Tuesday, January 29, 2013

Al qaeda bicycle attack!

Good morning economists. The following is a true story which took place in 2002. Just about that time, I was starting my postgraduate degree and the ten students that started the program with me were pretty excited! Of course we were a rather diverse group, with students from the US, India, Iran, Holland and Cyprus. One of the first things that we did once we settled in our apartments was to purchase vehicles in order to move around. A couple of students from India, I remember, bought bicycles.

As soon as they bought them, they took them for an all important test drive. While they were riding their bikes, on the designated bicycle strip, they noticed that a big truck was approaching. In order to be safe, they climbed onto the pavement. Major mistake! A police officer on a bike was waiting for them and awarded them with a ticket as no riding on pavements was allowed. My two classmates pleaded ignorance and that there was no sign prohibiting this action. The police officer pointed to a sign that was HIDDEN behind a tree. There is no doubt that at one point the sign was visible, but that was not the case anymore as the tree grew in size.

My two friends decided to photograph the sign and argue their case in court. Their original fine was for $25 each and they felt that they did not have to pay. When they presented their case in front of the judge, they showed the photographic evidence and instead of acquitting them the judge ordered 48 hours community service and $125 each in fines! Kind of an excessive punishment if you are asking me.

See my two friends did not take into account the fact that the judge might have been biased by anything foreign due to the 9/11 attacks. The matter became even worse as they were forced to clean highways for their community service and they became the mockery of the drivers. Hardly the behavior that a postgraduate student deserves.

Here we have an example of how two unrelated events, the 9/11 attack and the bicycle ride were wrongly connected in the mind of the judge. Sometimes, we take wrong decisions based on unrelated events. 

Have a nice day!

Monday, January 21, 2013

Got milk?

Good morning economists and have a nice week. Today I would like to discuss the benefits of owning a small geographical monopoly. The concept of a monopoly seller is not unknown to us all. A monopolist is a single supplier who provides goods and services in a given market. A geographical monopoly is a more refined concept and refers to a single supplier who provides goods and services in a particular geographical region.

A couple of weeks ago, some students in my Principles of Economics class, visited a secluded mountain village with a population of only five people. The village featured a small convenience store that satisfied the grocery needs of the people living in that community. Unknown to the owner of the store, my students rented an old house and even though they were prepared as far as supplies were concerned, they soon run out of milk.

They visited the store asking to buy a bottle of their coffee supplement, but they soon discovered that the store only had five bottles of milk, each reserved for a village household. Lucky for them, however, the milkman was just about to leave the village, so they managed to secure a bottle.

This story, got me thinking of the effects of a recession on the small grocery store. Even though general demand for goods and services is decreased during times of recession, necessities are still a requirement for households. Items such as milk, bread, and other basic food items will not suffer from a decreased demand, at least not to the extent of other more luxury items.

So it is safe to say, that the impact of the recession on the grocery store is virtually zero as the demand is known and the items sold are largely necessities.

Have a milky day!

Saturday, January 12, 2013

How to succeed in opening a business.

Good morning everyone. You may have noticed that the blog was not updated in the last four days. This is because we were facing some technical problems with the website which are now hopefully resolved.

Yesterday I was walking by a sports bar in a not so busy street in my home town. I noticed that right across the bar, there was a store that was selling shirts with team emblems. When taken out of context, such a business would most likely fail as on an average day, potential customers would not visit the store because it was off the main road. However, the owner was crafty enough to think about complementing the operation of the successful bar. Herein lies the success of the shirt store.

Most of the times potential business owners think about competition, overlooking complementary operations. It is possible to base a business on the operations of an established company without really considering the competition. Consider for a moment the shirt store. On that same street there are two more clothing stores but none are competing with that particular business because they do not offer specialised team apparel. The shirt store is dependent on the customers of the successful sports bar and is admittedly doing quite well!

So when opening a business scout the surrounding area. Competition may be irrelevant if the business specialises in offering a complementary good or service to the operations of a successful established enterprise.

