Prices, exchange, knowledge, and Markets: Also, discuss money, futures markets Gresham's law etc from The Economics of a POW camp. Why is diversity important in a market? Prices, exchange, knowledge, and Markets- Also, discuss money, futures markets Gresham's law etc from The Economics of a POW camp. Why is diversity important in a market?
CASE STUDY:
The topics assigned to my Wiki case covers a broad spectrum of the subject of economics. I believe the best place to start is to begin with discussing money. In order to fully understand the idea of money there needs to be a look at the history of the idea of money and how it has evolved in order to fully understand this idea. A look at the history of money reveals how the basic ideas of obtaining necessary goods for survival evolved into a complicated system of a global economy. “Money is anything that is commonly accepted by a group of people for the exchange of goods, services, or resources.” (About.com, 2011)
Money has not always been a part of the world, and in fact, the first form of buying, selling, or trading was accomplished through bartering. Bartering is “the exchange of personal possessions of value for other goods that you want.” (ThinkQuest, 2011) This website http://library.thinkquest.org/28718/history.html, offers a good, quick overview of the evolution of this idea of money we have come to know beginning around 1200 BC in China with the first known medium of exchange being cowry shells. The first paper currency was being used from the 9th century through the 15th century also in China, where it eventually saw large rates of inflation, and European nations would not have paper currency for many years after. Eventually, England made gold a benchmark of value, thus creating the gold standard around 1816 and the U.S. adopting the gold standard in 1900. He U.S. subsequently got away from the gold standard during the Great Depression, and very few nations still tie the value of their currency to gold.
Coins and paper money make up the primary medium of exchange now that is more commonly referred to as money. Focusing on the U.S. dollar and coins, after getting away from the gold standard, all coins were required to have a minimum level of certain metals which created the actual value of the coin. There is a long and interesting history with the idea of minting coins, but would be too lengthy for this assignment. The Coinage Act of 1965 eliminated silver from most coins making them worth less than their printed denomination, thus entering the age of what is considered “fiat” money. This is where, ”money is now given value by a government fiat or decree, in other words enforceable legal tender laws were made.” (About.com, 2011)
The supply and demand principles associated with all aspects of economics holds true for money, as well, and this supply and demand help determine prices consumers are willing and able to pay for products. In addition to the standard supply and demand factors involved with pricing, there is also the issue of the type of market a company operates under. There are three primary types of markets companies can operate in, including a Monopoly, Oligopoly, and Perfectly Competitive markets.
A monopoly is described by "a market structure in which a single firm serves an entire market for a good that has no close substitutes." (Baye, 2010) "In other words, the single business is the industry", according to Investopedia.com. This type of market clearly gives the firm greater market power since it is the only producer in the market. An oligopoly can be described by a market where "a few large firms tend to dominate the market." (Baye, 2010) These are firms in highly concentrated industries such as automobiles, airlines, and cellular phones. Profits are affected by price changes in other companies, so when one firm in the industry alters its business other companies have an incentive to change in order to keep pace. Similar to monopolies, there are high barriers of entry. "Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes." (Investopedia, 2011) The majority of firms operate under perfect competition where there are many options where buyers have many options with similar products and sellers produce homogeneous products. There are few barriers to entry and firms can easily enter and exit the market. Some good examples of products in perfectly competitive markets are consumer electronics, sodas and juice companies, and clothing producers and retailers.
The type of market can also be indicative of the degree to which perfect information is available to buyers and/or sellers and how readily knowledge is available to both parties. These aspects are discussed pretty well in our textbook written by Michael Baye, but I will also offer some real world examples to better expain this topic. As stated by Baye, "The presence of uncertainty can have a profound impact on the ability of markets to efficiently allocate resources." (Baye, 2010) This uncertainty stems from a lack of information by one or both parties in a transaction, or a lack of knowledge about what the future will hold for different aspects of the transaction. There are three important concepts when referring to knowledge in the market between buyers and sellers. Asymmetric information is described as a "situation that exists when some people have better information than others." (Baye, 2010) Asymmetric information encompasses the other two concepts, adverse selection and moral hazard, where adverse selection pertains to an individual that has hidden characteristics unknown by the other party and moral hazard pertains to a party which takes hidden actions another party cannot observe.
All of these concepts were encapsulated into an article written by R.A. Radford in 1945 based upon a true story of life in a POW camp during the end of World War II. The author describes various groups and the way their economic livelihoods got started and how they operated over time during his stay at the various camps. Since there were no jobs and/or wages to determine how resources would be distributed and justified, the prisoners relied on parcels distributed equally between all prisoners. The parcels came from the Red Cross or the Germans and consisted of various items necessary to sustain the prisoners such as food, toiletries, and cigarettes. This would be somewhat similar to a monopoly, in that there is one company/organization providing the goods/services. Since each individual values different levels of the available items in various quantities, they began bartering and trading for items they valued at any given time, similar to the first signs of exchange discussed previously from all the way back to 1200 BC and it seems the POW camps took on a similar evolution.
