Economic Essentials

by astanhaus

Originally submitted for an Economic Literacy independent research project with Professor Christopher Ragan at McGill University.

Starring: my Beau, my father Bernie, The Godfather, extra-long twin bed sheets, a sandbox, and strategies to say, “I love you.”

Supply, Demand & Equilibrium

Everything in life is negotiable.

I learned the power of negotiation when I was a young’un–a freshman in university. I was having cell-phone troubles, and I was told I could either pay $200 for a new phone or drive 3 hrs in LA traffic in my rented-by-the-hour car to get one for free.

I solved this problem as I solved all problems in those days: I called my daddie, Bernie.

Within 5 minutes, I was out the door with a free, new phone in my purse.

I called Bernie back on my new phone and asked wide-eyed, “Bernie, what did you say?”

“I made him an offer he couldn’t refuse…”

“Bernie, you threatened his life from thousands of miles away?”

“No, just that our family would take our cellphone contracts to another company.”

And that’s how it’s done–negotiate like you’re ready to walk away.

It’s a give and take to reach the end of the negotiation–the equilibrium.

Suppliers want to maximize their profit, selling the most stuff for the highest prices. They take into account the cost of production and how their competition is faring.

I always demand the most bang for my buck, shop around, and wait it out for a good deal.

Since I’m at odds with suppliers, we do a dance till we are both pleased with the negotiated result. AKA the equilibrium.

Opportunity Cost

My action-packed schedule has me constantly in conflict resolution mode.

Usually the responsible choice is pretty clear. AKA stay in and get my beauty rest before my all-day strategic planning session.

But, what is a budding, hourly-paid career gal to do when an external networking event overlaps with my work hours?

Ugh, I have to pay for a cab there and is it really worth it to miss out on an hour of work (AKA $$)?

Well, will the networking event land me a higher paying job? One perhaps that doesn’t pay by the hour?

Ah, weighing opportunity costs. I don’t want to miss out on any opportunities. But I can’t be at two places at once. [add to to-do list: ask Man about hacking possibilities.] On top of transportation costs, there’s an opportunity cost to choosing one event or the other. I like this cost as tiny as possible. Meaning, I pick the best event pour moi!

Microeconomics vs. Macroeconomics

Ah the good old days, my last summer before university when I could buy like an almost-adult, but spend like a child. I set up my new life with extra-long twin bed sheets, monogrammed towels, an infinite amount of bubble gum pink hangers etc. All thanks to Bernie & Bertie’s parental support.

At a micro level, these extra special purchases shifted the allocation of resources in my family from my parents to moi. AKA B&B’s trip to Delray was a couple of days shorter than usual that year.

At a macro level, every freshman–regardless of height– bought extra-long twin bed sheets. Because of our demand, firms increased their productive capacity and raised total output of bed sheets. Major demand for all the other stuff that makes dorm rooms less dumpy had similar effects for the economy. Employment has risen as more and more Americans attend college and live in dorm rooms. And all the output–that is made in America–boosts our GDP.

Stocks vs. Flows

I’m always on the look out for a perfect carry-all. Something that goes over the shoulder, but also can be hand carried when my jacket is too fabulous to be rubbed by a shoulder strap.

Kate Spade’s “2 Park Avenue Beau Bag” is perfection. But the price tag is a bit imperfect.

I’m thinking of “investing” in it and owning it for the long haul. If I buy it, just this once, it will be a new addition to my closet’s capital stock.

As always, when making a value investment, I look at the potential pros and cons.

Pro: Beau conveniently and discreetly fits everything I would need for day & night.

Con: If I buy Beau, I will be committed to Beau, and because of lack of residual funds I will forgo all other suitable sacs.

[mind math…weighing opportunity costs]

I’m okay with that con. Beau is a classic piece.

Now, when value investing in stocks, I look at the capital stocks and flows of a company.

“Capital Stock” is the lingo that refers to the amount of buildings or equipment. Ideally, a company will continue to use these big ticket items for years to come. If a company is buying these big-time, they are confident about their business prospects. Also, sometimes called “Capital Assets.”

“Flow” is the jargon that can refer to the flow of services that come from a given stock of capital. A common use of this term is “cash flow.”

The one-time purchase of my Beau will be an essential piece of equipment, adding to my closet’s capital stock and it will cause a constant flow of compliments. Decision made! I’ve invested and have become a bag-holder!

Role of Government

If government did its job, there would not be The Godfather Trilogy. Thanks for being incompetent! Don’t ask me which one I like more, deciding between pt. 1 and pt. 2 is too painful.

