Archive | September 2015

Two interesting microeconomic stories……….

One) 

Drug Goes From $13.50 a Tablet to $750, Overnight

How could this happen?   The drug, called Daraprim and used for over 60 years to treat diseases caused by immune deficiencies and malaria, was acquired in August by Turing Pharmaceuticals, a start-up company. Turing immediately raised the price to $750 a tablet from $13.50, bringing the annual cost of treatment for some patients to hundreds of thousands of dollars.

Think about what this implies for the price-elasticity of demand for the drug and for the optimum output of the drug.

Turing, on the other hand, justifies the price increase by asserting that the profits will fund research into better drugs. But it should be noted that the cost of producing one tablet is estimated to be about $1:00.

POST-SCRIPT:  A few days later the company announced that it would lower the price of Daraprim to a point that is more affordable and is able to allow the company to make a profit. The final cost was still being determined, but would be less than $750 per pill.

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Two)

VW intentionally violates clean air standards

The U.S. Environmental Protection Agency stated that Volkswagen intentionally skirted clean air laws by using a piece of software that enabled about 500,000 of its diesel cars to emit fewer smog-causing pollutants during testing than in real-world driving conditions.

This seems to be a case of market failure on two counts……the existence of negative externalities and asymmetric information.

The CEO has resigned, but the scandal will have reverberations not just for Volkswagen but also for the car industry as a whole and for international trade.

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Interest rates “on hold”…until when?

The “will they”  “won’t they” about interest rates continues. On 16th September it was reported that the Bank of England would soon raise rates and then, just two days later, the Bank of England advised that they might CUT rates!

Meanwhile, despite the anticipated rise, the Federal Reserve decided, in the end, not to change rates this month. The fundamental improvements in the US economy imply that interest rates could be raised, which would benefit savers and pensioners and would help to choke off the possibilty of inflation as real GDP increases (remember your AD/AD diagram!) and unemployment falls (remember the Phillips curve!). However, it seems that recent global events and, in particular, the uncertainty in China have dented confidence. There is concern that a rise in rates could hold back investment and consumption so much that the main global economies would fall back into recession.

Notice that changes in interest rates also have an impact on exchange rates. Next month, the grade 12 students will start to learn about the connections.

Central Banks in USA and UK tightening monetary policy?

At the end of this week, we will know whether or not the Federal Reserve will raise interest rates for the first time in about ten years. At present, nobody knows for certain what they will do and economists are also disagreeing on whether or not the rise should take place.

Any movement in interest rates has important implications for the macroeconomy, exchange rates, financial markets globally, and ordinary consumers who have housing loans or credit card debt.

Start of a new academic year (2015-16)

Congratulations to the 12th grade students on becoming seniors and welcome to the 11th grade students.

As requested, I have started to upload the power-points that I use when teaching to the new page entitled “Teaching power-points”. But do not forget that they are not a substitute for the hand-outs, the worksheets, taking notes, and (most importantly) thinking through concepts and models for yourself. They MIGHT be useful for review or for occasions when you miss a lesson.

During this year, I will endeavor to comment briefly on current economic events on this page. Let me know what else might be useful to you.