Various camps operated differently, but each evolved into its’ own market of trade. The author describes how cigarettes quickly became the currency of choice in most camps and prices would fluctuate based on the supply of cigarettes and other items. When a shipment of cigarettes were received it would drive up the prices of other goods since there would be an increase in the money supply so to speak, but as time went on between shipments there would be less of that monetary supply to spend on goods and this subsequently depleted prices until a new shipment made its way into the camp. The author discusses how even cigarettes as a currency was subject to Gresham's Law as the quality of cigarette began to muddy the system. Gresham’s Law states that "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." (Wikipedia, 2011) This is also described in the terms “bad money drives out good.” They began to get shipments of pipe tobacco which some entrepreneurs would take and roll into cigarettes which were of decidedly less quality, which is an example of asymmetric information in the form of a moral hazard. The disparity of quality created the need for each prisoner to evaluate their monetary exchange before accepting payment. The author describes how the entrepreneurial nature of the prisoners allowed them to set up different markets and a restaurant which created its' own monetary currency, the RMKs, which was backed by food and could equally trade for cigarettes. For a short time this currency competed equally with cigarettes until Officers began to step in and try to control prices and set rates on different items which created less of a free market for the restaurants and markets established.
This evolved into its own economy and savvy prisoners eventually began holding reserves of cigarettes and goods in order to profit during these deflationary periods. Middlemen who brought together buyers and sellers would also engage in buying futures of certain products such as bread at a lower rate in exchange for receiving the item at a later date. The ability to buy these items at a lower rate and then possibly hold them until there was more of a shortage and sell them for the highest possible price increased their wealth in the community but also carried risks that a product would spoil or an influx of that product would come in creating lower prices. During a period where shipments were cut in half and their camp was bombed, prisoners were no longer as willing to trade their food items or cigarettes for paper currency. When prices were too high for the supply of cigarettes or currency available, these items would be traded outside of the open market in a form of a black market.
Overall, this case of the POW camp economics offered a unique perspective into a microcosm of what we have studied this semester and many of the theories and principles we learned about were on display.
References:
Baye, M. R.(2010). Managerial economics and business strategy. New York: McGraw-Hill Irwin.
“Quiz Questions for my Wiki”:
1. Which of the following is not an oligopoly model:
A. Stackelberg
B. Cournot
C. Bertrand
D. Finkelberg
Answer: D
2. True or False: Adverse selection generally occurs when one party takes hidden actions, or actions that it knows another party cannot observe.
Answer: False (That would be Moral Hazard)
3. Which economic principal states that "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."?
A. Gresham’s Law
B. Sherman Anti-trust Act
C. Nash equilibrium
D. Supply and Demand
Answer: D
4. Which was the earliest form of exchange?
A. Auction
B. Bartering
C. Black market
D. Chinese Currency
Answer: B
5. Which legislation made all U.S. coins and currency a legal tender, and also eliminated silver from many coins?
A. National Banking Act
B. The Hatch Act
C. Coinage Act of 1965
D. Banking Act of 1933
Answer: C
SUMMARIES: Government Policies - Price Ceilings, Price Floors, etc.:
This summary of a very popular topic discussed the historical implications of government policies and how they have changed throughout the years and some of the reasons for these changes. I enjoyed some of the eye-opening statistics, although there was not as much discussion of price ceilings and price floors. Overall good examples of government policies.
Elasticity - elasticity of demand, etc:
This summary gave a very good synopsis over many of the concepts and ideas covered over the course of the semester. This summary provided really good real-world examples of how these concepts can be utilized. The graphs used were educational and appropriate and the quiz questions were very good at summing up this topic. Comparative Advantage:
This summary offers great insight into a topic we didn't give a huge focus to in the classroom, but is essential when discussing the dynamics of economics. We understand the principles of comparative advantage, but many of the examples given in this summary really drive home the idea of relative efficiences over a competitor or country. Also, the explanations as to how the efficiencies came to exist in some cases were very interesting. The way Columbia has become a beacon for illegal activity was pretty captivating. Create and answer a case study similar to Memo 11 from Time Warner:
This summary starts out defining a divestiture and then gets into what is covered in Memo 11 from the textbook. The reasons for a divestiture are laid out and then explained. The author then lays out the steps taken during a divestiture, and then offers a fictional case study. Overall, this was a very good case study which explains the topic well and offers different perspectives when discussing divestitures.
