Tag: microeconomics

Microeconomics and Credit Card Reward Points

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A lovely little article in the New York Times is worth a ponder, especially if you are a student of microeconomics:

There’s an undeniable feeling of excitement when you turn your daily credit card swipes at Starbucks into first-class airfare or a weekend jaunt to Costa Rica. Thanks to mobile banking and the ease of autopay, you can scrupulously avoid any additional costs by paying your monthly bill in full. Free flights and exclusive discounts abound.
Something for nothing, right?
Not exactly nothing. Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

https://www.nytimes.com/2023/03/04/opinion/credit-card-rewards-points-poor-interchange-fees.html

As you probably already know, one can “earn” reward points for spends on your credit card. You can then use these points to buy stuff, or earn cashbacks on these points, or spend them at partner stores. And there are other perks and benefits too. If you’ve travelled through an Indian airport, you might have seen the crowd waiting to get into an airport lounge – more often than not, access is tied to the kind of credit card you have in your wallet.

But remember, there is no such thing as a free lunch. You may not be paying for these perks as a credit card holder, but one of the first lessons of economics is that somebody, somewhere, is paying for it. So who is paying, in this case? As the last sentence in the excerpt makes clear, according to the article, that someone is the group of poor consumers.

Some background, based partially on the article in question, and partially on my own understanding of this space:

  1. Richer consumers are likely to spend more, but tend to not revolve much, if at all. To this group of consumers, a credit card is a way to get a (up to) 45 day interest free loan, with the added bonus of these reward points to boot. Remember, incentives matter – and these reward points are the carrot that is offered to people in order to get them to sign up.
  2. Dangling these reward points as a carrot makes business sense, for that allows a credit card company to sign up folks who will spend more via these credit cards. Credit card companies make money when people “revolve” – that is, when they spend using their credit cards, but do not pay up the entirety of their credit card bill on time. How much money do these companies make? Here, take a look.
  3. So consumers who take a credit card, spend a lot on it, and pay back the entirety of their credit card bill – these kinds of customers are actually a loss-making proposition for the credit card company.
  4. Consumers who spend a fair bit, find themselves unable to repay the entirety on time, and end up paying over months (if not years) – these customers are where the credit card companies earn their bread and butter (and jam and peanut butter, while they’re at it).
  5. Consumers who borrow a lot using their credit cards, and default on these loans – these are the very worst type of consumers for credit card companies. Risk departments in such firms exist to predict which consumers should be denied access to credit cards, and which of the existing customers are likely to default on their credit card loans.
  6. But broadly speaking, the NY Times article says that it is pt. 4 consumers (and pt. 5 consumers) who end up paying for the freebies that pt. 3 consumers enjoy. (but also see below, after this section)
  7. In addition, another way to make money for these credit card companies is to charge higher credit card processing charges to all consumers. This fee changes from country to country, but as a thumb-rule, assume it to be around 1-2% of each transaction. That’s not an exact estimate, but good enough for us over here. Rewards to specific folks, to be offset by diffusing the costs of offering these rewards across a much wider group, in other words. And note that merchants (who are charged these fees) will usually pass these fees on to the consumers. See here, for example.
  8. A 1-2% increase in price may not be the end of the world if your income is high enough – it is an inconvenience, not a crisis. But for low income earners, already on a tight budget, this price increase across all transactions can bite a fair bit.
  9. An out and out free market economist might say that this is fine, the market will work itself out. That is, if this 1-2% charge is an act of rent collection, new entrants in such a market will end up charging lower to no fees, and incumbents will be forced to respond by lowering their own fees. That’s econ 101, but life is more complicated than that.
  10. And that is a good first-pass answer, but as many people will tell you, markets don’t always work as designed or intended. Incumbents will go out of their way to prevent new entrants (through lobbying, through pricing, through R&D, and through a dozen different ways), which is why regulation is important.
  11. But will regulators do what they’re supposed to? What are their incentives? How can we make sure that regulation will be balanced between the interests of the incumbents, the new entrants, the potential entrants, and the customers? Hello, industrial organization, and hello, public choice.
  12. What is the role for government in all of this? In terms of participation (think UPI, for example, but note that this is a complicated story in its own right), in terms of regulation (both from a domestic and international financial markets perspective) and in terms of oversight?

