IB Blog Refection – Economics

1) IB Economics grading style is very different from the grading schemes of other classes. The criteria focuses more on direct definitions, key concept application and examples. I’ve found that grading wise the use of examples to explain concepts is always a positive. Using graphs to coincide with these examples and definitions is always advised.

2) Having more formative practice is very helpful. The ability to practice how we need to organize and express our ideas prior to their actual application for a grade is very helpful in reinforcing both specific definitions and also how we use these definitions to explain ideas. I can say that more formative practice will lead to better grades, but I feel that under the general circumstances of learning that is always a given. I feel the formative practice given to us to use for Section 1 was just enough to allow us to gauge how we wanted to write our final paper.

Production Possibility Curves and the Addition of Resources

Question: Using a production possibility curve, explain how the discovery of gold would effect an economy.
Response: The discovery of gold would expand the PPC of an economy. This is because gold would add an additional resource to the economy, expanding it’s production potential. On a PPC, this would result in an outward shift of the curve along both axes to a greater point. This can be seen below on the PPC diagram I have constructed to represent this shift. As you can see, the curve shifts from A1 to A2.

A PPC diagram depicting an outward shift of the maximum output curve

A1 represents the maximum output of the economy before the discovery of gold. A2 represents the maximum output of the economy after the discovery of gold. As you can see, the curve has shifted to a greater value along both axes from this discovery. This shows that the discovery of gold benefits the entire economy, as compared to a shift along only one axes, which represents a benefit to only a certain part of the economy.
A real life example of this PPC shift can be seen in Canada, where Bayfield Ventures Corp. has discovered a gold mineralization spot and has started drilling. This increase in gold in the economy increases Canada’s maximum production output, similar to what is represented in the graph above. This is because the addition of gold adds a new resource to the economy, expanding its maximum output.

Obama Seeks Tax Relief to Spur Growth – PPC

Earlier today President Obama expressed his wishes to expand tax relief in the U.S., proposing to start with increasing federal spending on the nation’s transportation system. Obama is encouraging these ideas in the hope that they will gain bipartisan support going into the November elections. It is uncertain whether or not the tax push will gain enough support to pass, but what is sure is that the proposition will have to be moved quickly if it is to take effect in enough time to change voter opinion this November.

Obama’s shift in spending from consumer to capitol based services can be shown on a Production Possibility Curve (PPC) diagram, seen below, and also explained here by me.

A PPC diagram explaining Obama's shift to Capitol services with his recent tax relief proposition.

Ferruccio Lamborghini: Entrepreneur

Ferrucio Lamborghini, the founder of Automobili Lamborghini.

Born in Italy in 1916, Ferruccio Lamborghini was fascinated with engines from an early age. Lamborghini joined the army during World War II, and was stationed on the island of Rhodes. There was very little military action on the island considering its isolated position in the Mediterranean. For this reason, any broken vehicles on the island had to be repaired on the spot, reusing old parts. Lamborghini found himself especially good at doing this, his friends calling him a mechanical wizard for his improvisation technique. Lamborghini kept many of the vehicles on Rhodes operational using old or outdated parts. After the end of the war, Ferruccio returned to his home in the north, near Modena. Here Lamborghini found a severe need for tractors due to the areas major agricultural business. Using old military parts, Lamborghini was able to build around one tractor a month. He expanded his company as there became a very high demand for tractors. Eventually Lamborghini began producing his own engines, and even reached a production right of over 400 tractors a month in 1960.

Around this time Lamborghini’s focus shifted to developing a high performance car. He had spent these years of his life owning many other exotic Italian cars, including Oscas, Maseratis and Ferraris. Lamborghini however was never really satisfied with these vehicles. Especially their engines. There is a famous story saying that Ferruccio was having troubles with the clutch of a Ferrari 250 GT he owned. He decided to visit Enzo Ferrari about it in his factory nearby. Enzo however would hear nothing from Ferruccio, who he called a simple tractor maker and dismissed. Angered by this, Lamborghini decided there was nothing a Ferrari could do that a Lamborghini couldn’t, and started production designs for his own car, designing it around a powerful new V12 engine, the design of which was drafted by one of Enzo’s ex-Ferrari engineers.

So what led to Lamborghini’s astounding success? His own personal ability. Lamborghini followed his passion, building a company around something he did very well, and something that was by no measure easy to do. Using his experience in the army, Lamborghini turned a small single man company into a sports car giant in only 20 years. With his ability to take risks for financial gain, such as building the original Lamborghini’s design with a much more expensive but much more powerful V12 engine compared to that of the Ferrari 250 GT, Lamborghini created record financial gain in only a few short years. With his new found wealth, Lamborghini again took a risk, expanding his company time and time again to be able to meet Italy’s production needs. Spearheading his company with almost tactical financial decisions, Lamborghini turned his small company into a name synonymous with sports car legends.

The Halo Effect

Microsoft’s latest game release in the multi-billion dollar Halo franchise is set to release this September 14. Why is Halo such a popular series, with its many spin-offs, book and merchandise? The halo effect. While the name might be a bit ironic, the idea is simple. Described in depth in this Businessweek article, the halo effect has turned a one-time game into a gaming and internet icon. The original Halo release was as part of the debut for Microsoft’s X-box in, a revolution in console gaming. That was 2001. Skip ahead to 2010; the Halo franchise is looking at it’s 6th title release, and expecting record-setting results.