Risk: mean, variance, standard deviation, etc.:
This summary starts out defining the terms that measure risk, such as mean, variance, and standard deviation and offers some pictorial examples which are very useful. The summary then gets into describing types of risks and risk-takers, including risk aversion, risk neutral, and risk lovers and also offers very good examples for each of these. Overall, this is a good summation of the topic and helpful to learning the subject matter.
The Economics of a POW camp
My first examination of this topic is to research the Economics of a POW camp. My research is based on the article from 1945 by R.A. Radford at the link below:
The article discusses a prisoner of war camp during World War II and takes place between 1944 and 1945. The author describes various groups and the way their economic livelihoods got started and how they operated over time. Since there were no jobs and/or wages to determine how resources would be distributed and justified, the prisoners relied on parcels distributed equally between all prisoners. The parcels came from the Red Cross or the Germans and consisted of various items necessary to sustain the prisoners such as food, toiletries, and cigarettes.
Since each individual values different levels of the available items in various quantities, they began bartering and trading for items they valued at any given time. Various camps operated differently, but each evolved into it's own market of trade. The author describes how cigarettes quickly became the currency of choice in most camps and prices would fluctuate based on the supply of cigarettes and other items. When a shipment of cigarettes were received it would drive up the prices of other goods since there would be an increase in the money supply so to speak, but as time went on between shipments there would be less of that monetary supply to spend on goods and this subsequently depleted prices until a new shipment made its way into the camp. This evolved into its own economy and savvy prisoners eventually began holding reserves of cigarettes and goods in order to profit during these deflationary periods. Middlemen who brought together buyers and sellers would also engage in buying futures of certain products such as bread at a lower rate in exchange for receiving the item at a later date. The ability to buy these items at a lower rate and then possibly hold them until there was more of a shortage and sell them for the highest possible price increased their wealth in the community but also carried risks that a product would spoil or an influx of that product would come in creating lower prices.
The author describes how the entrepreneurial nature of the prisoners allowed them to set up different markets and a restaurant which created its' own monetary currency, the RMKs, which was backed by food and could equally trade for cigarettes. For a short time this currency competed equally with cigarettes until Officers began to step in and try to control prices and set rates on different items which created less of a free market for the restaurants and markets established. During a period where shipments were cut in half and their camp was bombed, prisoners were no longer as willing to trade their food items or cigarettes for paper currency. When prices were too high for the supply of cigarettes or currency available, these items would be traded outside of the open market in a form of a black market.
R.A. Radford also discusses the use of cigarettes as currency and how it was widely accepted across many camps as standard practice and had similar values that over time became accepted. Certain prisoners would get private shipments sent to them and would typically have a better grade of cigarette that carried more value. The author discusses how even cigarettes as a currency was subject to Gresham's Law as the quality of cigarette began to muddy the system. They began to get shipments of pipe tobacco which some entrepreneurs would take and roll into cigarettes which were of decidedly less quality. The disparity of quality created the need for each prisoner to evaluate their monetary exchange before accepting payment.
Overall, this is a valuable case study in examining economic principles in their rawest forms and discovering how pricing strategies work at their most basic levels.
10/24/2011 - 10/31/2011
Part 2 of The Economics of a POW Camp
This entry is based upon the previously list article and is intended to offer more insight into the inner-working of the camp and different aspects discussed within the article not previously touched upon.
I did not previously list out the complexities of each camp and how they were intertwined and worked together. The camps the writer discusses normally consisted of any where between 1,000 and 2,500 people housed in separate bungalows consisting of around 200 or so to a building. "The permanent camps in Germany saw the highest level of commercial organization", according to the article and this makes the most practical sense with temporary camps of new prisoners evolving into more permanent and experienced groups. The newer detainees experienced much more chaotic economic principles as the price of goods were unknown or unestablished. Many of the camps were arranged by nationality or culture where many in the camp had the same or similar desire for certain commodities available to the prisoners. Thus, prices came to be from the principles of supply and demand, where certain items were coveted by the group, whereas a different nationality would covet other commodities in a similar fashion. Confined to their own camp, private advertisement was the most prevalent way of conducting business.
The article talks about "French, Russians, Italians, and Jugo-Slavs being free to move about within the camp", and "British and Americans were confined to their compounds". However, a few prisoners would bribe sentries with cigarettes for the opportunity to have one or two meant visit other compounds. This opened the trade markets to allow groups to procure items they desired in exchange for cigarettes or other items they desired less. Some even made small fortunes with this practice depending on the value of the good in other camps and some even capitalized on selling products through black market prices to German cafes. Permanent camps seemed to be made up of prisoners from all nationalities so prices became more standard in these environments.
10/31/2011-11/6/2011
Part 3 of The Economics of a POW Camp
Another aspect of the POW camps not previously discussed in depth is the attempt to regulate markets. As discussed in Part 1 of this discussion there were many factors dictating the prices of goods, many hinging on supply and demand as shipments of rations came into the camp and the amount of reserves held for different commodities. As prisoners settled into their new way of life and found their level of comfort needed to survive and excess capacity became a reality, markets began to stabilize and opportunities became available to offer additional products and services such as a restaurant and entertainment.