All these points (and I hope you come up with more) are worth thinking about as a student. Remember, these points aren’t proven facts – they are a summary in part of the article an in part of my own reflections for having read the article. Discussions such as these are a great way to outline a research agenda – but that is when the job of a researcher begins. Can we convert these points into testable hypotheses? Can we get data to prove/disprove these hypotheses? Can that data then be used to reach a definitive conclusion? Can that conclusion be used to formulate policy, or start a business?

In terms of research about this topic, sample this from the conclusion of a paper on the topic: “While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete.”

But also from the very last paragraph of the same paper:

We conclude by documenting that the costs and benefits of credit card rewards are unequally distributed across geographies in the United States. Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low minority areas, thereby widening existing spatial disparities.

https://www.federalreserve.gov/econres/feds/files/2023007pap.pdf

And here’s the link to a directive from the RBI about the issuance of and conduct regarding credit and debit cards in India.

Homework: who (ultimately) pays for CRED from a distributional perspective? Whatever your answer, explain your reasoning, and either provide data to back up your arguments, or explain what kind of data you would need to research this question further.

Try discussing this question with your friends and your professors (including ChatGPT, and yes, you should be thinking of it as one of your professors) – it will be a great way to learn the nuances of microeconomics!

My thanks to Mihir Mahajan for suggesting this topic.

Commoditize Your Complements

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I wrote about a post written by Joel Spolsky last year, and one of the many positive externalities positive spillovers of writing on this blog has been the fact that I’ve gotten to know about Joel and his writing. It is a positive treasure trove, and well worth dipping into.

But the reason I’m writing about him today is because I originally meant to write a post on a recent Ben Thompson post (AI and the Big Five). While going over that article and taking notes, I came across a reference to an old article written by Joel:

Once again: demand for a product increases when the price of its complements decreases. In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest theoretically sustainable price would be the “commodity price” — the price that arises when you have a bunch of competitors offering indistinguishable goods. So, smart companies try to commoditize their products’ complements. If you can do this, demand for your product will increase and you will be able to charge more and make more.

https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/

I found parts of the write-up mysterious, because I’m not familiar with both the firms and the products that have been spoken about in it. Partly a function of I not knowing enough about the tech world, and partly a function of the article itself being quite old (Transmeta, Ximian, Gnome are examples, of you are wondering).

But the core insight from the article? Both spot on, and an excellent example of a TMKK in a into class about micro.

What is the core insight? A simple, almost throwaway line in micro classes:

All other things constant, the demand for a product will go up when the price of the complement goes down

And we’ve all gone through examples of how “the demand for tea will go up when the price of sugar comes down”. But consider this instead:

When IBM designed the PC architecture, they used off-the-shelf parts instead of custom parts, and they carefully documented the interfaces between the parts in the (revolutionary) IBM-PC Technical Reference Manual. Why? So that other manufacturers could join the party. As long as you match the interface, you can be used in PCs. IBM’s goal was to commoditize the add-in market, which is a complement of the PC market, and they did this quite successfully. Within a short time scrillions of companies sprung up offering memory cards, hard drives, graphics cards, printers, etc. Cheap add-ins meant more demand for PCs.

https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/

Why did this matter to Microsoft? That is, why would they want to ensure cheap add-ins (complements) for PC’s, so that the demand for PC’s (the product) go up? They didn’t actually manufacture the PC’s back then, so how were they profiting?

Microsoft’s goal was to commoditize the PC market. Very soon the PC itself was basically a commodity, with ever decreasing prices, consistently increasing power, and fierce margins that make it extremely hard to make a profit. The low prices, of course, increase demand. Increased demand for PCs meant increased demand for their complement, MS-DOS. All else being equal, the greater the demand for a product, the more money it makes for you. And that’s why Bill Gates can buy Sweden and you can’t.

https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/

As always, do read the rest of Joel’s write-up, please.

Homework:

  1. What examples can you think of where this lesson has been applied in a modern context? Software or otherwise.
  2. How can those of us in the education sector think about the applicability of this lesson?
  3. Industrial organization remains an underrated subject. Discuss.

What Am I Optimizing For on EFE in 2023?

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Six principles, three big picture questions, and three bonus questions.

