Fast Food: An Economic Staple?

It’s been interesting to watch businesses enter the market during the economic recession and now as the economy begins to recover. The timing of new fast food restaurant locations has been especially intriguing. Consider, St. George, Utah, for example. In the past several months, major restaurant chains such as McDonalds, Pizza hut, and Hungry Howey’s, among others, have all expanded current stores and opened multiple new locations. According to an article written by Andrea Holecek this is no surprise and not a new development. When things started slowing down for many businesses in 2009, as Holecek writes, “burger business” industry leaders McDonald’s, Wendy’s and Burger King all saw consistent increases in revenue. While fast food suppliers rarely refer to their products as “junk”, one might assume that the label of “inferior” might sting even more. We know, as the text defines, that demand for an inferior product “is negatively related to changes in buyer’s income” (Page 29). In other words, when money is short we look for less-expensive alternatives. The numbers don’t lie and demand for fast food has increased as average American income has decreased.

However, the two concepts – lower income and higher demand for fast food – are seemingly juxtaposed one with another. The average person would assume that, as income decreases, consumers would be reluctant to spend since discretionary income is limited. Still, fast food sales continue to grow even in our current economic state. What is it that draws us to fast food? Price is an obvious determinant, but how much can our attraction to burger joints and pizza parlors be attributed to factors such as advertising, durability, weather, and location as the text suggests?

Is Quitting a Positive?

I found an interesting discussion on the positive sides of quitting at the Freakonomics blog. As a college athlete here at SUU, the idea of quitting is something that should never enter my mind, in every aspect of my life. But can there be positives, if done at the right time, to being a quitter?

The discussion focuses on the two concepts of, sunk costs and opportunity costs. Can sunk costs really be so overbearing, that it seems impossible to leave behind the current investment and move on to another one? There were a couple of examples that looked at professional athletes, specifically baseball players. I think baseball is a good sport to look at, it seems like, as a sport, a lot of athletes are drafted several years before graduating college. One player, Justin Humphries, gives an account about a time when he was reflecting on his situation in life. He was drafted into the minor leagues, where he had one goal in his mind, making it to the major leagues. He endured several injuries, and bounced around the minors for a while, until at age 27 he decided to quit. How could he quit when he had put so much time and energy into baseball? Especially when he had not accomplished his goal of joining a major league team? Was all the time he spent just a waste? (sunk costs) If you look at it from a economic point of view, it very well could be, playing in the minor leagues was not making him much money at all. He recounts making $2,000 a month, living with his parents, no degree, not even an associates and thinking that there were opportunities that he was missing out on. (opportunity costs) Should he continue to wallow in the despair of his sunk costs of baseball play? Or, quit and seek out more profitable opportunity costs that could improve his future? He felt like baseball was a means of sinking his life away, but that he had an opportunity to rise up and get something more.

Is Humphries experience so different from many other things we may encounter in life? I know baseball was the subject, but so many life lessons can be taken from being able to quit and accepting that decision. As hard as it might be to accept, I can see a brighter side to this whole quitting idea. Sometimes poor decisions are made in everyone's life and it seems as if it can be too hard to let go of poor decision because, too much has been invested. But if other options are considered, or weighed in comparison to what has been lost and what can be obtained in the future. Can there be greater things obtained by quitting? Or should the idea of quitting be something that is unheard of, and looked down upon? It seems that there can be a time for quitting, a chance to seek a better economic life for those that feel lost in their sunken costs. But there can be opportunities to have a brighter future!

Game-Changer

The article I read recently is about a topic that has caught my attention. It is called "Shale Oil Boom Takes Hold on the Plains" by David LaGesse of National Geographic (http://news.nationalgeographic.com/news/energy/2011/09/110928-shale-oil-boom-colorado-great-plains). The article talks about the recent discovery of a new oil drilling technique that makes it economical to drill and extract oil here in the U.S. Experts have always know about the vast amounts of oils located here in our own country, such as the Bakken fields in North Dakota, but the problem has been that it is too costly to extract. However, in recent months, a new technique to drill and extract crude oil, which has been adopted from the same technique to extract natural gas, is being used to extract crude oil. The technique, called fracking, makes more sense in the crude oil market than the natural gas market because the demand and price for oil has remained high whereas the same can not be said for natural gas. This recent discovery has changed the market for crude oil completely. The course text book explains that "...a seller that uses a technology with a lower variable cost will lower its average, average variable, and marginal cost curves" (pg. 89). One of the main reasons why more oil is not produced in the U.S. is the cost to drill and extract, but with improved technology, the costs to oil-drilling companies is significantly lower and more profitable. The text book also explains, "...a change in the price of any input will cause a shift of the entire market supply curve" (pg.102). The article is the perfect example of this economic principle. The article explains that "...oil production in the U.S. portion of the Bakken went from 3,000 barrels a day in 2005 to about 400,000 now". The improved technology has made it cheaper for firms to drill and recover more oil and increase the quantity they supply at a cheaper price, which (should) mean cheaper prices for us at the gas pumps. Drill, baby, drill!