11/7/2011 - 11/13/2011
I wanted to shift gears and get into a different topic this week and discuss Markets, since these are the backbone behind prices and pricing decisions among buyers and sellers. As Baye points out in our textbook "For every buyer of a good there is a corresponding seller. The final outcome of the market process, then, depends on the relative power of buyers and sellers in the marketplace." (Baye, 7th Ed.) Summarizing what Baye discusses in the text, a market can occur any time there is a buyer and seller brought together to exchange goods or services through barter, trade, or monetary exchange. These market participants consisting of buyers and sellers serve to establish the market prices. The Wikipedia page for "Market" adds "that a market is the process in which the prices of goods and services are established." (Wikipedia, 2011) This page also discusses some examples of markets, such as physical retail markets like shopping centers, auctions, labor markets, currency and commodity markets, artificial markets created by regulations such as pollution permits and carbon trading, and of course the stock market that most people think of when they hear "the market" when referring to almost anything dealing with economics.
I have missed a couple of week with these blogs due to some confusion in expectations, but will pick this back up and hope to post multiple times in the last couple of weeks to catch up.
This blog post will be on MONEY, as this is one of the topics required under my list of topics. Money sounds like a very easy topic to cover, but it is actually much more complicated than just describing the paper and coin currency of a population which is often the first thing most people think of when they hear the term "money". A look at the history of money reveals how the basic ideas of obtaining necessary goods for survival evolved into a complicated system of a global economy. According to the About.com website, "money is anything that is commonly accepted by a group of people for the exchange of goods, services, or resources." (About.com, 2011) Bartering, which is simply a method of exchanging one item or service of value for another item or service without exchanging money thus no exchange of a third-party medium is used, was used before the concept of money came to be.
Another topic I need to cover with this Wiki topic is the different markets companies operate under, focusing on: Monopolies, Oligopolies, and Competitive markets. The type of market a company operates in determines a lot about how they conduct business, set prices, and decide how much to produce.
A monopoly is described by "a market structure in which a single firm serves an entire market for a good that has no close substitutes." (Baye, 2010) "In other words, the single business is the industry", according to Investopedia.com. This type of market clearly gives the firm greater market power since it is the only producer in the market.
An oligopoly can be described by a market where "a few large firms tend to dominate the market." (Baye, 2010) These are firms in highly concentrated industries such as automobiles, airlines, and cellular phones. Profits are affected by price changes in other companies, so when one firm in the industry alters its business other companies have an incentive to change in order to keep pace. Similar to monopolies, there are high barriers of entry.
"Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes." (Investopedia, 2011)
12/4/2011 - 12/7/2011
The last topic I need to lay out for this Wiki blog is knowledge, specifically knowledge within a market. These aspects are discussed pretty well in our textbook written by Michael Baye, but I will also offer some real world examples to better expain this topic. As stated by Baye, "The presence of uncertainty can have a profound impact on the ability of markets to efficiently allocate resources." (Baye, 2010) This uncertainty stems from a lack of information by one or both parties in a transaction, or a lack of knowledge about what the future will hold for different aspects of the transaction. Basically, each party is looking out for their best interests and attempting to mask any imperfections from the other party in order to gain a better deal and this is the nature of business. Several definitions available in the textbook that are relevant to this topic include:
Asymmetric Information is described as a "situation that exists when some people have better information than others."
Adverse Selection occurs in "situations where individuals have hidden characteristics and in which a selection process results in a pool of individuals with undesirable characteristics."
Moral Hazard is a "situation where one party to a contract takes a hidden action that benefits him or her at the expense of another party."
An example of asymmetric information would include buying a car from a private party, where that person has more knowledge about the condition of the car and any possible flaws.
An example of adverse selection takes place when one applies for life insurance. Medical history and certain medical tests place applicants into different levels of risk and thus will determine the amount they can be insured for and at what rate.
An example of moral hazard, going back to buying a car from a private party, where the person sells the car and in between making the deal replaces the nice stereo speaker with a lower quality after market stereo.
Prices, exchange, knowledge, and Markets- Also, discuss money, futures markets Gresham's law etc from The Economics of a POW camp. Why is diversity important in a market?
