60 Second Economist

We all know that voting is a democratic right.

After all The Universal Declaration of Human Rights recognises the integral role that transparent and open elections play in ensuring the fundamental right to participatory government. So why is it that some vote but not everyone?

Research shows that most economists don’t vote because voting introduces costs such as time, effort, lost productivity etc - with no real payoff except perhaps some sense of having exercised your democratic right or played a full part in society.

If you were to ask an average non-voter and why they don’t vote. The most common answer you’ll get is “my vote really wouldn’t make a difference”. The funny thing is they are absolutely right!

The odds that your vote will actually affect the outcome of a given election are very, very, very slim.

But people who do not vote are missing a very fundamental point when they give an answer like the one above; it demonstrates they are only thinking of personal benefits not the benefits to society. Imagine half the population had the same excuse of not voting. If after the elections had taken place the winning candidate got 50% of the votes. What this means is that only 25% of the whole population actually support the candidate who is leading the country or region. Is that democracy?

If voting gives you personal satisfaction and you get utility from it then by all means it makes micro-economic sense to go out there and cast your vote.

As the local/regional and mayoral elections are in town in Britain today make sure you do what you feel is right. It’s most important not to follow the crowd.

The Centre for Economics and Business Research (CEBR) said each bank holiday costs the UK in the region of £2.3 billion. They say that we lose £19bn per year from these “breaks”. If we didn’t have these holidays the GDP (Gross Domestic Product) of the UK would be £19bn more!

‘We have done some maths on this and about 45 per cent of the economy suffers, the offices, the factories, the building sites where people tend not to go to work on Bank Holiday”

~CEBR founder Douglas McWilliams

If this is the case surely we should cut down on the amount of Bank Holidasy we ahve in the UK or just rid of them. But apparently not- we should instead spread them out as people ‘would enjoy them a lot more’.

Its not just one think tank which seems to think this.

The Governor of the Bank of England, Mervyn King, warned that GDP in the second quarter of this year might shrink owing to the number of bank holidays. Lets face it we do have quite a few this year.

“This year’s extra bank holiday for the Diamond Jubilee means there are five in April, May and June outside Scotland, where Easter Monday is not a holiday.”

~BBC News

However compared to our trading partners & other developed economies we don’t have many Bank Holidays.

• Japan, South Korea 15
• Spain, Malta 14
• Portugal, Austria 13
• Greece, South Africa 12
• France, Italy, Brazil, New Zealand 11

Source: Mercer HR, December 2011

So is it time David and his mates at Number 10 had a rethink on the whole issue?

Valentines day has come and gone. Some of you are left heartbroken whilst others filled with joy. Whatever’s happened next time the 14th of Feb comes round make  sure to take a leaf out the 60 Second Economists book.

Valentines day is concerned with signalling-give out the right signals and you may impress the other half. Bear in mind though it doesn’t have to be gifts worth thousands of pounds. (Just those little touches that show you’ve gone the extra mile) Of course from an economics point of view the most efficient gift is cash but it seems some people get offended if you give them money.

If all fails or you’re not so confident in showing your love and affection in the usual ways, just grab a piece of paper & pen to draw it on a graph. Who says Economists can’t be romantics eh?

The rose is red, the violet’s blue The money is green The economy grew

Image courtesy of: http://fosslien.com/

Have you ever though about the economics of vouchers? Well here is a 60 second case study to get you thinking…

You can get restaurant vouchers for nearly everywhere now and Pizza Express (the example we will use) is no exception. With less than a minute to explain I will not go in to specifics about how much Pizza Express may make on each pizza/pasta but the sake of argument, let’s agree that it is not a lot! The margins are even smaller when people (and the majority now do) use vouchers.

