Saturday, June 30, 2012

Congratulations PA College graduates!

Good morning economists! I would like to take this opportunity to congratulate the graduates of PA College. It was a memorable ceremony last night and it was a deserving conclusion to your efforts these past four years. I wish you all the best for the future and I am confident that you will make yourselves proud.

As for the rest of us, I wish us all a nice weekend!

Friday, June 29, 2012

So you want to buy a fake Louis Vuitton?

Good morning economists! After a rather lengthy discussion with colleagues and loved ones, today we will talk about the phenomenon of people buying fake designer pieces. Have you ever seen someone holding a designer bag that you or your friends deemed to be fake?

The rise of the "fakes" market is a fact and I will admit, it is flourishing in times of recession. People buy fake to satisfy their personal need of owning designer products. But what are the factors that determine this need and should people even consider buying designer fakes?

For the purposes of this discussion, I will employ game theory. In economics we consider that for every action there is a reaction with a perceived payoff (enjoyment). In the case of fakes the reaction is the perception of society about the person carrying the fake designer handbag. Let us take things from the beginning.

Two dimensions will be discussed today. The first dimension is the human need to purchase a fake handbag.This need can be broken down in two factors: taste and showing off. The factor of taste is very subjective and can differ dramatically based on the individual. There are people that will want to buy a fake purely for functional purposes and do not care about showing off. This factor escapes the purpose of this post so I will not discuss it any further.

Showing off on the other hand, is a different story. This factor represents the people who hold fakes with the hope of capturing attention and admiration from the people around them. They believe that the fake can add to their social status.



The second dimension to determine the purchase of a fake is social status. Social status can be divided in two broad categories: high and low. People with high social status are the rich.These are the people who can afford both originals and fakes. People with low social status are the relatively poor. These are the people who can afford fakes and perhaps, after lengthy savings, they may be able to afford an original.

For the purposes of this discussion I will assume that the proportion of people in society who can tell the fake from an original is extremely small and cannot affect the social payoff. 


Factors (Social Status, Need to buy)
Taste
Showing off
High

100
Low

-100

Consider for a moment the table above. The numbers under the showing off column represent the perceived social utility (enjoyment) for purchasing a fake. In other words the numbers show how society will accept the purchase. Afterall, the initial reason for the purchase of the fake is showing off.

When high status people buy fakes, society reacts by deeming the fakes to be originals. This is because society judges people based on past experience and social status. Even a fake will add to the status of the wealthy because society will reject the idea of the rich purchasing a fake. (This is afterall the reason for the scandal with wealthy ladies purchasing fakes in Nicosia three months ago).

Unfortunately, lower status people will be judged harshly by society. Even when an original designer piece is bought, society will deem it to be a fake. This is because raising one's social status is extremely difficult. Notice the negative perceived utility (or disutility) from the table above. This arises from the fact that no matter original or fake, society will be unwilling to accept a change of status. Gossips will be flying left and right about how fake the designer piece is, even though it may, in fact, be an original.

Have you heard the saying it is not the clothes that make the person, but rather the person that makes the clothes?

The outcome of this discussion is that in general the lower status people should avoid buying fakes for the purpose of showing off since they are judged more harshly than the higher status people. Sad, but true. A reminder that purchasing a fake because of functionality or other purpose that involves personal tastes is an entirely different story that will be discussed in a future post.

So next time you are considering purchasing a fake, think twice! 

Have a high utility day!


Thursday, June 28, 2012

Welcome to Everyday Economics!

Dear fellow economist,

Thank you for visiting the Everyday Economist website. After several discussions I had the last couple of days with some colleagues and subscribers, I have decided to write a post to clarify the purpose of the Everyday Economist.

I am a firm believer of economic theories and how these are used to solve everyday problems. Economics is not limited to the study of money. Far from it. Money is only one example of a limited resource. Others include raw materials, the workforce, land, capital and time. Economics studies the decisions which involve these limited resources.

Deep down, there is an economist in everyone of us. Subconsciously we use economic theories every day and every time we need to decide on a specific action. Like psychology and sociology as well as a number of other sciences, economics seeks to explain human behavior no matter how unrelated that is to money or to economics as most of the people perceive the word.

Economics is all around us. In these difficult times, we cannot afford not to listen to our inner economist. For this reason, the Everyday Economist blog was set up.

There are in total, two blogs that run concurrently. The first blog is the one you are visiting right now. Please feel free to subscribe to this blog or follow by email (on the right). This blog is updated daily when possible or at least three times a week.

The second blog is related to macroeconomic events and can be found at:  http://blogs.angloinfo.com/the-everyday-economist/

This is my attempt to critically evaluate economic policy in Cyprus. Anglo Info is one of the most successful websites worldwide and it is a privilege to be writing for them.

I hope that you will find the information here useful. Keep checking back for updates and soon to come free giveaways!

Keep reading and have a high utility day!

Dr. Constantinos Charalambous
Assistant Professor of Economics
Head, Department of Research and Development
PA College

Wednesday, June 27, 2012

Spending money to keep up with your neighbor? Stop NOW!

