Quirkonomicks.

Noble Prize - Fancy one?

2007-06-13T05:03:00.000-07:00

Fancy a quick million euros. Then simply solve one of the few remaining unsolved problems in economics:

* What is the proper size and scope of government? Where can government intervention improve on the market? Does a market failure necessarily mean that government intervention is warranted? Can intervention make things worse? If the government intervenes in a market, how should it intervene? To what extent is public ownership of assets and businesses warranted?

* The Great Depression. What truly caused the Great Depression? Did one single event cause it? Was the United States the cause? What set the stage for it? See also: possible Causes of the Great Depression

* The Equity premium puzzle. Can we explain the Equity Premium Puzzle? Why is it that observed average annual returns on stocks over the past century are higher, by approximately 6 percentage points, than returns on government bonds?

* Futures contract model. Can we create an equivalent of Black-Scholes for futures contract pricing?

* What is the microeconomic foundation of inflation? or How does inflation arise from individual agent decisions?.

* Is the money supply endogenous? Mainstream economics claims that it is; post-Keynesian economics claims that it is not.

* How does price formation occur? Why do some markets achieve Pareto efficiency?

* How much do Incentives really work? - This is more subtle. Come up with a quantifiable measure for adding incentives and make it standard for ever product/service and you're pretty much guaranteed to be the next economic Einstein.

Either way don't forget to send me a bit of your prize money when you win...Since I obviously inspired you to do so.

Steak and inflation sauce.

2007-05-31T04:31:00.000-07:00

Slate is running an interesting article that's very much in the guise of what I'm trying to do on this page.

Go read it! http://www.slate.com/id/2167201

excerpts:

"The financial results of these testosterone-filled cow palaces reveal much about several trends affecting the U.S. economy. First, they are a neat case study in the unexpected collateral effects of high energy prices. The high price of oil has spurred demand for ethanol, which in turn has boosted the price of corn."

Diminishing Marginal Utility, Beer and the Interweb.

2007-05-23T15:11:00.000-07:00

Every self respecting student of economics knows at least a little smidgen about marginal utility...

When we 'consume' a good or service we 'gain' something by doing so. This is expressed as our 'utility' gained from that very act of consumption. Now diminishing marginal utility is an interesting concept related to this. An individual's utility from consumption alters with the amount of a good that he or she consumes.

Being a student, I'll relate it in a particularly topical manner - Beers.
I drink one beer, and in doing so gain a certain satisfaction from it, the utility of consuming one beer is relatively high. Personally I'd probably quite enjoy another one and so I grab the attention of the barkeep and get myself another frosty one.
This one seems to go down particularly well and I experience a bigger utility from the second beer than that of the first. This cycle of a growing utility (- in this case quantified by how much I enjoyed the last beer and therefore how likely I am to order another) probably lasts up until around my fifth beer.

When Shakespeare penned the quote "one can have too much of a good thing" in As you like it; he probably had a whopping 16th century hangover.

Shakespeare can not begin to conceive how right he was. By this point the utility gained by consuming additional beers begins to reduce. Judgment becomes impaired and although I probably feel great I'm already well on the downward path to a hangover 5 centuries since Shakespeare first warned me. Any additional beers after 7 or 8 will give me very little utility at all. I'm sure whilst being completely trolleyed and being sick is generally quite funny in the right company, it's not pleasant upon reflection with a clear (non ale-bathed) mind. This is essentially the theory of diminishing marginal utility in all its glory. The more I drink the less I gain from doing so.

Graphically it's like this:

[click me and I get bigger]

The theory set aside, I began to start thinking about this in more depth. Whilst diminishing marginal utility is applicable to pretty much everything - people only want to watch the same film a certain number of times on dvd, smoke one cigarette on a smoking break or eat a certain number of big macs in one sitting. What does it NOT apply to?

And then it hit me, sort of. The internet surely is a good/service like any other. Therefore it should have a diminishing utility like that of any other. It seems however that a large proportion of people view time spent browsing the internet or using the internet to perform other actions ( gaming, emails, voip etc.) to have very little cost (i.e opportunity cost) and a 'slim to none' rate of diminishing marginal utility.

It appears thus, due to the vast scale and information within the net, the resource ( - or good if you like.) is simply too valuable to consumers that quantity consumed has no reduction in utility. This means our old pal Shakespeare has a flaw, there's an exception to his insightful judgment and I call for a footnote in every English literature students copy of "As you like it."

- "One can have too much of a good thing" - where 'good thing' does not = the internet.

Self proclaimed internet geeks can now relax, it's not their fault they sit at computers for endless hours on end. The marginal utility of doing so simply never declines enough to warrant stopping, it appears the only limiting factors are the 24 hour day and the fact we need to sleep at some point......