CASE STUDY:
The topics assigned to my Wiki case covers a broad spectrum of the subject of economics. I believe the best place to start is to begin with discussing money. In order to fully understand the idea of money there needs to be a look at the history of the idea of money and how it has evolved in order to fully understand this idea. A look at the history of money reveals how the basic ideas of obtaining necessary goods for survival evolved into a complicated system of a global economy. “Money is anything that is commonly accepted by a group of people for the exchange of goods, services, or resources.” (About.com, 2011)
Money has not always been a part of the world, and in fact, the first form of buying, selling, or trading was accomplished through bartering. Bartering is “the exchange of personal possessions of value for other goods that you want.” (ThinkQuest, 2011) This website http://library.thinkquest.org/28718/history.html, offers a good, quick overview of the evolution of this idea of money we have come to know beginning around 1200 BC in China with the first known medium of exchange being cowry shells. The first paper currency was being used from the 9th century through the 15th century also in China, where it eventually saw large rates of inflation, and European nations would not have paper currency for many years after. Eventually, England made gold a benchmark of value, thus creating the gold standard around 1816 and the U.S. adopting the gold standard in 1900. He U.S. subsequently got away from the gold standard during the Great Depression, and very few nations still tie the value of their currency to gold.
Coins and paper money make up the primary medium of exchange now that is more commonly referred to as money. Focusing on the U.S. dollar and coins, after getting away from the gold standard, all coins were required to have a minimum level of certain metals which created the actual value of the coin. There is a long and interesting history with the idea of minting coins, but would be too lengthy for this assignment. The Coinage Act of 1965 eliminated silver from most coins making them worth less than their printed denomination, thus entering the age of what is considered “fiat” money. This is where, ”money is now given value by a government fiat or decree, in other words enforceable legal tender laws were made.” (About.com, 2011)
The supply and demand principles associated with all aspects of economics holds true for money, as well, and this supply and demand help determine prices consumers are willing and able to pay for products. In addition to the standard supply and demand factors involved with pricing, there is also the issue of the type of market a company operates under. There are three primary types of markets companies can operate in, including a Monopoly, Oligopoly, and Perfectly Competitive markets.
A monopoly is described by "a market structure in which a single firm serves an entire market for a good that has no close substitutes." (Baye, 2010) "In other words, the single business is the industry", according to Investopedia.com. This type of market clearly gives the firm greater market power since it is the only producer in the market. An oligopoly can be described by a market where "a few large firms tend to dominate the market." (Baye, 2010) These are firms in highly concentrated industries such as automobiles, airlines, and cellular phones. Profits are affected by price changes in other companies, so when one firm in the industry alters its business other companies have an incentive to change in order to keep pace. Similar to monopolies, there are high barriers of entry. "Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes." (Investopedia, 2011) The majority of firms operate under perfect competition where there are many options where buyers have many options with similar products and sellers produce homogeneous products. There are few barriers to entry and firms can easily enter and exit the market. Some good examples of products in perfectly competitive markets are consumer electronics, sodas and juice companies, and clothing producers and retailers.
The type of market can also be indicative of the degree to which perfect information is available to buyers and/or sellers and how readily knowledge is available to both parties. These aspects are discussed pretty well in our textbook written by Michael Baye, but I will also offer some real world examples to better expain this topic. As stated by Baye, "The presence of uncertainty can have a profound impact on the ability of markets to efficiently allocate resources." (Baye, 2010) This uncertainty stems from a lack of information by one or both parties in a transaction, or a lack of knowledge about what the future will hold for different aspects of the transaction. There are three important concepts when referring to knowledge in the market between buyers and sellers. Asymmetric information is described as a "situation that exists when some people have better information than others." (Baye, 2010) Asymmetric information encompasses the other two concepts, adverse selection and moral hazard, where adverse selection pertains to an individual that has hidden characteristics unknown by the other party and moral hazard pertains to a party which takes hidden actions another party cannot observe.
All of these concepts were encapsulated into an article written by R.A. Radford in 1945 based upon a true story of life in a POW camp during the end of World War II. The author describes various groups and the way their economic livelihoods got started and how they operated over time during his stay at the various camps. Since there were no jobs and/or wages to determine how resources would be distributed and justified, the prisoners relied on parcels distributed equally between all prisoners. The parcels came from the Red Cross or the Germans and consisted of various items necessary to sustain the prisoners such as food, toiletries, and cigarettes. This would be somewhat similar to a monopoly, in that there is one company/organization providing the goods/services. Since each individual values different levels of the available items in various quantities, they began bartering and trading for items they valued at any given time, similar to the first signs of exchange discussed previously from all the way back to 1200 BC and it seems the POW camps took on a similar evolution.
