Archive forOctober, 2016

Positive Externalities of a Feed Supplement for Cows

Feed supplement greatly reduces dairy cow methane emissions

A new feed supplement has been proven to reduce cows’ methane emissions by 30 percent. Indeed, the supplement suppresses the creation of the methane gas in the cows’ rumen, and therefore, decreases energy losses, previously dissipated through methane expulsion. The saved energy from methane production results in a weight gain and higher productivity for the cows.

This new feed supplement produces a positive externality; In addition to increases in cows’ weight gains, milk production, and reproduction, the supplement helps reduce production of methane, a major green house gas, in the environment.

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PetroChina Fall After Government Creates $40 Oil Floor

At the beginning of 2016, Bloomberg posted an article describing how one of China’s biggest refiners fell after a policy that would not let fuel prices fall in line with crude prices below $40/barrel. This caused Asia’s biggest refiner, Sinopec to fall 4.9%. The price of fuels won’t be adjusted as long as crude is under $40 a barrel and the profits from fuels sales below the $40 level will go to a fund to promote energy conservation and security, while also improving fuel quality. The reason for this price floor was to help lower vehicle pollution.

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“US new home sales unexpectedly rise in September”

The sales of homes in the US rose in September. The CNBC article claims that this signals an increase of demand for housing in the US. In our terms, this means that the demand curve for houses has shifted up and to the left. There are not enough houses though, because the supply curve is not as elastic as the demand curve. In effect, there are not quite enough houses being built to match the demand.

Article: http://www.cnbc.com/2016/10/26/new-home-sales-reported-for-september-2016.html

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Rising Oil Prices lead to Higher Gas Prices

During August of 2016, oil prices rose by three dollars, which caused the gas prices in southern states like Florida, Georgia, and Tennessee to increase by three to four cents per gallon. This was the first time gas prices rose in Florida in 62 days. Oil prices rose because the amount of crude oil supplied decreased in the second half of 2016. While there has been an overall decline in prices over the past two years, this was still a shock to see an overall increase of six cents in gasoline. In terms of supply and demand, this shock would cause of a shift in the supply curve. The curve would shift to the left because the quantity supplied decreased, which would lead to a larger equilibrium price. According to spokesman Mark Jenkins of The Auto Club group, “Gas price are likely to remain volatile through the rest of the month, but stay low through the rest of the year.” Luckily, gas prices have been and still will be in an overall decline.

http://www.news4jax.com/consumer/rising-price-of-oil-pushes-gas-prices-higher

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Top video game prices may increase in price

link: http://www.nbcnews.com/id/3078404/ns/technology_and_science-games/t/top-video-games-may-soon-cost-more/#.WA0Dw_orJPY

Article published by Tom Loftus for msnbc.com in June 2013

Constantly evolving development costs of video games are predicted to increase the price of top-sellers. There are a multitude of increasing costs that go into video game development – more complicated coding, more development team members, higher quality team members, etc. – that derive from the need to meet the capabilities of increasingly sophisticated gaming technology. These higher input costs lead to a decrease in supply (less quantity supplied and greater price willing to sell for).

Another concept that is presented is the “life cycle” model, which illustrates the price fluctuations of gaming consoles, which are complements to video games. A few years after a console’s initial release, when the development teams are able to shift to production of a new console with more sophisticated technology, the price of the initial console is significantly lowered. This is when over 50% of console sales occur. Thus, during this time, lowered sale prices result in a higher demand (greater quantity demanded and greater price willing to buy for).