Good morning economists! Have you ever been in a village or town where you can see the "whatever you can do, I can do better" syndrome? Huge houses left and right, each trying to claim the title of the best house in the neighborhood. Yes you have!

Today we will discuss the need of people to keep up with their neighbors. Has your neighbor bought the latest model High Definition television and has shamelessly demonstrated its potential by watching the Euro 2012 matches on his veranda? Do you also feel the need to purchase the bigger screen model? Well DON'T.

Keeping up with your neighbors is an unhealthy sport. Think back to when you were a child and you were playing with your friends. You admired some of the games that they had, even though truth be told, you might have had better and more expensive games than them. It seems that this sociological need to be better than the people around you has followed you even in an older age.

The problem with keeping up with your neighbors, the Joneses as the Americans call them, is that is costing you money and effort that could be spent more wisely.

Think about the satisfaction you will get if you manage to match and actually beat your neighbor in the eyes of the people around you. Will they respect you more? Will they seek your advise or invite you to parties because you own the largest screen TV on the block? Very doubtful.

As consumers, we tend to place great weight on what other people may think in our decision processes. This weight can throw our expected future utility out of balance and cause us to take the wrong decisions. If you believe that having the largest house in the neighborhood will make you socially acceptable, you may even spend the last Euro (or Dollar) that you have in building that house. Chances are that when the recession hit, a lot of people lost their houses because they overextended themselves, perhaps due to the neighbor syndrome.

So the next time you consider a purchase as a way of keeping up, STOP. Think twice, sleep over it if you have to. You will find that once the primary urge subsides, you will take the right decision.

Have a high utility day!


Tuesday, June 26, 2012

In simple words, what is a Recession and who is the Troika?

Good morning economists! We have all felt the impact of the current recession, each one of us at a different level. We hear the words "recession" and "troika" thrown left and right but believe me only a few know their meaning. We have felt the recession, but what is it?

A recession is when production in a country decreases for more than 6 months. It is in other words a prolonged condition. Because of decreased production, employment also decreases and more people are left without work. As a result, households have less money and thus they consume less goods and services which in turn causes the firms to produce even less. This cycle continues for an unspecified period of time.



There are four ways to combat a recession. The first, proposed by John Maynard Keynes, is to use the government budget to lift the economy. This can be done by increasing government spending and/or reduce taxes. The second way is targeting supply and the argument is that reducing or abolishing corporate tax can cause firms to produce more and hire more people. The third way is to decrease interest rates, so that borrowing and investment increase thus having a positive impact on production. Finally, the fourth way is to do nothing. Allow the economy to balance the markets itself and get out of the recession on its own.

The problem with the current recession is that governments cannot react by using any of the tools described above. Most of the world governments already have a budget deficit, meaning that they spend more than what they receive as income. In fact, they have been borrowing money for some time now. So they find it impossible to decrease taxes as this would immediately decrease their income which is needed to pay off their debts. Lowering interest rates may be a solution, however, investors have lost confidence in the financial system and banks face liquidity problems. Simply put, there is not enough money to lend!



This is where the Troika comes in. Troika comes from the Russian word three. Three entities that have the responsibility to monitor the economies of countries that ask for monetary help from the European Union. These are the European Commission, The European Central Bank and the International Monetary Fund.

Troika's main aim is to impose strict economic policies for the country that requests assistance, by cutting government spending, increasing taxes and reinforcing the financial system. The problem, however, is that these policies push the country into a more severe recession in the short run because production declines even more due to a further decrease in consumption and the effects are usually felt by the lower income groups.

Have a nice utility day!




Monday, June 25, 2012

Things are not always what they look like (Funny Video)

Good morning economists! Have you ever bought an item that was advertised as performing a particular task only to be disappointed? Let me tell you, I used to consume large quantities of the red bull energy drink when I was younger but, darn it, I never grew wings! Watch this short video and you will understand:


Our decisions are based on several factors that can be classified in one of two broad categories: retrospective and prospective. Retrospective factors are recollections from the past, reminders about how much we enjoy or dislike something, in other words our tastes. Prospective factors are our expectations of the results from performing a particular action. If we expect to receive enjoyment from a good or service then we will consider purchasing it. We would not even go anywhere near a product that would cause discomfort.

The purpose of marketing campaigns is to confuse the prospective decision factors of the consumer. They promise a high level of expected utility that may be realized (in the case of a consumer who is satisfied with a purchase) or remain unattainable (for consumers who are finally disappointed with the product). 

The best way to shield ourselves is to obtain as much information about the product or service we are considering to purchase. Gathering information will increase the probability of avoiding disappointment and save us money in the process.

Have a high utility day!




Why do people get angry? (Video)

Have you considered the factors that make you feel angry? Some of these may be long term. Some, may be instantaneous. You may loose control from one moment to the next and start behaving like a crazy person. Watch the following video from an office security camera:


This employee suddenly feels a sense of frustration from not being able to complete his assigned work. He retaliates by beating on the machine in a way that looks....well, crazy! But consider what is happening to his utility (or enjoyment) when the machine initially fails. He witnesses an initial disutility (or a sense of frustration). He does not react immediately. What really pushes him over the top is the toner accident which causes a further disutility, this time at an unacceptable level.