Various camps operated differently, but each evolved into its’ own market of trade. The author describes how cigarettes quickly became the currency of choice in most camps and prices would fluctuate based on the supply of cigarettes and other items. When a shipment of cigarettes were received it would drive up the prices of other goods since there would be an increase in the money supply so to speak, but as time went on between shipments there would be less of that monetary supply to spend on goods and this subsequently depleted prices until a new shipment made its way into the camp. The author discusses how even cigarettes as a currency was subject to Gresham's Law as the quality of cigarette began to muddy the system. Gresham’s Law states that "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." (Wikipedia, 2011) This is also described in the terms “bad money drives out good.” They began to get shipments of pipe tobacco which some entrepreneurs would take and roll into cigarettes which were of decidedly less quality, which is an example of asymmetric information in the form of a moral hazard. The disparity of quality created the need for each prisoner to evaluate their monetary exchange before accepting payment. The author describes how the entrepreneurial nature of the prisoners allowed them to set up different markets and a restaurant which created its' own monetary currency, the RMKs, which was backed by food and could equally trade for cigarettes. For a short time this currency competed equally with cigarettes until Officers began to step in and try to control prices and set rates on different items which created less of a free market for the restaurants and markets established.
This evolved into its own economy and savvy prisoners eventually began holding reserves of cigarettes and goods in order to profit during these deflationary periods. Middlemen who brought together buyers and sellers would also engage in buying futures of certain products such as bread at a lower rate in exchange for receiving the item at a later date. The ability to buy these items at a lower rate and then possibly hold them until there was more of a shortage and sell them for the highest possible price increased their wealth in the community but also carried risks that a product would spoil or an influx of that product would come in creating lower prices. During a period where shipments were cut in half and their camp was bombed, prisoners were no longer as willing to trade their food items or cigarettes for paper currency. When prices were too high for the supply of cigarettes or currency available, these items would be traded outside of the open market in a form of a black market.
Overall, this case of the POW camp economics offered a unique perspective into a microcosm of what we have studied this semester and many of the theories and principles we learned about were on display.
References:
Baye, M. R.(2010). Managerial economics and business strategy. New York: McGraw-Hill Irwin.
Bellis, Mary (2011). The History of Money. About.com Inventors. Retrieved from http://inventors.about.com/od/mstartinventions/a/money.htm
Education Foundation (2011), The History of Money*. Oracle ThinkQuest. Retrieved from http://library.thinkquest.org/28718/history.html
Investopedia (2011). Economics Basics: Monopolies, Oligopolies, and Perfect Competition. Investopedia.com Retrieved form http://www.investopedia.com/university/economics/economics6.asp#ixzz1fXgDh91C
Radford, R.A. (1945). The Economic Organisation of a P.O.W. Camp. Economica, vol. 12. Retrieved from http://www.albany.edu/~mirer/eco110/pow.html.
Wikipedia, the free encyclopedia (2011). Gresham’s Law. Wikipedia. Retrieved from http://en.wikipedia.org/wiki/Gresham's_law.
“Quiz Questions for my Wiki”:
1. Which of the following is not an oligopoly model:
A. Stackelberg
B. Cournot
C. Bertrand
D. Finkelberg
Answer: D
2. True or False: Adverse selection generally occurs when one party takes hidden actions, or actions that it knows another party cannot observe.
Answer: False (That would be Moral Hazard)
3. Which economic principal states that "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."?
A. Gresham’s Law
B. Sherman Anti-trust Act
C. Nash equilibrium
D. Supply and Demand
Answer: D
4. Which was the earliest form of exchange?
A. Auction
B. Bartering
C. Black market
D. Chinese Currency
Answer: B
5. Which legislation made all U.S. coins and currency a legal tender, and also eliminated silver from many coins?
A. National Banking Act
B. The Hatch Act
C. Coinage Act of 1965
D. Banking Act of 1933
Answer: C
SUMMARIES:
Government Policies - Price Ceilings, Price Floors, etc.:
This summary of a very popular topic discussed the historical implications of government policies and how they have changed throughout the years and some of the reasons for these changes. I enjoyed some of the eye-opening statistics, although there was not as much discussion of price ceilings and price floors. Overall good examples of government policies.
Elasticity - elasticity of demand, etc:
This summary gave a very good synopsis over many of the concepts and ideas covered over the course of the semester. This summary provided really good real-world examples of how these concepts can be utilized. The graphs used were educational and appropriate and the quiz questions were very good at summing up this topic.
Comparative Advantage:
This summary offers great insight into a topic we didn't give a huge focus to in the classroom, but is essential when discussing the dynamics of economics. We understand the principles of comparative advantage, but many of the examples given in this summary really drive home the idea of relative efficiences over a competitor or country. Also, the explanations as to how the efficiencies came to exist in some cases were very interesting. The way Columbia has become a beacon for illegal activity was pretty captivating.
Create and answer a case study similar to Memo 11 from Time Warner:
This summary starts out defining a divestiture and then gets into what is covered in Memo 11 from the textbook. The reasons for a divestiture are laid out and then explained. The author then lays out the steps taken during a divestiture, and then offers a fictional case study. Overall, this was a very good case study which explains the topic well and offers different perspectives when discussing divestitures.
