10/1/15

What is present value?

The present value is the value in today's dollars of an asset, benefit, or cost that will occur in the future. Perhaps the easiest way to think of a present value is to ask yourself how much you would be willing to accept to sell your rights to a future asset.

For example, is you were to plant an orange tree today you make expect to get \$50 worth of oranges in the future. Since you have to wait for the oranges (and their \$50 value), the value in today's dollars will be less. If someone is patient and the time they have to wait for the oranges is small, then their willingness to accept amount (the present value) may be \$45 or \$40. If the person is impatient or has to wait a long period of time, then the willingness to accept amount (the present value) may be much lower approaching \$5 or so.

The present value of a future payoff should never be larger than the face value of the payoff. This is a result of the idea of "discounting" which means that people tend to prefer having resources now rather than in the future. For example, imagine you were given the choice between:

9/7/15

What is a price function?

Sometimes you will be asked to define a price function. When you receive such a question, it is probably in regards to a supply and demand graph, and you will be asked to graph said price function. The three components of a price function include: price (as you probably expected), an intercept, and quantity. It is also possible for a price function to include many other variables such as preferences, prices of related goods, income, number of buyers, etc. but this is for more complicated price functions (and upper division style classes).

A price function generally looks like:

The gift economy seems like a pretty straightforward concept, people giving gifts to each other. However, there are a bunch of subtleties involved in the gift giving culture. In its purest form, we look at gift giving as a transfer of property rights over objects. For example, if person A gives an apple to person B, we can assume that is the end of the story. No money changed hands, and person A has no expectation of reciprocation from person B. Person A is also assumed to gain no influence or other non-tangible benefits from their gift, other than perhaps a "warm glow" or happy feeling. In reality though, a gift giving economy cannot thrive without other ulterior motives attached to this giving.

8/18/15

Games for learning economics

Freeeconhelp.com is proud to present the following games to help you learn economics:

Economics island is a short "choose your own adventure" or "point and click adventure" type game that begins with you being stranded on an island. As you progress through time, you gather resources ultimately planning your escape. Along the way you learn about opportunity cost, PPFs, and other introductory vocabulary (typically good for the first 2 or 3 chapters in a standard text book). The game allows you to experience the economic principles firsthand, generally before you are introduced to the terminology. It is recommended as study guide, or perhaps for those who REALLY need to learn the material but are having a hard time with dry textbooks. There is also a bit of challenge to the game, in trying to leverage your economic knowledge into completing the game faster. The quicker you pick up the principles and use them, the higher the score you can attain. This game is available for play at Newgrounds.com at the above link, and available via google play: Economics Island App. Amazon users can download the game on Amazon at: Economics Island Amazon App.

8/15/15

The effect of taxes on supply and demand

One form of government intervention is the introduction of taxes. Taxes are typically introduced to increase government revenue, but they also have the effect of raising the cost of goods and services to the consumer. Because of the increased cost, we generally see a reduction in the quantity of goods and services produced and consumed after the introduction of taxes. A common form of tax is a sales tax, which is added on to the price of a product and paid by the consumer. Another common type of tax is a VAT (value added tax) which is paid by the producer along their production chain.

Supply side externalities

Externalities occur whenever a third party not directly involved in a transaction is affected by the transaction. These effects are external to market being studied, which is why they are called externalities. The most common example of a supply side --or firm-- externality is pollution. When a factory in California produces hot sauce for consumers in Florida, residents near the factory in California are affected by the dirty air or water even though they did not purchase the product. Because they were not involved in the transaction, their "cost" of dealing with the pollution may be ignored.

Demand side externalities

Externalities can be either positive or negative. They occur when a third party not directly involved in a transaction is affected by the transaction. For example, when someone decides to buy cigarettes and smoke them, they purchase the cigarettes from a firm (which incurs a cost and makes a profit) and then smokes them (enjoying the leisure associated with cigarette smoking). However, anyone near the smoker incurs the cost of having to breath/smell/see the smoke (which may be quite high if they are allergic). This cost to the third party occurs outside of the traditional supply and demand framework, which is why it is called an externality. Identification of the externality allows us to separate the private marginal benefit of an action vs. the social marginal benefit.