His exertion of brute force by beating on the machine is his way to increase his utility level back to acceptable levels. He obtains a sense of satisfaction from the particular action. Consider another example:


Here the cycle repeats itself but now the anger is driven towards a lawn mower. Remember, anger is just the feeling you get when your utility drops to unacceptable levels which differ from person to person.

Did you get angry today?

Sunday, June 24, 2012

Two Nobel price winners try to save the world!

Good morning all and have a nice week. This past Thursday, I had the privilege to attend an event organised by the bank of Cyprus. Professors Prescott and Pissarides, both Nobel prize winners delivered talks about the causes of the recession and possible solutions. I am actually surprised that the event did not gain the attention it deserved in the media. Perhaps, I can start setting things right with this blog entry.

The event was introduced by a representative of the bank of Cyprus. I was quite surprised to hear him talk about the alleged falsification of economic theories as the cause of the recession. I am afraid that the statement was misguided. In fact I could not disagree more.

Professor Prescott was the first to take the podium. He shocked everyone in the crowd when he said that where the European Union is a success, the Euro is actually a failure!! He argued that the new entrants in the EU are catching up to the original founders with respect to production and GDP. This means that they are producing relatively more than the more developed countries. He explained that the cause of the recession is the ageing population and the lack of available places to save.



The ageing population means that people continue to work well after retirement and as a result this causes unemployment in the younger age groups. While I agree with the problems created by the ageing population, I do not consider this to be the cause of the crisis. The problem of the ageing population existed well before the recession and will most likely persist after the recession ends. I will comment on this further in my recommendations.

Prescott also mentioned the lack of good strong financial markets to accommodate savings. Forms of savings are business equity and government debt. But more public debt is not the option because governments are not able to honor large debts.



Prescott finally proposes a solution to reform the tax and finance systems. His argument is based in getting rid of capital income tax. This will cause investment to rise. Also he proposes for the government to sell capital to the private sector and then leasing it back.

Financial crises are symptoms not a sign of bad economic times. Prescott believes that macro theories work contingent that several conditions are met.



Professor Pissarides recognised the cause of the recession to be the collapse of the financial system beginning with the failure of the Lehman brothers. In a sense he agreed that there is a lack of good places to save and identified the problem of the ageing population.



He argued that the tourism sector in Cyprus is not going to develop further and that the only thing Cyprus can do is increase the quality of service. Development will occur in the health and financial sectors and this is where the government needs to focus.

Finally he said that abolishing the capital income tax is not politically possible because this will cause a redistribution of income where the rich will get richer. Restructuring the economy with the entrance of private investors is a good solution for the long run however it will not have any short term effects.

Having heard both arguments and recommendations I will respectfully put forth my own. I do not believe that one person alone holds the answer to the problem. For me, it is no secret that I am in favour of restructuring the economy. This was my recommendation in a previous post.

I do not consider the Euro to be a failure. Actually I do not think it is possible to differentiate between the European Union and the Euro as they both represent the will of the member states towards a unified economic entity. The Euro can still exist even if decentralization occurs.  

I consider the failure of the financial system to be the cause of the recession. This is mostly because of negative speculation and lack of investments. I propose to take immediate measures to gain investor confidence by insuring bank deposits and decreasing interest rates to encourage investments. Further, I am in favour of abolishing the capital income tax as it was proposed by Prescott. Even though this will lead to an income redistribution in favour of the rich, we must not loose scope as to who actually invests. Abolishing capital income tax will undoubtedly lead to an increase in investment.

I also propose as a long term solution to proceed with the restructuring of the economy as soon as possible. This will have several advantages in the future and will deter future recessions of this magnitude. The restructuring should invite the private sector to take on the role of public service provider. I do believe that a combination of the proposals we heard on Thursday can go a long way to help the economy.

Have a high utility day.

Friday, June 22, 2012

Coming up on Monday: Can two Nobel prize economists save the world?

Good morning all. I recently attended presentations from two Nobel prize winning economists, Professor Christopher Pissarides and Professor Edward Prescott. They each tried to identify the problem for the current recession and proposed several solutions. On Monday, I will provide a review of their arguments and critically evaluate their solutions. Can two Nobel prize economists save the world?

Meanwhile, you can visit my Anglo Info blog to learn why economics never fails.

Have a nice weekend!

Do you really need to show off when you own a Lamborghini?

Excessive show off can be bad for your health and wallet. Notice how happy the crash makes the people who filmed the video. This is what we call "being happy at somebody else's misery".

Drive safe!

Thursday, June 21, 2012

Why do people show off?

Good morning all! Yesterday, I stopped for petrol in a centrally located station in Nicosia. Suddenly I heard loud music when I turned around I saw a gentleman in his 40s driving a Porsche Cayenne. He stopped at the pump right next to my car and told the attendant to pump 5 Euros worth of gas!. I found this to be both funny and sad at the same time because the 5 Euros worth of gas would just be enough to take this person home. Why do we feel the need to show off? I remembered Hyacinth and Richard from the show "Keeping up Appearances". For those of you that do not remember take a look at the video below.