Anybody who’s attended a principles class taught by me knows what is coming next. It is my deeply rooted conviction that almost every single problem/concept/idea in economics can become more relatable by simplifying it down to one out of these twelve things: six principles, three big picture questions and three bonus questions. If you get the hang of these twelve things, you can go a very long way in terms of both understanding what economics is about, and how economics can be used to make the world around you a slightly better place.

And while mastery over these twelve things will likely take a lifetime – and almost definitely more than that – familiarity with them isn’t so difficult. And my aim is to write blogposts – in one way or another, and as much as possible – centered around one of these twelve things.

Not just blogposts, but we’ll leave that for aother day. For today’s blogpost, a simple list of what these twelve things are.

First, the six principles:

  1. Incentives matter
  2. TINSTAAFL – There is no such thing as a free lunch
  3. Costs matter
  4. Trade matters
  5. Prices matter
  6. Externalities matter

If I’m teaching a class in a semester at a college, I would dearly like to spend as much time as possible in speaking about just these six principles. Different teachers the world over may have a slightly different list, but I would be surprised if there were to be no overlap at all between two different lists. We may define concepts within these principles slightly differently, we may disagree on some of the underlying mechanisms, but here’s a nice way to think about my list. I am more than willing to listen to arguments about what I really should be adding to my list, but you’ll have to do a lot of convincing to make me remove an item from this list.

These six principles really do define economics for me. They can be expanded upon in multiple ways, a million derivatives can be constructed, there are endless tangents that can be drawn, and the nuances for each can be separate books in their own right. But at it’s heart, these six principles do most of the weight-lifting when it comes to economics.

Next, the three big picture questions:

  1. What does the world look like?
  2. Why does it look the way it does?
  3. What can we do to make the world a better place?

I don’t much like the artificial divide of the subject into “micro” and “macro” economics, but if you like, you can think of the six principles as a way to think about an introduction to microeconomics, while these three questions are a way to get started on thinking about macroeconomics. Depending upon how you want to go about answering the third question, there is yet a further division that is possible, between short term macroeconomic fluctuations and long term growth theory. But we’ll get to that in a bit.

But you can’t really begin analyzing macroeconomics without having a sense of what the world looks like today. Which countries in the world are doing well today, and how do you define “doing well”? Which countries in the world are not developing as rapidy as one would have hoped for? A comparative analysis of what the world looks like is where the study of macroeconomics should start.

At which point, the second question comes into its own. Why is Afghanistan doing so poorly when compared to its peers (howsoever defined), or when compared to its neighbours? Is it because Afghanistan is a landlocked country? Are all landlocked countries poor? If not, why not? Is it because of natural resources in Afghanistan? Is it because of geo-politics? Is it because of colonization? Does religion have a role to play? The list of questions is nowhere near complete, and this is just one nation. We can go on and on like this for all nations – and multiple careers have been spent on answering only parts of one question for just one nation.

And then we come to question number three, the most vexatious question of them all. Just two little words in that sentence, but what a world of (intellectual) pain they bring forth into the world.

“What can we do to make the world a better place?”

Who is we? What form of government works best to make one’s own country a better place? Is the answer to this question always the same regardless of the stage of development? Is your answer based on ideals and hope, or on empiricism? For which part(s) of the world and in which time period?

Does the word better mean the same thing to all people? Are we in a better world when everybody has access to a washing machine? Or are we in a better world when we don’t generate more carbon emissions? Can we have both? If yes, how?

These three questions define macroeconomics for me. Most of what we do in big picture economics (a term that I prefer to macroeconomics, for reasons I’ll get into in a later blogpost) can be thought of using this framework.

There are many good things that have happened as a consequence of blogging regularly here on EFE. But one of the best things to have happened is that I’ve been able to come up with three additional questions – questions that I find myself asking ad nauseam, both to myself and of other people:

  1. What are you optimizing for?
  2. Relative to what?
  3. Over what horizon?

That first question, strictly speaking, isn’t really a question economics can answer. What you are optimizing for is a question that requires deep introspection, and the answer likely comes from either other domains, or from a place that will perhaps forever lie beyond the fartherest probes of academia. But I will say this much – it is impossible to proceed further in economic analysis of any kind, without clarity about the answer to this question.

The second question here really is just another way of saying opportunity costs. But it is surprising to see how easy it is to forget that opportunity costs are real. This is particularly true in the case of public policy, but “relative to what” is a question that more people need to ask of themselves (myself included).

