog, are additional resources to enhance the four courses that I am scheduled to teach this semester. All three are a work in progress and will be updated with new information regularly.

Bookmark these three sites now and check them regularly to get 24/7 answers to many of your questions.


No Free Lunch Web Site


Blockbuster Revisited

My Spring 05 Classes

A couple of days ago I wrote about how competition was forcing Blockbuster to drastically modify its late fee policy. I also commented that I had received a late fee notice from Blockbuster at the same time as I saw the article. I had apparently been late in returning a video in November (probably forgot about Blockbuster's noon deadline and dropped the video off on my way home from work in the evening) and Blockbuster was notifying me that, as a result, I had an outstanding "extended viewing" fee on my account which I was asked to clear by January 4th.

Well, today I took my son to get a haircut in the same plaza where the local Blockbuster is located and, while he was getting his haircut, I paid the fee and brought my Blockbuster account current. However, along with my credit card receipt I was given a coupon for one free rental which effectively refunded my money (ok, I can only spend it at Blockbuster, but, as a family of six, we patronize Blockbuster frequently so it won't go to waste).

This little episode is a demonstration of how profits work in a market economy. As an early and aggressive player in this market, Blockbuster generated significant economic profits. But these economic profits attracted competition with newer and more efficient business models (Netflix and Wal-Mart are the two biggest new entrents) and the competition began eating away at the economic profits driving prices down for all sellers in this monopolistically competative market.

My coupon is but one miscule piece of evidence of this evaporating of economic profits. According to the December 15th Wall Street Journal article I quoted in the December 29th blog entry, Blockbuster could have expected to collect between $250 and $300 million in late fees in 2005. These have now been waived and Blockbuster is now effectively rebating the late fees charged in the past two or three months and this will further cut into their revenues. Add to this the fact that people who rent more than three games (at about $6 each) or four movies (at about $4 each) per month now have the option of paying a flat fee of $17.49 per month for unlimited rentals by mail or $24.99 for unlimited store rentals and you can see why Blockbuster's economic profits are disappearing and their customer's consumer surplus is increasing.

Blockbuster is still a profitable, well run company and the video/DVD/game rental industry will continue to grow. But this industry is rapidly maturing into a stogy established insustry with normal profits and no economic profits to attract many investors looking for areas to start a new business.