Hyacinth was a person that always had to show off to the people around her. She even considered buying a Rolls Royce, a car that her family could not afford, just for showing off. Now, given, there are wealthy individuals in the world that would like to project their status so they surround themselves with expensive items. I will not judge that. But why would someone go out of his way to show off?

Psychologists explain showing off as a sign of inferiority or low self esteem. In economics, we can explain this phenomenon as a reaction to a long term factor which causes disutility or discomfort. In a previous article I explained the need for people to shop when they feel bad. This was the short term reaction to a feeling of discomfort.

When the problem is long term however, people deal with this disutility by taking long term actions, for example, buying an expensive car like in the case of Hyacinth. What was Hyacinth's source of disutility or discomfort? Her family (take a look at the short video below).

She constantly felt the need to balance her long term utility by going to extremes in order to show off to the world. Is your utility level balanced?

Have a high utility day!

The happiest DJ on earth illustrates the concept of utility in economics!

This is it folks! Watch the video and you will understand. Utility is the total enjoyment a person gets from performing an action. Can you guess how much utility this person is getting?

Wednesday, June 20, 2012

Why do people commit crimes?

Good morning everyone! I was talking to a friend the other day about the surge of crime that is mainly attributed to the current recession. During the discussion, I asked the hypothetical question of whether crime would exist if we somehow managed to perfect the law enforcement agency and all criminals were caught on the spot. My friend, a psychologist in profession, responded that criminals may feel the unbeatable need to break the law so logically, crime would still exist.

This got me thinking about the assumption of the rational agent in economics. In our discipline, we economists assume that all people are rational, that is, they take the rational decisions based on the information that they have available. So how can we explain such behavior as crimes of passion or other irrational behavior?

The key here is irrationality. People are irrational when they behave outside the norm, they behave outside what is generally considered acceptable behavior. Economics, goes one step further to investigate the reasons of this behavior. What was the person thinking at the time? What was his expected utility level and what was he trying to achieve?

A thief for example, may be willing to take the chance of getting caught in order to enjoy some great utility from the lute he stole in the future. In general, criminals, underestimate their chances of getting caught and they thus overestimate their expected utility level or enjoyment in the future. But remember my initial question. If the criminals knew that they would get caught would they still do the crime?

Economics answers this question by making use of the notion of utility or enjoyment. There is no question that if such a condition held, crimes would greatly decline, especially the crimes that promise future utility, as this, would no longer be an option. What would cause people to still exhibit criminal behavior in that case? My friend already provided the answer. Their unbeatable need. This unbeatable need, arises from the expected utility and disutility from doing the crime.

At the time of the illegal action the criminal gets a utility surge, the unbeatable need, which overwhelms the expected future disutility that will arise from being caught and being thrown to jail. This is the answer. For this reason it will be impossible to live in a crime free society. The promise of a crime free world is an imaginary one because criminals will always consider the benefits of committing the crime to outweigh the costs.

Yes, criminals may regret their actions in the future when they are apprehended, but this is because their expected disutility is actually realized from being caught. The regret stems from the fact that they realize that they overestimated their future enjoyment.

Stay rational and have a high utility day!

Tuesday, June 19, 2012

Dear politicians, I blame you!

Good morning everyone. I have watched with great interest the press wars between the former governor of the Central Bank of Cyprus and the government spokesman. I was initially planning to take on the topic of why people commit crimes in today's blog, but I cannot in good conscience leave yesterday's events without comment. This post was written in parallel to another over at Anglo Info forum, that will go live later today.

Dear Mr. spokesman, are you blaming the former governor for the current condition of the Cypriot economy? Do you believe that people are naive enough to believe that the Cypriot economy crumbled from the decisions of a single person? Is the governor the sole person to blame for the reckless investments of Laiki Popular Bank in Greek government bonds? Do you realize that the press wars are harming the Cypriot economy at a time of uncertainty?

Dear Mr. former governor, where were you when the Cypriot banks were exposing themselves to risky financial assets like the Greek government bonds? Where was the Cyprus Central Bank to monitor these investments? Why can't the Central Bank act as a lender of last resort now? Why aren't we in a position to sustain our financial system without foreign assistance? And would the president's disagreement on the shaving of Greek debt achieve anything of substance?

Gentlemen, the financial system has failed and this is your fault! All of you. If Adam Smith, the first economist was here, he would probably be dumbstruck. His book, the wealth of nations, was first published in the late 1700s and it contains the answer to our problems. I am a fanatic supporter of Adam Smith's invisible hand. That left alone, markets can reach equilibrium, in other words, the point where quantity demanded equals quantity supplied. When we are dealing with labor markets this translates to ZERO unemployment and in output markets, whatever is produced, is actually sold. BUT MARKETS NEED TO BE LEFT ALONE.

How can this be achieved? We do not need politics at this point. Politics are useful to solve political problems, but our problem now is purely economical. The answer for the Cypriot economy lies in the drastic reorganization of the structure of the economy, where decentralization and privatization take the center stage. Enough with the record losses amassed by the publicly owned companies. It is time to let in private investors in order to increase competition and benefit the consumer.

Enough with protecting natural monopolies like water and electricity. Open up the markets to private companies and allow private bidding for different geographical regions like in the United States. I guarantee you the price for these services will dramatically decrease.