The stated average cost of a Triple-A game (games with the highest development budgets and levels of promotion; expected to be high-quality bestsellers) is stated to be $49.99/game. These are the games that are expected to rake in over 50% of game sales. The decrease in supply and increase in demand should result in an unknown new equilibrium quantity and a greater equilibrium price, what is estimated to be closer to $60/game. However, game producers are not raising their prices because they believe that as long as the quantity demanded increases, then they’ll be able to sustain their market. Demand has been shown to increase considerably over the years as gaming grows into mainstream media and the market expands, so producers aren’t wrong in their assumption of increasing consumer demand. However, they are naïve in that they do not recognize that buyers would also be more than willing to pay a raised price for a higher-quality game, and that sustaining or lowering prices might signal to buyers that the game is of a lesser quality. The resistance to raise prices has resulted in a shortage, since quantity demanded is greater than quantity supplied.

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Indonesian Airline Price Floors

After years of Indonesian Airlines suffering from various accidents, the Jakarta Post came out with an article describing the Indonesian government’s recent debate to change price floors within their airline industries. But what do price floors have to do with the safety of Indonesian Airlines?

By installing price floors, governments make it illegal for products to be sold underneath the regulations. Price floors would create competition between airlines to offer passengers the best quality; by creating price floors within their airline system, Indonesia could be insuring safer and high quality carriers, resulting in less accidents. The current floor calls that airline fees must be within 40% of the already established price ceiling, but the CEO of Air Asia is calling for a 30% reduction of that minimum price.

Some Indonesian economists still argue that accidents will continue to occur despite the price floor, and that more extensive measures must be taken. But whether safety is completely insured or not, the floors would still prevent “predatory pricing” from the lower-end airlines. Regulating prices doesn’t always result in killing healthy competition, but the industry will continue to make their argument until the government makes a final decision.

 

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Example of demand and supply movement: Wool Price

The price of wool faced a decline since 1985 because of technology innovation that leads to a decrease in demand. The technology innovations are cotton and synthetic fabrics. More buyers shifted their demand in buying wool to buying cotton and synthetic fabrics, which benefited them in a better deal. The shift in the demand curve cause movement along the supply curve, and thus resulted in a lower price.

In 2016, the price of wool increased after 30 years of decline. This increase of price resulted from a harsh winter and less feed, which leads to a decrease in supply shifting the supply curve to the left. The shift in the supply curve cause movement along the demand curve, and thus resulted in a higher wool price.

Link: http://www.stuff.co.nz/business/farming/sheep/76146110/Wool-prices-on-the-riseFullSizeRender

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Increase in Chicken Price due to Genetic Change

A genetic defect in chickens led to a decrease in the amount of chicken eggs that were born healthily, thus causing a decrease in supply and a leftward shift of the supply curve. The most commonly used chicken for chicken production developed a change in its genetic makeup that led to an increase in chicken laying eggs that did not hatch. Because of this decrease in supply, the price for chicken products throughout the US increased. Producers could not afford to sell chickens at the old price because they were not able to produce as easily as before. This increased price caused a decrease in the quantity of chicken demanded by consumers. Consumers did not want as many chickens as before and most likely sought less expensive substitutes. An increase in the equilibrium price and decrease in the equilibrium quantity of chicken was due to the decrease in supply of chickens. http://time.com/2969926/chicken-prices/

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France to finalize carbon floor price mechanism plan next week

France is planning to put a price floor on carbon. France is still in the process of deciding if they should charge a coal run company a flat fee for emissions or put a flat tax on power facilitates. Initially, the price floor will be focused at coal run power plants. The purpose of imposing a price floor on carbon is to discourage the use of coal for electricity. The flat tax on the power facilities or the flat fee for emissions will make it more expensive to burn coal and therefore discourage the use of coal.

 

http://www.reuters.com/article/us-france-carbon-idUSKCN1271ZT

 

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Economics Nobel prize winners: theories explained

The Nobel prize in Economics this year went to Oliver Hart and Bengt Holmström for their research on contracts and corporations. While their work can be highly technical, one of our textbook authors, Tyler Cowen, explains some of their findings here. Some of their work explains how contracts can be well-designed. Other work by Holmström shows that in other cases, such as medical insurance deductions, “there isn’t a rigorous way to get this trade-off just right.”

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