Government is supposed to have a monopoly of violence, but if Sonny’s death is any indication…

Government is also suppose to enforce property rights, but the five families like their cut, and take things into their own hands if…

Now that we know what government is supposed to do and what happens when this doesn’t happen (Thanks for the visuals, Coppola!), let’s understand the dead-man debate over the role of government.

Adam Smith (author of The Wealth of Nations in 1776)  argued that government should have a monopoly of violence and protect its citizens. But, this manly man also believed in magic…the magic of Capitalism. An invisible (manicured) hand guides the market to the optimal allocation of resources. Governments need to be paws off. People do what’s best for them, specializing their skills and trade accordingly. Individuals, left alone in a sandbox, will achieve an [cough, “ever-elusive”] optimal equilibrium.

Karl Marx (author of The Communist Manifesto in 1848) believed that, even in a sandbox, there is a hierarchy. Karl would convert vulnerable workers to Commies. Adam’s Capitalism was just a phase, Karl claimed.  People would get pissed off when portions of the sandbox were restricted, especially when they are working so hard to grind rocks into sand and costs of machinery were eating into their salaries. Workers would use their pails as helmets, put their own paws up (à la Gaga), and abolish private property!

Neither Adam’s or Karl’s train of thought worked out in full. Instead, America (and most others too) is somewhere in the middle. Government claims to be paws off, but provides public goods and protects its citizens and…

Gains From Trade & Comparative Advantage

I specialize in collecting vintage jewelry. Literally, no stone is unturned when I go shopping at thrift shops, vintage stores, or estate sales.

Babe, my bestie, takes her consignment designer shoe shopping just as seriously.

Conveniently, we wear the same shoe size.

While we take our specialties seriously (AKA our comparative advantages), we occasionally trade when either I have a piece of jewelry that will match a pair of her shoes or vice versa.

We have David Ricardo to thank for connecting the dots and coining the term comparative advantage in the early 19th century. Pre-David, it was thought only absolute advantage existed.

I can shop consignment for designer shoes, but I’m just not as good as Babe, so I let her do the heavy lifting.

Canada likes to share its trees. America likes creating technology. America & Canada are besties (AKA trading partners) because they understand the gains from trade. They swap their special goodies, so American houses are made from Canadian lumber and Canadian factories use American technology.

My mommie, Bertie always told me I would be good at everything, but I would be better than everyone else at one thing. Mother knows best!

Game Theory

Saying “I Love You” is relationship dynamite. It can lead to an explosion of passion. Or the utterer could mortally wound her own relationship.

As Lady Gaga pointed out in LoveGame, “The story of us it always starts the same with a boy and a girl and a huh and a game! …A love game!”

I learned game theory to fully comprehend the pros and cons of professing my love.

If both profess, mazel tov!

If the lady professes and the gentleman does not reciprocate (I would say “or vice versa,” but I am unaware of that happening in the history of the universe), awkward…

If the three BIG words are not exchanged, safety zone!

But, it’s just so tempting to profess…think of the possibilities if he says “I love you, too”?!?

And that’s why love is a game.

Money as a Medium (and the Exchange Rate)

When I don’t have cash with me at a cash-only establishment, I make my eyes look really big, bat eyelashes, and get the waterworks going.

The man holding the hat that collects the $$ at the bluegrass night I frequent was not amused. It was an extra dry winter, so I pitched in my travel-sized hand cream. Never again would I forget cash.

Without money, I’m back to bartering. To get what I want, I have to offer exactly what the other person wants. It’s difficult to do.

Cash is a piece of paper. But I don’t doodle on it because that would ruin the value it represents. These pieces of paper are traded because the recipients know that they can trade it for whatever they want or need next.

Not all pieces of paper are created equal. Their different denominations clear up confusion and make the value a bit more precise. Plus, currencies differ by country (except for the euro zone and their euro).  Warning: mind math ahead.

When I had to venture to London for business, while there, I obviously had to parooze  Harrods, Topshop, and wherever Princess Catherine shops!

Before I embarked on some serious shopping, I needed to figure out how to make quick cognitive currency conversions.

One British Pound was equal to 1.5 US Dollars.

Meaning if…

a Topshop dress costs 80 pounds…1/2 of 80 is 40….80 + 40 is 120…or costs 120 US Dollars.

Currency conversions can be cumbersome, but one thousand times easier than finding the perfect bartering partner each time I want or need something.