And finally, that most problematic of all questions: time. Just when you think you’re done with intellectual wrestling, trying to answer that third question can often bring you all the way back to square one. Is your answer to the first two questions the same over all time horizons?

I could have optimized for playing (judge me all you like) Subway Surfers instead of writing this post, because I was optimizing for relaxing myself. Or that, at any rate, is the story I tell myself when I give in to temptation. That choice is the best for me (if at all) only in the very short run. That is, over a very short horizon. So is playing yet another round of Subway Surfers really the best thing that I can do? Back, as I said, to square one.

India can optimize for (extending PMGKAY/ reviving the old pension scheme / pick whichever topic makes you the most uncomfortable), and ask yourself why what India is optimizing for. Ask what the opportunity costs of doing so will be. And finally ask if your answer (whatever it may be) remains the same if you ask what is best for India over the course of the next two years. What about two decades? What about two centuries? Which is the best timeframe to use to answer this question, and whatever your answer, what are you optimizing for? Back, as I said, to square one!

In one way, this is exactly what I have been doing in any case these past six years – writing blogs about these topics. A little bit of circular logic is involved here, of course. If I say that this framework:

six principles | three big picture questions | three bonus questions

can be used to think about any topic in economics, maybe I say I’ve been writing about this because I now think about those blogposts that I have written using this framework.

Be that as it may, writing here on EFE has convinced me that this framework can be used to think about all questions in economics, regardless of whether you have been formally trained in the subject or otherwise. And my attempt, this year, is going to be to think about as many questions as I can, explicitly using this framework. Of course I’ll benefit, but hey, as the sixth principle reminds us, externalities matter. You’ll benefit too!

Or is it the other way round?

Consoles, Competition and Comprehension

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If you are studying microeconomics, whether in undergrad or postgrad courses, it can sometimes get a little too theoretical. Or that, at any rate, is how I used to feel about the more abstruse parts of advanced micro. And while memorizing the millionth derivation in order to regurgitate it in an examination, I would often wonder if there was any relevance of what I was attempting to study to the real world outside.

If you, today, as a student of micro share this opinion, let me ask you this: are you interested in video games? Are you living in fond hope that a PS5 will land up in your living room? Or are you figuring out ways to get XBox Pass?

If the answer to any of these questions is yes, I’m guessing that you like playing video games. Do you know how the industry started? Do you know what the Gang of Four was all about? Do you know how different business models in the industry originated? How they evolved and why, and with what consequences? Had you heard about the Great Video Game Crash of 1983? I knew a little bit (but not a lot) about the answers to all of these questions, save for the last.

But the reason I bring this up is because Ben Thompson has an exellent essay out on the evolution of the gaming industry, with a lovely recap of all of what happened, and why. You’ll learn about vertical and horizontal integration, lock-ins, attempts to create monopolies, attempts at preserving monopoloies, about how business models had to change to account for changing strategies, changing technologies and changing aspirations on part of creators, consumers and corporations. It’s head-spinning stuff!

It begins with a description of the world’s first video game (OXO, 1952, in case you were wondering) and ends with how the FTC (perhaps) doth take things too far with the Activision acquisition by Microsoft. And in the interim, it touches upon names that will evoke nostalgia among folks of a certain vintage, and curiosity among folks of a more recent vintage.

If you are a student struggling with micro but happen to love video games, this essay might motivate you to read more about the evolution of the video game industry, and understand micro better in the process.

If you are a teacher struggling with helping students fall in love with micro, consider reading and using this essay.

And a meta lesson: a great way to learn about microeconomics is to pick your industry of choice, and ask how it has evolved over time, and why. The answers to these questions is a great way to become a better student of economics.

If you’re looking for suggestions in this regard: music, television, movies, gaming, publishing, hospitality and sports (football, cricket and tennis would be great examples). And if I may offer one piece of contrarian and possibly heretical advice – begin with the industry and work your way to the textbook, rather than the other way around.

Microeconomics for all, by Paul Seabright

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For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.

https://www.project-syndicate.org/commentary/paul-seabright-criticizes-the-poverty-of-the-undergraduate-microeconomics-curriculum

Thus begins a short but hard hitting essay by Paul Seabright. Regular readers will know of him as the author of the magnificent “In The Company of Strangers“, but in today’s blogpost, we’re going to be speaking about the essay I just excerpted from. This essay was written back in 2013, but if anything, it rings even more true today.