Big Changes Ahead for Consumers

Bank of America, THE giant among banks in the United States, announced the institution of a new fee today. According to Andrew Johnson, writer for the Wall Street Journal, Bank of America will begin charging $5 per month to account holders who use a debit card. According to the article, other large financial institutions are expected to follow suit.

For me, this is a sign of major changes to come in the banking industry. It is also a sign of major pressures being placed on banks across the country by federal regulators. Outlining an industry wide $6.6 billion projected loss, Johnson cites new federal limits which have been placed on "swipe" fees associated with debit card usage. Banks are facing a need to be creative in the way they generate their revenues. So who are the victims? You and I as average consumers. We will now have to pay similar fees which, on the surface, may seem minuscule on a monthly basis. The catch is that a simple $5 fee each month means billion dollar gains for large institutions such as Bank of America.

I view this as being a direct outgrowth from onerous regulations which have been placed upon financial institutions. Federal regulations have caused a severe shortage of capital for small business, and a lack of revenues for financial institutions. The question is what lies ahead economically for financial institutions? Also, will life become even more difficult for the average consumer as regulations mount on the shoulders of financial institutions?

...and you thought your job was safe

Budget cuts have happened all around school districts, and even teachers have begun to worry about what their future holds. We hear that school districts do not have the money they use to have, but how on earth did they fund a new data portal for parents to compare schools on standardized test performances. According to a recently published article, millions of dollars have been spent in developing, administering and collecting data for this portal. The article talks about how parents can easily misunderstand this data and come to their own conclusion that one school is better than another based off of the test scores. Talk about making education worse for teachers, now they will have to worry about students being removed from their school to go to another because of higher test scores. If the supply of students decrease at specific schools, that means that the demand for teachers will also decrease. Teachers no longer can think their jobs are safe. Teachers must now recruit students for their classes. And that is not all; teachers now have to compete with online schools, which will also decrease the supply of students in classrooms. What does the future hold for public educators? Will public schools be obsolete 20 to 30 years from now?

High Style in the City

According to an article found today in Barron’s Financial News, the market for high-end urban real estate in the United States is back on the rise. The article, entitled “High Style in the City” , states that unit sales in Manhattan, Miami, and San Francisco are up by as much as 50% since 2009 and that prices are up 15% or more from their 2008 lows.

The article attributes the rise in high-end urban real estate to an increase in the number of new foreign buyers that have recently entered the market. While wealthy Russians, Indians, and Europeans continue to have a strong presence in high-end real estate investing in the United States, a new group of foreign investors have recently entered the market. An expanding wealthy class from China is looking for new places to invest, as are Brazilians, who are currently enjoying a big currency benefit from the Real, which is up 35% against the dollar since January 2009. These new investors are choosing to invest in U.S. properties because the luxury market here is significantly undervalued compared to other major cities throughout the world.

This article does a great job of illustrating how a shift in demand can take place as new buyers enter the market. This year in Manhattan the demand curve for apartments and townhouses in the $5 million-plus range has sifted outward as the new Chinese and Brazilian investors have entered the market. This has caused an increase in the number of units sold accompanied by an increase in the price of properties being sold.

From Corn to Beef ... and Everything in Between.

Just going for groceries is not as cheap as it was a year ago, and for the average consumer, might even cause one to plan for more budgeting. One of the main drivers for these price increases is not just a result of high inflation of the US Dollar that you read streaming across the TV screen every morning as you eat your Wheaties. Bruce Blythe is a business editor for The Cattle Network. In Blythe's article titled: "Supermarket meat, dairy inflation accelerates in August," he explains, "Supermarket dairy prices last month posted the largest increase in over three years and beef and pork inflation also accelerated as high feed costs and tight animal supplies forced consumers to pay more for steaks, chops, milk and other products" (Blythe).
There is a great effect between economic complements and substitutes in agricultural production. For example, milk cows are not just used for milk. If a milk production cow does not produce an adequate amount of milk to cover its own costs, that cow will be culled (sold for meat). Meat and dairy markets work simulaneously. If I sell a milk cow for beef because of inefficiency, the supply of milk decreases and the supply of meat increases. Legitimately inflating milk prices and deflating beef prices.
Now, let us say the Central US is flooded for two months longer than it is normally. This lowers the supply of corn, of which, is a staple for people and animals. This increases the price of corn which is an input cost for animal production, relaying that cost throughout beef and milk prices and to you the consumer.
This is great food for thought next time you sit down for a steak at Texas Roadhouse or Outback Steakhouse.