• Companies don’t reduce their profit margins for fun and so here are the 3 reasons I believe Pizza Express et al use vouchers: - Get customers through the door. Once you are through the door they have the opportunity to impress you and make you a long term customer.
•  Drinks. This one is simple, people who go out for meals will always have a couple of drinks on average per person – margins on those are still good.
•  By giving you, the customer, a discount that increases your satisfaction with the meal you got from Pizza Express. As economists I’m sure you are all screaming ‘Marginal Utility’ at the screen and if you are not, it’s worth looking up. (If nothing else, at least you are potentially aware of a new concept?!). You are therefore more likely to go to Pizza Express again, in theory at least…

BUT, the question I am going to leave you with is this… how many of those who go to Pizza Express for the first time because they have a voucher, go back as full-paying customers in the future? (The minute is over… so go on treat yourself to a pizza (or not if you’re cynical), it is economics after all!)

Guest post by Will Roberts

We’ve all heard it the number 42 is “the answer to life the universe and everything”.

Whilst the number 42 has uses its uses in fields of Mathematics, Science, Technology, Astronomy & Religion- it seems not in Economics.

However in the world of Economics & Finance we have the 72 Rule. A very odd number (well mathematically its even). The rule of 72 is used to predict the doubling time of an investment.

We can also use it to predict the time required for an economy to double its GDP.

GDP =  Gross Domestic Product = The value of goods and services produced in an economy over a given period of time.

Here’s an example for you:

If you were to invest £10 with compounding interest at a rate of 8% per annum, the rule of 72 gives 72/8 = 9 years required for the investment to be worth £20.

Assume first, believe second, tackle the problem third.

A physicist, a chemist and an economist are stranded on an island, with nothing to eat.

A can of soup washes ashore.

The physicist says, “Lets smash the can open with a rock.”

The chemist says, “Lets build a fire and heat the can first.”

The economist says, “Lets assume that we have a can-opener…”

I couldn’t find the original source to attribute for this.

Economists haven’t adopted the practice of physicists and applied numbers to their laws, but if they did, the first law of economics would be that lump-sum transfers are more economically efficient than in-kind transfers. If you are going to give a gift to somebody, you should just give them the money. They will be a better judge of the best way to spend it.

If instead, you give them a specific good, then you make them worse off, unless you somehow miraculously know what the recipient would purchase if they received the money instead.

At Halloween, each house on a typical London block picks out one type of candy, and they give that exact same candy to everyone who shows up at the door.

It’s an economic nightmare!

Adapted from Kevin Hasset, Bloomberg

First Law:

The views of an economist remains constant unless someone else challenges it.

Second Law:

F=ma

R=qp Where R= Revenue, q=quantity demanded and p= price per unit.

Third Law:

For every economist, there exists an equal and opposite economist.

The nine friends surrounded the tenth friend and beat him up.

The next night, the tenth man didn’t show up for coffee. So the nine sat down and had their lattes without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them to pay even half of the tab! Too late, though, since their wealthy friend had no plans to return.

And that, ladies & gents, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction, all the while still getting stuck for most of the tax revenues.Tax them too much, attack them for being wealthy, and they just may not show up anymore.

In fact, they might go to other coffee shops where the atmosphere is somewhat friendlier and less demanding and where they can drink a latte for the same price everyone else pays and possibly with nicer friends.

Adapted from David R. Kamerschen, Ph.D., Professor of Economics, University of Georgia

Via Ivman Blague

(continued)

So, to be fair, the owner suggested reducing each of the six men’s bills by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
- The fifth , like the first four, now paid nothing (100% savings).
- The sixth now paid £2 instead of £3 (33%savings).
- The seventh now paid £5 instead of £7 (28%savings).
- The eighth now paid £9 instead of £12 (25% savings).
- The ninth now paid £14 instead of £18 (22% savings).
- The tenth now paid £49 instead of £59 (16% savings).

Each of the six was better off than before. And the first four continued to drink coffee for free. But once outside the shop, the friends began to compare their savings.

“I got only one pound out of the £20,” declared the sixth friend. He pointed to the tenth friend, “but he got £10!”