Because what we teach in microeconomics has very little to do with reality, and that’s just the truth.

A typical course in micro will work its way through consumer theory, producer theory, markets, and then throw in a sprinkling of topics to round off an introductory course: a bit about externalities, a bit about asymmetry of information (and related topics) and maybe touch upon risk and intertemporal substitution.

But as Paul Seabright says, most of what goes on in research based in microeconomic theory is so much more than that. For example (and this is my point, not his), if you are a microeconomics faculty, will you be able to explain to your students during an introductory course what, exactly, was the seminal contribution of Hart and Holmstrom?

Here’s what I mean by that question: can you explain where, exactly, this fits in to what they’ve learnt thus far? Is this consumer theory? Producer theory? Information asymmetry? All of the above? And more? Motivating students to learn about their (Hart and Holmstrom’s) work ought to be the easiest thing in the world, given that most of them will be on the labor market soon, but I very much doubt if this comes up as a point of even cursory discussion in an intro micro course. (And this goes without saying, if I’m wrong about this, yay!)

Paul Seabright brings up a list of other topics besides the example I just mentioned: two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design.

In addition, he also brings up applications of microeconomic theory: antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation, and speaks about how in terms of both the topics and their applications, econ students are being under-served.

The whole point of learning economics (micro or macro, or anything else, for that matter) is to be able to apply what you’ve learnt to the real world. An education in economics should, in other words, help you see the world like an economist does. And that would mean that one should be able to appreciate the world for what what works within it, and one should be able to identify problems with the world that economic theory might help you solve.

Unfortunately, the point of a micro course, more often than not, is simply to be able to solve enough problems so that one can score well in the semester end examination.

Which reminds me: I don’t think they learn about Michael Spence’s work either!

This really deserves a separate post, what I’m about to say next. But if I had to distill my post down to its essence: there are two ways to teach economics.

  1. Now that we’ve finished going through the textbook, let’s try and figure out if certain things about the world become more understandable.
  2. Here’s what the world looks like, and here is how economic theory helps.

The latter approach, in my experience, is so much better.

On Starting Salaries

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I joined Genpact as a data analyst in the year 2006, fresh out of college. Genpact was one of the few firms that had visited our campus for recruitment that year, and I was lucky enough to be “placed” along with three other batchmates.

My starting salary? 3.75 lakh rupees, or INR 375,000/-.

I remember thinking how princely an amount this was back then, and I couldn’t for the life of me figure out how I could possibly spend whatever amount I got on a monthly basis. Of course, life very quickly taught me the same lesson that it has taught everybody else – so it goes.

But the reason I bring this up is because of a Finshots write-up that’s been shared with me a fair few times this past week:

₹3.6 lakhs
That was the typical salary paid out to a fresher in 2010 when they entered one of India’s top IT companies. Think — TCS, Infosys, HCL, and Wipro.
A decade later, they were still being paid roughly the same sum.
So technically, if you were to take into account inflation, freshers in 2020 were far worse than their counterparts back in 2010. And the salary hikes weren’t particularly enticing too.

https://finshots.in/archive/it-firms-great-resignation/

I’m not sure where they got the data from, but anecdotally, this sounds about right. I’ve been in charge of placements at the Gokhale Institute, where I work, for about four years now, and while we’ve managed to get firms on campus that pay substantially more, starting salaries for most firms at the entry level are at about this number, more or less.

Which, as the Finshots newsletter goes on to point out, is ridiculously low for 2022. And why might this be so?

Well, two ways to think about it. First, as the newsletter itself points out, it’s simple economics. There’s excess supply.

You see, India produces roughly 1.5 million engineering graduates every year. And IT firms hire around 200,000 people every year. This means the effective pool of applicants remains sizeable and IT companies continue to be spoilt for choice. Even others attributed it to cartelization, alleging that IT companies banded together to deliberately suppress salaries. But despite what you want to believe, the bottom line remains the same — Entry-level salaries simply did not budge a lot in the past decade and IT graduates were getting a bit angsty.

https://finshots.in/archive/it-firms-great-resignation/

It’s worth learning more about economics to help yourself understand what terms such as excess supply, homogenous goods, elasticity, cartelization, inefficient labor markets mean, because they help you understand why starting salaries are so low. Search for these terms online, on this blog, or begin with MRU videos, but help yourself by learning about these concepts if you are unfamiliar with them.