Sporting Events in Our Economy

Sporting events in the past, have been seen as a form of entertainment, competing with other forms of entertainment. But according to the Wall Street Journal, WSJ Sports Econ there has been a visible change caused by our economy. According to Brett Yormark, CEO of the New Jersey Nets (NBA), "We're not just competing for people's entertainment dollars anymore... We're going up against milk and orange juice."

If this statement is true, the traditional forms of entertainment that once competed with sporting events are not seen as substitute goods any more due to the decrease in income levels. Not only do we see a shift of the demand curve to the left but also a change in the substitute goods that compete with sporting events. This would suggest that utility changes with a change in income level.

Many people can still see sporting events on TV or on the internet. This could cause new behaviors for how we experience entertainment and keep the demand curve from returning to its original position.

Should those involved in the Sporting Event Industry expect a full return of consumers or change their traditional view on sporting events?

Normal and Inferior Goods

In an interview posted on NPR (http://www.npr.org/2011/08/19/139774844/grocery-shoppers-leave-wal-mart-for-dollar-stores?ft=1&f=1006), retail research analyst Brian Sozzi explains the reason behind Wal-Marts lower-than-expected sales figures. He explains that Wal-Mart's core customer makes between $30,000 and $60,000, however, with the economy struggling to climb out of a recession, many of those core customers are forced to stretch their income. Mr. Sozzi explains that due to the reduced income of customers, many households are purchasing cheaper brands of products and in smaller package sizes and the beneficiaries of all of this are the dollar stores. Dollar Tree, Family Dollar, etc. have all seen their stock prices rise backed by increased earnings.
The trend of individuals and households migrating towards dollar stores illustrates the economic principle of normal and inferior goods, a concept illustrated in our most recent assignment. The text Managerial Economics, authored by Ivan Png and Dale Lehman, explains that "...the demand for a normal product is positively related to changes in a buyer's income. By contrast, the demand for an inferior product is negatively related to changes in a buyer's income" (29). In the case of Wal-Mart and the dollar stores, we see that certain products at dollar stores are inferior goods because as buyer's income has decreased, demand for these products have increased.

Unemployment is high yet skilled people are in short supply

In an article entitled The great mismatch, the author suggests that employers from rich nations are now hiring freelance workers from developing countries due to a lack of quality skilled labor in their local job market. Several benefits these employers derive from outsourced labor are: lower wage expense, flexible staffing, and higher quality work.

My close friend builds websites for a living. He called me today suggesting that he plans to stop building sites using local labor and start using freelance labor from India for a fraction of the cost. He feels that the savings derived from using freelance labor will allow him to lower the cost of his services and increase his profit margin.

What economic results are likely to occur in the local economy when he spends more money personally from increased earnings but removes jobs from the local market? How does the market compensate?

New vs. Used

I heard a news report on the radio last week that implied new vehicle sales were up due to the high prices of used vehicles. I bought a pickup truck at the end of 2007. I curiously checked the Kelley Blue Book value of it 10 months later and was a little miffed to see the value of my truck had dropped almost $5,000. I just checked the value again and surprisingly it is hasn't dropped much over the past 3 years. Used vehicle prices are currently so high that in many instances it makes more sense to buy new. According to edmunds.com, in a typical economic climate, there is usually more value in buying a used car. However, the current economic climate is anything but typical. The deals on new cars are so enticing as to make buying a new car the better alternative over buying a certified pre-owned or a one year old car of the same model. There are also some pretty good perks to buying new such as warranty and interest rates. Below the same article on edmunds.com is a list of vehicles with lower than or similar monthly payments when comparing new and used vehicles. In our current economy, the prices of used vehicles are to the point where people are going to go with a substitute, which in this case has increased the quantity demanded of new vehicles.

Discipline or Bust

Does the aggregate level of self discipline within an economy play a role in our economic stability, or more specifically—does it determine the extent to which our economy will be able to recover from a crash? Some leading economists seem to think so—I agree. Dr. Brian Knutson a Stanford Psychologist has published a number of articles that have linked the idea of us receiving a large sum of money, to stimulating the same emotional sensors of the brain that sex and drugs activate. In other words—money and the idea of consumption is a very powerful stimulus. His work is helping financial planners better understand how to consult their clients; how casinos can take advantage of individual’s emotions to increase profit and the like. The idea that emotion affects our financial decisions is nothing new and seems almost common sense, but what if those at the lower income brackets all overspend and refuse to live within their means? Dr. Steven Gjerstand’s (a Nobel Peace Prize recipient) article hypothesizes that excessive consumer debt is the differentiating factor present when our financial markets crash and have a difficult time rebounding. If his hypothesis is correct, we may be in a world of hurt. Remember, Dr. Knutson has linked our response to money as being on the same level as some incredibly powerful stimuli (drugs and sex)—as long as liquidity is available to the undisciplined, consumer debt will continue to grow and increasingly violent market corrections will, hopefully sooner than later, beat us and our government into living within our means. In the mean time, small businesses lack liquidity and in most cases need credit to achieve a scalable system. Only time will tell how markets and regulators will respond, but make no mistake—self discipline is a variable we must reconcile with.