Can you think an example in your part of the woods where this applies?

Have a nice weekend!

Sunday, January 6, 2013

A Hotelling model with a twist.

Good morning economists. Last night we were driving on a rather busy two way street when we noticed that a newspaper kiosk opened business right across the street from another one that has been established for nearly a decade. Our first thought, was that this decision was rather silly since the new kiosk would effectively be in competition with the old one because of the choice of location. But is that truly the case?

I remembered the old Hotelling model example of the two ice cream vendors on a beach.
Both vendors are selling the same ice cream and charge the same price. As such people to the left of point B on the beach will prefer vendor A because the distance to that vendor is smaller than the distance to vendor C. The opposite applies for the people to the right of point B. 

According to the model above, the new newspaper kiosk should essentially move its operations a fair amount of distance away from the old kiosk. In that manner, it will be able to capture more customers as the distance from the midpoint (between the two kiosks) grows. 

BUT what the traditional Hotelling model ignores, is the DIRECTION of travel of potential customers. Last night, when we observed the new kiosk phenomenon, it was raining pretty hard. I asked myself, what is the probability of someone parking his/her car on my side of the street and then crossing over to the older kiosk? Given that they both sell exactly the same goods at exactly the same prices the answer would be that the probability will be really really small. Especially because a mile further down the street there was another kiosk on our side of the street. 

Taking into account the direction of travel, makes this a whole new ball game. The kiosk on the left of the street is in a sense in competition with the kiosk on the same side of the street located a mile away (as opposed to the kiosk located across the street). 

I have a feeling how this battle will turn out and I will let you know as soon as it happens.

What do you think will happen?

Have a nice day!

Wednesday, January 2, 2013

An economist is a man's best friend!

Good morning everyone! Today I would like to share with you something that I noticed in the behavior of other people towards me in the last few months. In fact, this behavior can be summarized in the form of a story which happened to me the other day.

As the professor in charge of the student union at my educational institution, I was helping with the organization of the Christmas ball. I visited the venue of choice the day of the event to check out the layout of the tables and how the room was organized. Since I was already there, I asked to talk to the manager who I knew was an old neighbor of mine back in my flat renting days. In the two years that we lived next to each other we rarely talked, just the occasional "hello" and "how are you doing".

My old neighbor knew of my profession so when he heard that I wanted to see him, he invited me up to his office for coffee. Long story short, we basically sat in his office talking for about two hours about the economy, current economic events and the prospects of his business. I found it amusing and interesting at the same time, how this person who never really talked to me before, was opening up himself to me, revealing sensitive information about his business.

I asked myself, could it be that in difficult economic periods, demand for economists increases to the point that this affects their social life? Has the economic recession suddenly increased the number of people that I consider to be my friends?

Have a friendly day!

Tuesday, January 1, 2013

Handicapped parking vs personal convenience!

Good morning economists and may you all have a lovely year! Our topic today will focus on what we call in economics the social welfare function. In very simple terms, a social welfare function is the total utility or satisfaction of all the people in a society. In a sense, if we add the quantifiable satisfaction that each individual feels in an society we should be able to come up with this social welfare function. It is understandable that the goal of the society is to maximize the satisfaction of all people in society so that the social welfare function produces the highest possible utility level.

Having defined this, I would like to share with you an event we witnessed a couple of days ago while we were doing our last minute New Year's eve shopping. We visited a large toy retailer and I was shocked to see the following:
The parking spots marked with blue are meant for people of various disabilities! The cars above were casually parked (sometimes even parked along two parking spots) yet NONE was carrying a handicapped parking permit. I was disgusted with this behavior and I immediately wondered...

If our goal as society should be to maximize our social satisfaction, who gets the most utility or satisfaction from parking in a handicapped parking spot? A person with disabilities who needs basic access to the building or a healthy person who is just too lazy to walk for fifty meters?

Personal gain vs basic social behavior. Where is the police when you need them?

Have a nice day!