Or watch AIB videos!

If you ask me, do both. It’s a great way to learn econ theory and have a bit of fun.

But as the newsletter goes on to point out, things are changing, and they say this is because of three reasons: increased attrition, greater recruitment by start-ups and burnout from the pandemic. Each of three, I should add are inter-related, but I broadly agree with their explanation.

Average salaries are up, firms are paying more, and it’s a great time to be out there looking for a job. But, as the conclusion of the newsletter points out, it would seem that there is a recession looming on the horizon, and that may drag starting salaries back to square one.

How does one find out about the probability of a recession? Well, there’s lots of ways, but without being too meta, keep an eye out for the kind of questions that are being asked about the macroeconomic situation:

One data point doesn’t add up to much, I’ll admit, but there’s other ways to keep yourself abreast of the situation:

https://trends.google.com/trends/explore?q=recession&geo=IN

Or, once again, run searches online (this time for macroeconomics), or on this blog, or begin with MRU videos. Or all of the above, if you ask me.

But trust me on this: a good intuitive grasp of basic economics concepts goes a very long way indeed. And when it comes to wages, we all have skin in the game. (Read the book, if you haven’t already).

No?

Joel Spolsky on Camels and Rubber Duckies

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I spent two weeks in May teaching a bunch of extremely enthusiastic kids economics and statistics. When I say extremely, I am not exaggerating. Somebody said their raised hands in response to questions that were asked in class were akin to popcorn going off in a pressure cooker, and I assure you that this is not hyperbole.

And when I say kids, I’m not exaggerating either. The youngest was in the 8th grade or standard, and the oldest was just about to enter their tenth grade/standard. Anyways, a lot of fun was had, and I hope I get to do this again.

I taught the kids two different one week long courses. One was on economics, and the other was on statistics. But along with these two courses, there were lots of other courses on offer, and one of them happened to be on AI/ML, taught by the excellent Navin Kabra. People like Navin can single handedly present excellent arguments for remaining on Twitter, and I would strongly recommend that you follow him if you are on Twitter.

During one of the many excellent conversations I had with him, he brought up an essay, and asked me if I had read it. The title is “Camels and Rubber Duckies“, and I hadn’t read it. But with a title like that, how could I keep away from it?

It’s a wonderful read, and I would strongly encourage you to read it, no matter how good your microeconomics basics are. It is engagingly written, liberally sprinkled with oddball humor, and explains a lot of concepts in microeconomics without making the subject boring. And trust me, this is difficult to do.

Here are my notes for having read it:

  1. Follow along with a spreadsheet and try and run the simple exercises yourself.
  2. He actually uses the word Visicalc, which is a lovely little rabbit hole in its own right
  3. The old Excel charts generate so much nostalgia. I’d forgotten the dull as death grey backgrounds, and the horribly jarring pink and blue colors.
  4. The law of demand, the calculation of profits, the maximization of profits, the meaning of consumer surplus, segmentation, inelastic demand, coupons, opportunity costs – and best of all, real world problems that occur when it comes to pricing software, all have been wonderfully explained.
  5. Focus groups and market research are also explained intuitively
  6. I realize this is a post from 2004, but he talks of RSS feeds and RSS readers! I shall use this opportunity to once again lament the passing away of Google Reader, the best social networking site cum RSS reader there ever was.
  7. Besides writing about camels and rubber duckies to help explain economics, he’s also come up with some products you’ve heard of, such as Trello, or Stack Overflow. Joel Spolsky is a person you want to learn more about.

What is common to online calls from the UAE and football match broadcasts *in* England?

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I traveled to the UAE for work a coupe of times in 2018 and 2019. One of the most surprising things during both trips was the realization that online calls were banned in that country. So for example, calling my family back home in India over Whatsapp was not possible. Duo wouldn’t work, and neither would any other app (save for one weird app that I had never heard of before or since – Botim, I think it was called).

The pandemic meant that Zoom, Google Meet and MS Teams now work just fine (duh), but Whatsapp and FaceTime are still a strict no-no.