So what does the halo effect have to do with Halo’s popularity? The halo effect is described as a simple bias. The perception of one trait is affected by that of another. In other words, if the part of the series looks good, so does the rest. After Halo set major sale records in 2001, the plan for the sequel’s release was set for 2004. But what made Halo 2 sell so well? Halo 2 sold well because people saw and understood how good the original Halo was, and therefore decided (with bias) that the second one should be as well. That is, the perception of an aspect in the series’ first game affected that of the second, and then the second with the third and so on. This growing effect lead to the expansive growth of the series, with it’s release of Halo 3 in 2007 netting over $600 million. The franchise itself has an estimated revenue of $16 billion after June of 2010. And finally, this bias towards the solidity and other overshadowing aspects of the Halo franchise culminates as Microsoft is prepared to back it’s latest release with “the largest marketing budget it has spent on a game.” While Microsoft won’t disclose just how much it’s planning on spending on the new release, it can be estimated that sales will cover this cost and much, much more for the gaming and software giant.

The halo effect can also be applied to more vague aspects of economics. Take Halo for example. It’s simply a game franchise building on it’s previous releases, the same way shoe companies release new model cleats each year or car companies with newer, safer cars. You wouldn’t feel impulsive when buying a cleat or a car you knew nothing about. But based upon the cleats looks (say it’s shiny, with a large, vibrant logo on the side), you may feel the cleat as being superior to others. Price can also create bias. The general idea is that things that cost more are better. While this may be true in most situations, it is not always the case. If you can’t decide between two cars with exactly the same paint, frame, ratings and reviews, price might influence which one you think is superior, when in fact they are both equal.

Opportunity Cost

“Time is money” -Benjamin Franklin

A simple statement that helps define the concept of opportunity cost. Opportunity cost is not just the cost of the item or activity you are attending, but the cost of the activities, items and time you are giving up in order to obtain your want. Opportunity cost may at first seem to be only the cost of your activity (say $100 to see a baseball game), but it is really much more. To find the true opportunity cost of an activity, you need to account for the things you are giving up asĀ  well. For example, in the 5 hours you are spending watching the baseball game, you could be doing other things, such as spending time with your family, or reading a book, or cleaning you house. These things can be priced upon personal value, meaning they can be compared against the value of the baseball ticket. So the actual price of going to the baseball game is not only the price of the ticket, but the personal cost of whatever activity you are choosing to give up as well. These things are known as alternatives.

You can sum together all of you alternatives into a single price to understand the real opportunity cost of your chosen activity, right? Wrong. You can’t sum these values together because you don’t have enough time to do them all. You only have time for one alternative. Let’s say for example that instead of going to the baseball game you could instead spend time with your family for 5 hours or work on a book you are reading for 5 hours. Now, the opportunity cost is not both of those activities because even if you did not attend the baseball game, you cannot spend time with your family and read your book because the sum of time is 10 hours, and you only have 5 available hours from not attending the baseball game. For this reason, you cannot sum together the value of all your alternatives as being part of an activities opportunity cost.

You Can’t Place a Value on Life

Today we looked at the ‘You can’t place a value on life’ activity. This activity requires you to choose from 6 patients which ones are given time on the dialysis machine. Factors that play into these decisions include required time on the dialysis, occupation, other illnesses and age. You are limited to a maximum of 100 hours of dialysis time weekly, meaning you can only save a few of the patients. This activity relates to medical situations in the real world, where the demand by patients is more then the supply of the machinery available at the hospital. In situations such as these, doctors must chose who can stay on the dialysis machine and who must look elsewhere for help. These decisions were not easy to make in the classroom, and I can only gather that they would be all the more difficult in real life situations. Situations such as these stress the moral base of a doctor’s true character, and whether he makes the decisions on the basis of the patients needs or the hospital’s funds. Keeping this in mind and understanding all of the factors that play into our decisions, our group set forth on deciding who lives and who is turned away in this activity. In the end, our group chose to save Peter, Todd and Tom on the decision that their situations could recover with the help of dialysis.

Peter was our first choice knowing that he was the father and breadwinner for a family of 4 kids. He is also insured, and only 37 with no background illnesses, meaning he will live a long life with the help of dialysis. We chose Peter understanding that he was the main financial support of his family. If Peter was to die, not only would he suffer, but so would his 4 children and widowed wife. On this basis we decided that Peter could be allowed the 40 hours of dialysis he required weekly.

Our second choice was Todd, a 16 year old student who is uninsured, and has a slight mental retardation. We decided Todd deserved the dialysis since he has only had the illness for slightly over 2 months. Knowing this, we believe that Todd does have a large chance of recovery and the chance to lead a long and successful life, even with his slight handicap. Even if Todd was stuck with dialysis for the majority of his life, we believe that as a young student who’s illness has only been given 2 months to be treated deserves more time on the dialysis to determine whether or not he could be healed indefinitely. For this reasons we allowed Todd the 20 hours of dialysis he needs weekly.

Our final choice was Tom, the 45 year old politician with a wife and 3 kids, no background illnesses and insurance. We believe Tom deserves the dialysis treatment as he, like Peter, is the breadwinner for his family. Without Tom, his family would most likely suffer the effects of his death financially for years. Tom is also insured, meaning the medical costs would be largely covered and he would be able to afford the medical treatment in the long term as well. This would be a level of financial security for Tom’s life that made him a candidate for our selection, something other patients lacked. For this reason we chose Tom as our final patient, allowing him the 40 hours of dialysis he needs weekly.

Making these decisions, real or not, was a difficult task. I cannot imagine the hours of decision making that goes into making these decisions in real life. From a financial aspect, the decisions are simple. From the medical aspect, the decisions are simple. But combining the two makes for a very difficult decision, and not one that always has a clearly correct answer.