Enough with sustaining a catalog system for appointing public primary and secondary school teachers. Isn't it obvious that the system has failed when one has to wait until he/she is 300 years old in order to be hired in the public sector? Are we going to keep this charade for a few more years or is it time to act now?

I say do away with the catalog system. It is an heirloom of another era and it does not belong in the contemporary economy. Instead of having hundreds of illegal private tutoring institutes, structure a system of private subsidized schools where a proportion of the tuition is paid by the government and decrease taxation so that the households will be in a position to pay for the remaining tuition.

This may cause certain people to react. Why do we need to pay for our kid's education, they may ask. What they do not realize is that they are already paying a fortune in private tutoring when this could have been avoided altogether by providing high quality educational institutions.

Gentlemen, allow us to work alone. Allow us to save whatever dignity the Cypriot economy has left.

Thank you, and have a high utility day! 

The Everyday Economist is coming to Anglo Info!

The success of the Everyday Economist blog was instantly recognized by the people over at Anglo Info, one of the most well known websites globally. The first blog post of the Everyday Economist on the Anglo Info website is ready to go live. I will keep you updated on this.

I would like to thank you for your continued support. Without you this would not have been possible. Keep on liking and sharing!

Monday, June 18, 2012

Planning for the future

Good morning!! The topic of today's discussion is planning for the future, a trade particularly important in times of crisis. Traditionally in economics, we are referring to the notion of retrospective memory, that is, the ability of the individual to recall past information and act accordingly. Today we will talk about prospective memory or recalling to act on a future event.

The problem with taking decisions that will be implemented in the future is that people do not possess the full information on the state of affairs at the time of action. A potential car buyer for example might enter into a lease agreement for four years, but end up loosing his job in two years. At that time it may be impossible to continue making payments and most likely he will end up loosing the car.

The problem with prospective memory, is that we tend to overestimate our future potential when taking a decision today. Have you ever found yourself making a promise that you couldn't keep? That is because at the time that the promise was made, you overestimated your chances of fulfilling the promise. Very simply, this is the economic theory behind prospective memory.

Let us combine this with the simple assumption in the circular flow of income model in macroeconomics. Households can do two things with their net income. Consume and save. Consumption requires that we spend money today or in the immediate future whereas saving means that we place importance on money in the distant future. People have different views about consumption and saving. They place different weights on these two actions. Households that place greater weight on consumption do not save as much whereas the opposite is true when greater weight is placed on saving. At the time of the decision making process however, households do not possess the full information so as to take an accurate decision.

In times of economic prosperity, people place greater weight on present consumption. They overestimate the chances that the economy will continue to boom in the future. Thus, they do not save as much. In times of crisis, the weight is displaced towards saving because people overestimate the chances that the economy will continue to be bleak in the future. Thus, households do not spend as much.

The right answer lies somewhere in the middle of these extreme behaviors. For each one of us, the weights of our future actions will be different, depending on how much we earn, our total savings, the current economic conditions. How much would you save?

Sunday, June 17, 2012

A Guide to Saving Money at the Supermarket the Everyday Economist Way

Good morning all! I decided to write this post after a discussion I had with a colleague this morning about food item prices at supermarkets. In the post "Time is money" I talked about "coupon mining" and the way that American families lower their food and drink budgets. So without further a due, here is the guide of the Everyday Economist with regards to grocery shopping:

 Step 1:

Preparation at home. This entails two things. Firstly, go through your pantry and fridge and decide what you need to buy and make a list. You need to stick to that list at all costs! Supermarket managers count on buyers NOT sticking to their list. They will make several items to appear attractive (sometimes by offering them at low prices) but you need to ask yourself whether you actually need them. Chances are, that if they were not on your list to begin with, then you don't. Stick to the list!! This is important.

Secondly, you need to convince yourself that you may need to visit more than one supermarket or grocery store in order to buy all items on your list at acceptable prices. Remember that you need to trade convenience with money savings. This is your opportunity cost according to economic theory. You need to be prepared to give up convenience in order to save money. Oh, and since we are talking about convenience, avoid going to the supermarket on Saturdays and save yourself the effort of long lines, no parking etc.

In general, you need to KEEP AWAY from your neighborhood grocery store unless you are buying your daily bread or milk. These stores are competing using the Hotelling spatial competition model in economics. In other words they are counting on capturing nearby households and if there are no other stores around, they have what we call a spatial MONOPOLY. They have higher than normal prices because they offer the option of convenience.

Step 2:

Prepare your budget. Check your monthly income and decide how much you would like to spend on grocery shopping. The budget also depends on how many times you visit the supermarket. You can then allocate your money accordingly. It may be a good idea to do your shopping once or twice a month. Visiting the supermarket more times than that would be overkill, wasted effort and chances are that you are not sticking to your budget.

You can allocate the grocery money based on the special offer leaflets that you can find outside your door! Go through the special offers and decide what you want to buy and where from. DO NOT give in and buy everything from a single supermarket. You are NOT minimizing your budget.