Risk: mean, variance, standard deviation, etc.:
This summary starts out defining the terms that measure risk, such as mean, variance, and standard deviation and offers some pictorial examples which are very useful. The summary then gets into describing types of risks and risk-takers, including risk aversion, risk neutral, and risk lovers and also offers very good examples for each of these. Overall, this is a good summation of the topic and helpful to learning the subject matter.
The Economics of a POW camp
My first examination of this topic is to research the Economics of a POW camp. My research is based on the article from 1945 by R.A. Radford at the link below:
http://www.albany.edu/~mirer/eco110/pow.html
The article discusses a prisoner of war camp during World War II and takes place between 1944 and 1945. The author describes various groups and the way their economic livelihoods got started and how they operated over time. Since there were no jobs and/or wages to determine how resources would be distributed and justified, the prisoners relied on parcels distributed equally between all prisoners. The parcels came from the Red Cross or the Germans and consisted of various items necessary to sustain the prisoners such as food, toiletries, and cigarettes.
Since each individual values different levels of the available items in various quantities, they began bartering and trading for items they valued at any given time. Various camps operated differently, but each evolved into it's own market of trade. The author describes how cigarettes quickly became the currency of choice in most camps and prices would fluctuate based on the supply of cigarettes and other items. When a shipment of cigarettes were received it would drive up the prices of other goods since there would be an increase in the money supply so to speak, but as time went on between shipments there would be less of that monetary supply to spend on goods and this subsequently depleted prices until a new shipment made its way into the camp. This evolved into its own economy and savvy prisoners eventually began holding reserves of cigarettes and goods in order to profit during these deflationary periods. Middlemen who brought together buyers and sellers would also engage in buying futures of certain products such as bread at a lower rate in exchange for receiving the item at a later date. The ability to buy these items at a lower rate and then possibly hold them until there was more of a shortage and sell them for the highest possible price increased their wealth in the community but also carried risks that a product would spoil or an influx of that product would come in creating lower prices.
The author describes how the entrepreneurial nature of the prisoners allowed them to set up different markets and a restaurant which created its' own monetary currency, the RMKs, which was backed by food and could equally trade for cigarettes. For a short time this currency competed equally with cigarettes until Officers began to step in and try to control prices and set rates on different items which created less of a free market for the restaurants and markets established. During a period where shipments were cut in half and their camp was bombed, prisoners were no longer as willing to trade their food items or cigarettes for paper currency. When prices were too high for the supply of cigarettes or currency available, these items would be traded outside of the open market in a form of a black market.
R.A. Radford also discusses the use of cigarettes as currency and how it was widely accepted across many camps as standard practice and had similar values that over time became accepted. Certain prisoners would get private shipments sent to them and would typically have a better grade of cigarette that carried more value. The author discusses how even cigarettes as a currency was subject to Gresham's Law as the quality of cigarette began to muddy the system. They began to get shipments of pipe tobacco which some entrepreneurs would take and roll into cigarettes which were of decidedly less quality. The disparity of quality created the need for each prisoner to evaluate their monetary exchange before accepting payment.
Overall, this is a valuable case study in examining economic principles in their rawest forms and discovering how pricing strategies work at their most basic levels.
10/24/2011 - 10/31/2011
Part 2 of The Economics of a POW Camp
This entry is based upon the previously list article and is intended to offer more insight into the inner-working of the camp and different aspects discussed within the article not previously touched upon.
I did not previously list out the complexities of each camp and how they were intertwined and worked together. The camps the writer discusses normally consisted of any where between 1,000 and 2,500 people housed in separate bungalows consisting of around 200 or so to a building. "The permanent camps in Germany saw the highest level of commercial organization", according to the article and this makes the most practical sense with temporary camps of new prisoners evolving into more permanent and experienced groups. The newer detainees experienced much more chaotic economic principles as the price of goods were unknown or unestablished. Many of the camps were arranged by nationality or culture where many in the camp had the same or similar desire for certain commodities available to the prisoners. Thus, prices came to be from the principles of supply and demand, where certain items were coveted by the group, whereas a different nationality would covet other commodities in a similar fashion. Confined to their own camp, private advertisement was the most prevalent way of conducting business.
The article talks about "French, Russians, Italians, and Jugo-Slavs being free to move about within the camp", and "British and Americans were confined to their compounds". However, a few prisoners would bribe sentries with cigarettes for the opportunity to have one or two meant visit other compounds. This opened the trade markets to allow groups to procure items they desired in exchange for cigarettes or other items they desired less. Some even made small fortunes with this practice depending on the value of the good in other camps and some even capitalized on selling products through black market prices to German cafes. Permanent camps seemed to be made up of prisoners from all nationalities so prices became more standard in these environments.