Why, you ask?

While Microsoft Teams, Zoom and Skype for businesses now enable remote work and learning, WhatsApp and Facetime audio and video calls are still banned, the official said. This means residents have to use the paid services provided by telecom operators in the country.

https://www.khaleejtimes.com/news/whatsapp-calls-in-uae-talks-to-lift-ban-continue

The key sentence is obviously the last one. The regulation is an attempt to get more people to use conventional (have we reached a stage where we ought to wonder if regular phone calls are still “conventional”?) methods, presumably to help those telecom companies recover their investments. That last bit is a surmise on my part, but hey, what else could possibly explain this?

But its not just the UAE, of course. Here’s England:

CRISTIANO RONALDO makes his long-awaited return to Manchester United this Saturday, in a match against Newcastle. Tens of thousands of fans will chant “Viva Ronaldo” from the stands of Old Trafford, but the match will not be televised live in Britain. Instead, fans not lucky enough to be in the stadium will have to turn up the radio or find an illicit online stream from a foreign broadcaster. The rest of the world can watch the game live. Why are British fans not allowed to?
Blame the “blackout rule”. On Saturdays only two matches in the Premier League, English football’s top flight, are shown live, at 12.30pm and 5.30pm.
The measure is supposed to encourage football fans to get off their sofas and support their local teams.

https://www.economist.com/the-economist-explains/2021/09/10/why-cant-english-fans-watch-ronaldos-return-on-tv

I have been watching EPL matches for the past two decades, but have been happily unaware of this rule. I’ve had friends and family both visit and stay in the US, but this rule never came up for discussion. Or at least, I have no memory of speaking/reading about this. But the similarity between the two things we have spoken about is striking, is it not?

In my introductory econ classes, I often speak about STD/ISD booth owners and how they effectively lost their business to those devices that you now carry about in your pockets.

https://upload.wikimedia.org/wikipedia/commons/6/6c/STD_ISD_PCO_India.jpg

I’m yet to meet a student who thinks that there ought to exist regulations that ban us from using our cellphones so as to protect the employment of STD/ISD booth owners.

As a certain French economist might have said, plus ça change, plus c’est la même chose.

No seriously, Macro *IS* Hard

AshishLeave a comment

It’s one of my favorite phrases while writing on EFE. And it is a favorite for a reason: it is true.

And today’s post is about an excellent essay by David Glasner, author of the excellent blog Uneasy Money.

I usually excerpt bits and blobs of whichever essay I am recommending to you, and I will get to that part eventually, but today, I want to spend some time in explaining why it is that I find macro so hard.

One, modeling a firm is hard enough. Trying to model an entire economy entails massive abstraction, and so whatever conclusions you reach are likely to be little more than informed guesses.

Two, time. A simple word, but with massive implications. You can call it what you like, but the basic simple point is that any project that lasts for more than a day is taking a bet on what the future is going to look like. And the uncertainty that is necessarily associated with the future means that your estimates are guaranteed to be wrong. Mostly correct if you’re lucky, somewhat off the mark if it is business as usual, and hopelessly off target if you’re unlucky.

Consider this from The Economist:

The dearth of chips is a consequence of the pandemic, which boosted demand from makers of electronic devices for those stuck at home during lockdowns. Car firms also underestimated the rapid pace of recovery this year. Expecting weak sales, in 2020 they pared back orders. Although carmakers spent $40bn or so on chips in 2019, that accounted for only a tenth of global demand, which puts them low in the semiconductor pecking order. This makes orders hard to reinstate.

https://www.economist.com/business/semiconductors-pose-an-unwelcome-roadblock-for-carmakers/21803287

Three, in my mind, used to be kind of related to two. Time also meant that much like your assumptions would eventually be wrong, so also would the assumptions of your suppliers and customers be wrong. And those assumptions being wrong would mean that all plans would need constant modification on an ongoing basis. Which makes the study of macroeconomics hard, but also endlessly interesting.