Another way to minimize your budget is to avoid buying complement items from a single source. Notice the special offer leaflets. You will see that most of the special offers and discounts are given on basic food items such as rice, potatoes and pasta. This is because these items are used in almost every meal. Grocery stores are willing to sell these items at ridiculously low prices because they know that they can make money on their complements. Two items are complements when they are used together. For example, pasta and tomato sauce. So you will find a low price on pasta and a high price on tomato sauce.

You need to somehow break this complement relationship between items. Instead of going for the tomato sauce, why not go for fresh tomatoes so that you can prepare the sauce yourself? It will be healthier and a whole lot cheaper. This is entirely up to you.

Finally if you do go over budget, try to set an "over budget" spending limit in advance, for example 10% of the total spending money. Leaving your credit cards at home may be a good way of keeping your budget.

Step 3:

You are now at the supermarket with your list and your coupons. Here is another tip. LOOK DOWN. Most of the cheaper items are located on the bottom shelves. This is because suppliers are competing for shelf space. The shelf spaces at eye level, are the most expensive and logically they display the more expensive items. You can find a lot of cheaper substitutes by just looking at the bottom of the shelves. Trust me, you will save a lot of money this way.

Also, avoid walking around the supermarket without purpose. You will be tempted to buy items that you do not need and for God's sake, NEVER GO TO THE SUPERMARKET FEELING HUNGRY. Eat a cereal bar before shopping. Otherwise you run the risk of buying the entire store!!!

Step 4:

Once your shopping is complete store the items in your pantry and fridge and ration them over the predetermined time period. Here the key is to avoid wasting food because this is the same as throwing your money away.

So in short here is the list again:

1) Make a list of what you need
2) Prepare your budget
3) Once at the supermarket LOOK DOWN
4) Ration the items appropriately 

What do YOU do to save money at the grocery store? Have a high utility day!

Saturday, June 16, 2012

Everyday Economist is going public.

The blog has hit 400 readers in a week! I would like to thank you for your support. There is now a Facebook website link which appears on the right of this post. Next week a new blog on Anglo Info Cyprus is launching entitled "The Everyday Economist". The blog on Anglo Info will discuss current events in Cyprus from an economic perspective and make recommendations as to how to survive the crisis. I will have further updates on that next week. Further, "Everyday Economics Explained" will be listed on Technorati, the largest blog search engine. Claim QSXGDDJ6KGCT. And remember...keep subscribing, liking and commenting. It is now time for us all to become everyday economists. Have a nice weekend!

Friday, June 15, 2012

Free food!!!

The word "free" has become some sort of fashion in the last decade. It is used in various advertisements as a way of attracting customers. We have all been to the supermarket and bought the occasional "buy one get one free" item. I noticed that the number of these items has increased exponentially during the last three years as a way of attracting buyers in the midst of the crisis. People are attracted to this word. They want the "free" item, they feel the need to possess it because it is, afterall....free!

I noticed, that most of the traffic on my blog was directed to the post entitled "Free Economics". This verifies to an extend the attraction that people have to this word. But is there any item or service out there that is provided for free? I have several examples that I would like to share with you.

When I was a student at UVA, I noticed several kiosks operated by students promising "free t-shirts". Of course, I approached with the intention to satisfy my desire of owning the free item. Upon approaching, I was asked to fill in an application form for a credit card in order to be entitled to the "free" t-shirt. I am ashamed to admit that I did fill one in and I was awarded with a not so impressive t-shirt, which I ended up paying tenfold in interest charges when I used the credit card for purchases. Lesson learnt, the t-shirt was not really free.

The second story is also from my college years. When it was time for me to graduate, I needed to sell my belongings that could not fit in my suitcase. I had if I remember correctly a music deck (CD player, with a double cassette recorder, and NO I am not THAT old) and an independent subwoofer speaker. I advertised the items on a local website and I priced the music deck at $100 and the speaker at $50. I waited for a week but nobody replied to my ad. Then I thought to try another approach. I advertised the music deck for $150 and I threw in the speaker for FREE. Mind you, I advertised on the same website. The items were sold the same day! Lesson learnt, the speaker was not free.

Do you need a third example? Kia Motors USA in 2006 launched a buy one get one free campaign for their KIA Rio model. People could buy a KIA Rio at retail price (which meant no dealer discount) and they were entitled to a second Rio for free. But KIA committed the buyer to use approved dealerships for service and any other maintenance that the car needed, which really translated into elevated maintenance prices. In the end the free Rio ended up costing the buyer more than the alternative of paying a discounted dealer price and using an independent cheap mechanic for maintenance. Lesson learnt, the car was not really free. I have many other examples but I could go on forever.

My first university economics professor Kenneth Elzinga used to say that "there is no such thing as free lunch". Until someone proves otherwise I have no reason to doubt that. So the next time you see the word "free" advertised, do not rush into the purchase.

The item might not be as free as you think.... 


Thursday, June 14, 2012

Why do we get parking tickets?

Have you ever parked illegally? Have you ever caught yourself worrying about getting a parking ticket because you did not park in an approved parking space 200 meters away? Why do we park illegally when there is a danger of getting a parking ticket?

Just like with every other decision people weigh the costs and benefits before taking action. Parking in an approved space is worry free, but it may be far from the destination point. Parking illegally is convenient. Weighing costs and benefits can sometimes determine our preferences. I say sometimes because we may be indifferent between two or more alternatives. Having clear preferences brings up the notion of opportunity cost.