Blockbuster vs. Netflix

The battle between Blockbuster and Netflix continues. From 2006 – 2007, Blockbuster closed over 500 stores trying to compete with Netflix. As Blockbuster tried to increase their over-all membership, Netflix was increasing in domination because of their “total access” to movies. (Say Goodbye to Blockbuster) In 2010, Netflix gained market power and received revenue of over $2.14 billion. (Netflix Press Release) One would think Blockbuster would just give up. But in 2011, Hollywood put their foot down against Netflix, and the light began to shine for Blockbuster. Because of Netflix market power, Hollywood demanded additional compensation. Netflix agreed not to rent out new releases from Warner Brothers Studio for 28 days. Thus, allowing Hollywood to see more growth in their DVD sales. (Netflix Gains Market Power) With market power, Netflix also decided to raise their prices. Blockbuster saw this as an opportunity to take away Netflix’s unhappy customers and came up with a “total access” plan which provided customers with a 30-day free trial and only $9.99 per month (renting one disc at a time). (Blockbuster Rescues Furious Netflix Customers) Both companies are not giving up! This battle is continuing…who will come up with the next great idea to win over unhappy customers and regain market power?

No Double-Dipping!

Fears of a double-dip recession have even reached the farthest reaches of Africa. As I watch the stock market react to all the "assistance" the federal government wants to provide in growing the economy, I wonder if I'm alone in thinking that much of the actions taken by our public servants aren't causing more harm than good. Am I a conspiracy theorist in feeling that the more the government meddles in the market, the more uncertainty is introduced? Does President Obama truly think that announcing a plan to spend $447 billion more in government funds in a "jobs" bill will instill confidence in the Wall Street investor, small business owner, or average consumer? Since when does America need it's government to create jobs through spending? It's time that instead, government steps aside, extricates itself ever-so-slightly from the taxing, monitoring, and regulating of America's entrepreneurial base, and allow businesses to create the jobs that are so desperately needed.

Issues behind College Football TV Networks

The recent conference realignments that took place in NCAA Division I Football may actually stem from the 1984 SCOTUS decision to break up the NCAA cartel in TV broadcasts and the lack of similarity among conference members which is critical in order for a joint venture, such as a conference, to succeed, according to Market Power blog. For example, teams in the Big XII Conference believe they should all serve the same market and split revenues evenly through a conference TV network. However, larger schools in the conference, such as Texas, are able to market themselves to larger markets and generate greater amounts of revenue for their school through their own TV networks. This leaves teams in the conference who have smaller markets, such as Nebraska and Texas A&M, fighting to earn revenues in the marekt they share and upset with how the market in the conference is distributed. Since Texas serves the largest market in the Big XII Conference, is it unfair for Texas to be able to have their own TV network to broadcast to their market so they maximize their revenue potential or should they be forced to cooperate with smaller market teams and split revenues evenly due to their conference affiliation (joint venture)? Should the smaller Big XII schools create their own TV networks in order to expand their revenue potential as much as possible to compete with Texas's TV network or should they coordinate a network with Texas that will allow both parties to be better off?

Shift in Demand

Kill two birds with one stone. The University of Maryland and Under Armour may have done just that. By introducing a new uniform during their first football game this season, designed by Under Armor, they may have increased demand in both products. The wild uniforms drew a lot of questions and in turn spurred a lot of interest. The uniforms definitely caught my attention, causing me to ask questions and dig deeper into the uniforms. The article, “Under Armour, Maryland Score Marketing Touchdown with Unique Football Uniforms”, found on Forbes.com, gives us insight that both parties received good advertising from the new uniform. However, advertising is only the first step. In order for this to be beneficial it must increase revenue by increasing demand. Is this marketing ploy enough to cause a shift in demand for the parties?

Is raising resident taxes and lowering corporate taxes a good idea?

In this article: offthechartblog it talks about how Wisconsin, Michigan and other states are raising taxes for residents and giving tax breaks to corporations. With an increase in taxes the residents of these states now have a decrease in disposable income. The question is will this absence of funds be reflected in a decrease of sales to these corporations that received a tax break? In other words will the demand for goods(clothes, products, cars etc.) decrease as taxes of residents increase? Or will these corporations reflect the tax breaks in there pricing? Or remain unchanged? Of course there are those companies that do much of there sales in other states or countries that have not yet received a tax increase. But for those corporations that do most of their business in state what will be the result of the tax increases and decreases? Would they be better off not increasing or decreasing taxes?