10/31/2011-11/6/2011
Part 3 of The Economics of a POW Camp
Another aspect of the POW camps not previously discussed in depth is the attempt to regulate markets. As discussed in Part 1 of this discussion there were many factors dictating the prices of goods, many hinging on supply and demand as shipments of rations came into the camp and the amount of reserves held for different commodities. As prisoners settled into their new way of life and found their level of comfort needed to survive and excess capacity became a reality, markets began to stabilize and opportunities became available to offer additional products and services such as a restaurant and entertainment.
11/7/2011 - 11/13/2011
I wanted to shift gears and get into a different topic this week and discuss Markets, since these are the backbone behind prices and pricing decisions among buyers and sellers. As Baye points out in our textbook "For every buyer of a good there is a corresponding seller. The final outcome of the market process, then, depends on the relative power of buyers and sellers in the marketplace." (Baye, 7th Ed.) Summarizing what Baye discusses in the text, a market can occur any time there is a buyer and seller brought together to exchange goods or services through barter, trade, or monetary exchange. These market participants consisting of buyers and sellers serve to establish the market prices. The Wikipedia page for "Market" adds "that a market is the process in which the prices of goods and services are established." (Wikipedia, 2011) This page also discusses some examples of markets, such as physical retail markets like shopping centers, auctions, labor markets, currency and commodity markets, artificial markets created by regulations such as pollution permits and carbon trading, and of course the stock market that most people think of when they hear "the market" when referring to almost anything dealing with economics.
http://en.wikipedia.org/wiki/Market
11/25/2011 - 12/3/2011
I have missed a couple of week with these blogs due to some confusion in expectations, but will pick this back up and hope to post multiple times in the last couple of weeks to catch up.
This blog post will be on MONEY, as this is one of the topics required under my list of topics. Money sounds like a very easy topic to cover, but it is actually much more complicated than just describing the paper and coin currency of a population which is often the first thing most people think of when they hear the term "money". A look at the history of money reveals how the basic ideas of obtaining necessary goods for survival evolved into a complicated system of a global economy. According to the About.com website, "money is anything that is commonly accepted by a group of people for the exchange of goods, services, or resources." (About.com, 2011) Bartering, which is simply a method of exchanging one item or service of value for another item or service without exchanging money thus no exchange of a third-party medium is used, was used before the concept of money came to be.
http://inventors.about.com/od/mstartinventions/a/money.htm
11/25/2011 - 12/3/2011
Another topic I need to cover with this Wiki topic is the different markets companies operate under, focusing on: Monopolies, Oligopolies, and Competitive markets. The type of market a company operates in determines a lot about how they conduct business, set prices, and decide how much to produce.
A monopoly is described by "a market structure in which a single firm serves an entire market for a good that has no close substitutes." (Baye, 2010) "In other words, the single business is the industry", according to Investopedia.com. This type of market clearly gives the firm greater market power since it is the only producer in the market.
An oligopoly can be described by a market where "a few large firms tend to dominate the market." (Baye, 2010) These are firms in highly concentrated industries such as automobiles, airlines, and cellular phones. Profits are affected by price changes in other companies, so when one firm in the industry alters its business other companies have an incentive to change in order to keep pace. Similar to monopolies, there are high barriers of entry.
"Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes." (Investopedia, 2011)
Read more: http://www.investopedia.com/university/economics/economics6.asp#ixzz1fXgDh91C
http://www.investopedia.com/university/economics/economics6.asp#axzz1fXMaqbAC
12/4/2011 - 12/7/2011
The last topic I need to lay out for this Wiki blog is knowledge, specifically knowledge within a market. These aspects are discussed pretty well in our textbook written by Michael Baye, but I will also offer some real world examples to better expain this topic. As stated by Baye, "The presence of uncertainty can have a profound impact on the ability of markets to efficiently allocate resources." (Baye, 2010) This uncertainty stems from a lack of information by one or both parties in a transaction, or a lack of knowledge about what the future will hold for different aspects of the transaction. Basically, each party is looking out for their best interests and attempting to mask any imperfections from the other party in order to gain a better deal and this is the nature of business. Several definitions available in the textbook that are relevant to this topic include:
Asymmetric Information is described as a "situation that exists when some people have better information than others."
Adverse Selection occurs in "situations where individuals have hidden characteristics and in which a selection process results in a pool of individuals with undesirable characteristics."
Moral Hazard is a "situation where one party to a contract takes a hidden action that benefits him or her at the expense of another party."
An example of asymmetric information would include buying a car from a private party, where that person has more knowledge about the condition of the car and any possible flaws.
An example of adverse selection takes place when one applies for life insurance. Medical history and certain medical tests place applicants into different levels of risk and thus will determine the amount they can be insured for and at what rate.
An example of moral hazard, going back to buying a car from a private party, where the person sells the car and in between making the deal replaces the nice stereo speaker with a lower quality after market stereo.
- James Crews