Opportunity cost is the next best alternative that we forgo when we take a decision. In the decision of whether to park legally or illegally we consider the costs and benefits of each choice. If the probability of getting caught and cost of the ticket outweigh the utility derived from saving time and effort from parking illegally near our destination then we decide to park legally. If on the other hand we value our effort and time more than the fore mentioned cost then we will break the law. In fact this theory explains the reasons why criminals engage in robberies, murders and other illegal activities. But more on that in another entry.

How far from your destination would you park?

Wednesday, June 13, 2012

Free Economics!!!

A well known saying in economics suggests that "there is no such thing as free food". As with any good ol' saying, there is some truth behind this statement, however this will be the subject of analysis in a future article.

For now, I am offering free economic advise for the people that need it. Check out my profile if you are wondering who I am. If you would like to contact me please do so on charalambous@gmail.com. I will be happy to answer your questions. And since there is "no free food" all I am asking you to do is subscribe to my blog.

Have a high utility day!

Why do we shop when we are feeling sad?

Have you ever felt the need to shop because you were feeling sad or stressed? Come on, admit it...

Some philosophers may rush to say that we are living in the age of materialism where there is a lot of unnecessary spending and over consumption. However there is a perfectly simple economic explanation for this phenomenon.

In economics, we have what we call the "utility equation". This equation is comprised of all factors that can affect our mood or enjoyment. Playing basketball for example, puts me in a good mood so I will play basketball in order to raise my enjoyment or UTILITY. Eating a good meal at a restaurant is another factor that raises my utility and hence puts me in an uplifting mood. Utility is measured in utils, an imaginary measurement that exists only to help us organize our preferences.

For me, a scoop of strawberry ice cream offers me 200 utils of enjoyment where a scoop of chocolate only offers me 100 utils. This means that I prefer strawberry ice cream to chocolate. Actually, I like strawberry twice as much as I like chocolate. Now, I know what you are going to ask? What is the scale for these utils? The answer is that there is none. Each person has a scale of his/her own and every time that a decision needs to be made, utils are subconsciously attached to each alternative. The alternative selected, is the one with the higher level of utils. Needless to say that there are alternatives that may offer negative utils and thus a feeling of discomfort. Offer me some grapefruit and I will kindly decline, because I personally attach a negative utility level to the particular fruit.

When we wake up in the morning, we subconsciously have an expected level of utility in mind for the day ahead. When we receive disturbing news, our utility level declines and we are feeling sad and moody. When we are stressed we feel a certain level of discomfort. This is because our utility level has decreased because of the stress. In order to balance our mood and increase our utility, we need to somehow find a way to increase our enjoyment. This is where shopping comes in.

Shopping helps us balance our utility level when we are feeling down. Once our utility level returns to the expected acceptable level, that is where we stop. Given, you might wonder now why is it that women shop more than men.

Even though this theory applies to both men and women, the latter seem to have a higher "marginal utility of shopping". What this means, is that women receive a higher level of enjoyment from buying a commodity (clothes for example) than men. Men attach a higher utility in other activities such as watching a football match. That is why the choice of unwinding methods for men and women are rather different.

Do you feel like shopping today?

Monday, June 11, 2012

Betting in the European football cup

I was talking to some fiends the other day about the European cup tournament currently under way. My friends had their own favorite teams and their own theories as to which team would come out on top. To that effect they placed several bets. Nothing too serious...the sum placed in each case was limited to two digits, however the promised payoff (if the bet was successful that is) was hefty!

Last night during a discussion with my dad, he revealed that it was England's time to win the cup and that such a bet had nine to one odds. This got me thinking. Is it possible that people are becoming more risk lovers?

I have talked about how people change their spending behavior due to the financial crisis in a previous post. Also, I discussed how people's marginal utility of money has increased. Financial theory suggests that the greater the risk associated with a specific investment, the greater the expected return. So if people know that there is a high risk of loosing money on an investment (in the fore mentioned case, a bet) then they expect that if the investment is successful in the future, they will receive a high payoff.

There are two types of investors, risk lovers and risk averse. Risk lovers like risk and they expect that their investments will pay up a hefty amount in the future. Risk averse investors are more down to earth. They avoid risk where possible and they expect lower payoffs from their investments.

Looking back to the whole betting idea it seems that people are avoiding "the sure result". Spain is the favorite of winning the cup, however, nobody will bet on Spain because the payoff is low. In other words it is not worth the trouble or the money investing in Spain. People are betting on teams that they believe are capable of winning the tournament, and are also promising high payoffs.

Now, one could argue that this has always been the case and that the crisis has no impact on the risk taking of people. I respectfully disagree. People are now more careful with investments. They will only invest if they see a satisfactory expected payoff in the future. And since the marginal utility of money has increased, so do the expected payoffs. But these higher payoffs accompany riskier investments.

Which is your favorite team and how much are you willing to bet that it will win the European cup?


Saturday, June 9, 2012

Porsche for sale......