But David Glasner’s post raised a point that is well worth thinking about:

When contesting the presumed necessity for macroeconomics to be microeconomically founded, I’ve often used Marshall’s partial-equilibrium method as a point of reference. Though derived from underlying preference functions that are independent of prices, the demand curves of partial-equilibrium analysis presume that all product prices, except the price of the product under analysis, are held constant. Similarly, the supply curves are derived from individual firm marginal-cost curves whose geometric position or algebraic description depends critically on the prices of raw materials and factors of production used in the production process. But neither the prices of alternative products to be purchased by consumers nor the prices of raw materials and factors of production are given independently of the general-equilibrium solution of the whole system.
Thus, partial-equilibrium analysis, to be analytically defensible, requires a ceteris-paribus proviso. But to be analytically tenable, that proviso must posit an initial position of general equilibrium. Unless the analysis starts from a state of general equilibrium, the assumption that all prices but one remain constant can’t be maintained, the constancy of disequilibrium prices being a nonsensical assumption. (Emphasis added)

https://uneasymoney.com/2021/08/04/general-equilibrium-partial-equilibrium-and-costs/

That’s…a convenient assumption, at the very least, even for an economist.

It gets worse (or if you enjoy thinking about this sort of thing, better):

Unless general equilibrium obtains, prices need not equal costs, as measured by the quantities and prices of inputs used by firms to produce any product. Partial equilibrium analysis is possible only if carried out in the context of general equilibrium. Cost cannot be an independent determinant of prices, because cost is itself determined simultaneously along with all other prices.

https://uneasymoney.com/2021/08/04/general-equilibrium-partial-equilibrium-and-costs/

Towards the end of the post, David Glasner helps us understand why comparative-statics are extremely limited tools.

Very briefly (please do read the entire post),

1. the fact that you must begin in a state of disequilibrium,

2. plus the fact that the movement towards some (potential) equilibrium will take time,

3. and finally, the lack of a guarantee that changes in this dynamic system will move us towards equilibrium…

… imply that one should use partial-equilibrium analysis only when fully aware of its limitations.

As David Glasner reminds us, none of this is new or path-breaking, but as students of economics, it is helpful to remind ourselves that, well, macro is hard.

Help Me Understand This, Somebody…

Ashish3 Comments

A fellow Puneri citizen sent out this tweet yesterday:

It was hard not to be snarky, and I didn’t even bother trying to resist:

But in my day job, I try to be an economist, and so I have questions. Just two of them, and they’re fairly simple ones. Here they are:

  1. He (or SII) was free to set the price, correct? Free market economics: let the seller decide the price, and let the buyer decide if she wants to buy at that price.


    So the price now stands reduced by a whopping 25%. Does that mean that it was set too high in the first place?


    That is, let us assume that SII is able to increase capacity expansion at a price of 300 per dose. Also assume that it can make a normal or “super” profit at this price – then was 400 not too high?


    If we assume that he was going to earn an extra 100 rupees per vaccine sold, and that he was going to sell say 200 million vaccines to the states, that’s 200 million into 100 rupees.1

    I don’t want to do the math, but were we ok with at least that much “extra” money going into the Poonawalla coffers until yesterday?

    If yes, why?


  2. Unless, of course, that was not the case, and capacity expansion will suffer at a price of 300. A raise in the minimum wage will mean switched-off air-conditioning, correct? Well, in that case, is it not our moral duty to ask him to take the price back up to 400? Because if the opportunity cost of his philanthropy is reduced capacity expansion, isn’t that worse?

(By the way, all this is taking the assumption that SII “needs” the proceeds from the sale of this one vaccine alone to fund capacity expansion. That may or may not be true. And this also assumes that this is the only vaccine that SII will be producing and selling, which is obviously not true. Even in this “best-case” scenario, my questions hold up – if we do a full reckoning, they become even more important!)

If it is the first point above, us economists must explain why we think it is ok for those 100 rupees (per dose) to go into SII’s coffers.

If it is the latter, there ought to be a stream of op-eds beseeching Mr. Poonawalla to roll back his offer, for that would be truly philanthropic.

Which will it be?

And I know I said only two questions, but forgive me my greed, and let me ask one more: what is the definition of “transparent pricing”?

  1. Where do I get that number 200 million from? Who knows? I assumed that for the 960 million people in total who become/continue to be eligible on the 1st of May, he gets to sell only 200 million doses to the states. And yes, I am assuming only a single dose for these 200 million. Since nobody knows what the quantities are actually going to be, this is as reasonable an assumption as any other. If anything, this is a very conservative estimate. No?[↩]