ECON1 in the Real World

During my final year at Stanford, I’ve been selected to be an ECON1 TA (which is relatively rare for a non-Econ Ph.D. student). ECON1 is the introductory economics course at Stanford, and it’s a course I’ve always wanted to help teach.

By the end of 10 weeks, students gain a foundational understanding of microeconomics and macroeconomics. At the end of the quarter, I like to remind students of all they have learned, as well as the importance of knowing how to combine concepts from their “Economics toolbox” to have educated debates about many situations in our world. Here are a few policies and issues in the real world that an ECON1 student can successfully reason through:

  • The US government is dealing with a glut of surplus cheese due to price floor agreements with cheese producers. How might the government reduce this surplus without revoking the price floor?
  • You’re the COO of a major company, and public pressure is mounting to increase regulation in your industry. Instead of hiring lobbyists to fight this, why might you welcome more regulation?
  • The “fight for 15” minimum wage debate has been gaining more traction in recent years. What are some potential outcomes from a city choosing to adopt a $15 minimum wage?

 

Some brief responses:

  • Cheese surplus
    The demand/supply curve is one of the most basic tools in an economist’s toolbox, as well as one of the most versatile ones. The government either needs to shift supply leftward or demand rightward, reducing surplus by moving the equilibrium price closer to the price floor. Since this policy is supposed to keep cheesemakers in business, focusing on the demand side makes common sense, and has precedent. Remember the “Got Milk?” campaign? Ad campaigns can help shift the demand curve by increasing the desire to consume a specific good.
    Another way to tackle the surplus is to combine it with other policies. For example, the government could have analysts review purchases made by food stamp (SNAP) recipients. If they found that this demographic wasn’t purchasing much cheese, they could distribute more cheese to these recipients with minimal impact to cheesemakers.
  • More regulation
    A little game theory goes a long way here. The tobacco industry, for example, is banned from TV advertising by regulators. Before the ban, millions were spent by each of the major companies just to maintain their relevancy, resulting in fewer profits across the industry. After the ban, all the advertising money was retained by tobacco companies as profit. Since the tobacco industry is an oligopoly, these can be considered positive economic profits, which leads to a second point on regulation – stiff regulatory barriers to entry means that the entrenched companies are protected from competitors!
  • “Fight for 15”

    I love the minimum wage debate; it illustrates how important an economic lens can be in considering far-reaching policies. The first graph to consider is a graph of the supply and demand of labor. Just like in our cheese example, a $15 minimum wage is generally thought to be a binding price floor. We then expect a surplus of labor compared to the perfectly competitive equilibrium point, and a higher surplus relative to the current minimum wage of $7.25. As a result of the policy, those who have jobs enjoy a higher wage, but more people will be unemployed. The exact magnitude depends on the relative elasticities of the supply and demand curves, which is often hotly contested.
    For other introductory economics classes, this may be the extent to which people discuss the minimum wage. It’s far more interesting, however, to consider a monopsony (single buyer) or oligopsony (a few buyers) model in the labor market. For illustration, consider a small city with a few fast food restaurants, all owned by the same franchise owner. It can be hard to travel far distances for work, especially for minimum-wage jobs, so in the absence of a minimum wage the owner has a lot of market power over the wage he pays. Based on a monopsony model, we would expect him to set a lower wage and hire fewer people than in a perfectly competitive industry. In this case, a minimum wage actually increases both the wage and number of people employed. If a minimum wage is set correctly in this model, it can actually return the industry to the perfectly competitive, Pareto efficient point.
    In general, the empirical truth is probably somewhere between these two points for most domestic geographic areas. To enhance the story with another interesting complication, consider the impact and formation of strong labor unions in the absence of a minimum wage.

You may have noticed that I only relied on ECON1 knowledge to draw insights. Economics is a lens by which we view the world, and I fully acknowledge that it’s not the only lens we can use. These examples, and the answers I give, are meant to encourage further thinking on a variety of lenses: political philosophy, history, morality, even engineering principles. Indeed, a very interesting part of Economics as you venture further on is to consider normative aspects – you may care a lot more about helping a particular group in a population than the aggregate welfare, for example. While basic economic knowledge is an incredibly powerful way to begin to understand our world, it is up to all of us to continue to educate ourselves (in Economics and beyond) so we can better understand far-reaching consequences of our choices.


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