I was going through some car ads today not because I am looking to buy a car but because I am what you would describe a gearhead. I noticed that several luxury cars were being sold at bargain prices. A Porsche Cayienne for 20000 Euros, a BMW X5 for 14000 Euros.

These are amazing prices especially if you consider that 3 years ago these cars were fetching twice as much on the used car market. What would cause their owners to sell them so cheap?

Given, these cars have high maintenance costs. Also they are expensive on petrol. But these cars are usually owned by more wealthy individuals.

This got me thinking. Blame the crisis on loosing money from investments. Blame the crisis for wanting to buy a car that runs cheap. But would you willingly take a huge loss by selling your Porsche Cayienne at a sixth of the retail price? Why not at half or third of the retail? What causes the price of luxury cars to decline by this much?

The answer lies in the marginal utility of income. The level of utility or enjoyment derived from cash inflows. I say cash because income can take different forms. During times of economic depressions the need for liquidity rises and so does the marginal utility of cash.

This term is coined after observations in everyday life like...used car prices. Those that have a high marginal utility of cash, that is they place higher relevant importance on extra cash received, are likely to sell their used cars at lower prices.

Those that have a low marginal utility of cash are likely to sell at higher prices and will be unwilling to take huge losses on their car investment.

How much would you sell your car? Food for thought.....

Friday, June 8, 2012

Make a wish....

Have you ever heard that if you wish something hard enough it will become true? Well, in the world of economics this is actually the case.

Think about that computer you are thinking about purchasing. Today, it costs 600 Euros but you expect (perhaps due to the crisis) that in a couple of months' time the price will fall to 500 Euros. Would you buy it today? Chances are that you wouldn't unless of course it was some kind of an emergency.

Newsflash! You are not the only one expecting the price to fall to 500 Euros. The other potential buyers also possess the same information (because they also realize that the economy is in crisis). So they will also avoid purchasing the computer today.

Result? Due to inadequate demand for the computer, the price will eventually fall to 500 Euros. And even then, some potential buyers might expect it to decrease even more.

The outcome here is that expectations are strong enough to make or break a national economy. John Maynard Keynes referred to this phenomenon as "waves of optimism or pessimism".

Now is as good a time as ever to become an optimist!

"Time is Money"

Have you caught yourself looking at the promotional leaflets the supermarkets are posting to your door lately? Or have you cut out a coupon from a magazine or newspaper?

It seems that people are changing their shopping habits. I was watching a program the other day on TV about families that were competing in getting the most discount when they were going shopping. I remember a particular scene where an entire family was going through literally hundreds of magazines cutting out and organizing coupons. I thought at the time that I would never have the patience nor the time to perform such a task.

The results, however, were no short of impressive. One family managed to get 95% off from the total cost of groceries. I recall the final bill was around the range of 1000 dollars and the family ended up paying only 50 dollars. This really blew my mind!

I thought to myself that this is literally the meaning of "Time is Money". The effort and time spent by the family going through the coupon magazines paid off!!! Suddenly it does not seem like a bad idea going through the special offers of the grocery stores every so often.

Have you changed your spending habits? And if so, do you find that you spend more time on deciding what and where to buy from?

Let us talk about the crisis

Let us start with the obvious. People are wondering whether the current financial crisis will continue or fade away. And more importantly, when?

There is no right or wrong answer. First, we must contemplate whether we have the right information to even begin considering an answer. I do not think we do.

There are so many variables that can affect a National economy and even more in the case of International economy, that we cannot come up with an answer. We can make educated guesses, but anybody's guess is as good as mine. Does that mean that we should receive the news about the recession in a passive manner? Well...no! But for God's sake do not take what other people are saying for granted.....INVESTIGATE.

Did we see the recession coming? Well, yes we did. We knew it was coming, but we did not know when it was going to hit. In retrospect of course everyone becomes a prophet. "I knew this was coming" or "I told you so" are some of the common phrases that are thrown left and right. Don't even get me started on the politicians. These are the same people that have been amassing millions of Euros in budget deficits over decades.

But if you are borrowing money to survive, guess what? The time will come that you will have to pay the loan back and if you fail to do that, then the lender will stop lending. How many countries have a balance of payments deficit? The vast majority of them.

The other problem with borrowing is that every time a bank gives a loan, it creates money. Take a simple example. Suppose a person walks in a newly established bank and deposits 100 Euros. The bank in order to make profit, it will need to lend that money to someone who requests a loan with a higher interest. Suppose now that you are that person. You are approved for a loan of 100 Euros and the bank deposits that money in an account that was set up for you. Remember there is physically 100 Euros in the bank yet now, both you and the original depositor have a claim over the 100 Euros. In a sense the bank created another 100 Euros from the original deposit.

Now imagine this on a larger scale involving countries and governments. This money that is created is simply imaginary. It does not really exist. When the depositors and the borrowers ask for the money at the same time the banks suffer from liquidity problems. Simply put, there is not enough physical money to go around. Boom....recession.

So do not listen to politicians or investment advisers who think that they know everything. They know nothing. They know what we know. We are currently in a recession, the economic indexes are on the decline.

Will we survive? Of course we will. Just hang in there. The recession is part of the business cycle. Better days are coming, we just don't know when.