“Yeah, that’s right!” exclaimed the fifth. “I saved only one pound , too. It’s unfair that he got ten times more than me!”

“That’s true!!” shouted the seventh . “Why should he get £10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute!” yelled the first four in unison, “We didn’t get anything at all. The system exploits the poor!”

Sorry , thats enough for 60 seconds, come back next week to read the last part.

Adapted from David R. Kamerschen, Ph.D., Professor of Economics, University of Georgia

Via Ivman Blague

Every weekday ten friends go out for lattes. Each day the total bill for the ten  comes to £100. If they paid their bill the way we pay our taxes, it would go something like this:

- The first four friends (the poorest) would pay nothing.
- The fifth would pay £1.
- The sixth would pay £3.
- The seventh would pay £7.
- The eighth would pay £12.
- The ninth would pay £18.
- The tenth (the richest) would pay £59, enjoying the latte and his friends.

So, that’s what they decided to do. The ten friends had lattes every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily coffees by £20.”

Lattes for the ten now cost just £80. They could continue to enjoy their lattes and their time together, but for a lot less!

The group still wanted to continue to pay their bill the way we pay our taxes, so the first four friends were unaffected. They would still drink coffee for free.

But what about the other six - the paying customers? How could they divide the £20 windfall so that everyone would get their “fair share?”

They realised that £20 divided by six is £3.33. But if they subtracted that from everybody’s share, then the fifth friend and the sixth friend would each end up being paid to drink their coffee.

Sorry , thats enough for 60 seconds, come back tomorrow to read the rest.

Adapted from David R. Kamerschen, Ph.D., Professor of Economics, University of Georgia

Via Ivman Blague

Once, a boy starts spending more and more, at a point the satisfaction the girl was getting from the gifts gets diminished. And vice-versa. (Diminishing marginal returns)

By the way…

TPP= Total Physical Product

MPP= Marginal Physical Product

1. Increasing Returns - TPP increases at an increasing rate with increase in inputs (gifts and expensive dates).The MPP( i.e., the addition to the total output (benefit) from an extra unit of input) keeps on rising and reaches its highest.
2. Increasing at a decreasing rate -TPP increases at a slower rate and MPP starts falling.
3. Declining Returns- TPP starts declining, even after gifts, you are not getting what you want. This is the stage, when most of the clashes start as one starts expecting more from the partner and no one getting satisfied, ultimately the relationship falls apart.

Adapted from Amartya Bag.

What would have happened to a popular fiction series if instead of Hogwarts, J.K. Rowling had sent Harry Potter to the London School of Economics. So, with that in mind…….

“Harry Potter And The Sorcerers’ Lump Sum”
“Harry Potter And The Chamber Of Marginal Analysis”
“Harry Potter And The Prisoners’ Dilemma Of Azkaban”
“Harry Potter And The Coase Theorem Of Fire”
“Harry Potter And The Order Of The Invisible Hand”
“Harry Potter And The Half Blood Optimising Individual”
“Harry Potter And The Deathly Pareto Efficient Outcomes”

Thanks to BGI student David Rutherford for conjuring this one.

Some people don’t understand what economists do all day.

An economist is a man who states the obvious in terms of the incomprehensible.

Knopf, Alfred A.

But at least we can have a laugh at their expense.

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A mathematician, an accountant, and an economist apply for the same job. The interviewer calls in the mathematician and asks, “What do two plus two equal?” The mathemetician replies, “Four.” The interviewer asks, “Four, exactly?” The mathematician looks at the interviewer incredulously and says, “Yes, four, exactly.”

Then the interviewer calls in the accountant and asks the same question, “What do two plus two equal?” The accountant says, “On average, four — give or take ten percent, but on average, four.”

Then the interviewer calls in the economist and poses the same question, “What do two plus two equal?” The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, “What do you want it to equal?”

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A very big thank you to Ivman Blague for this insight.