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Rationality

Have you ever noticed yourself to buy an item you didn’t want or need but you happen to buy it anyways?

To be more specific have you ever been put into a state where you don’t need or want something but

  1. You ‘like’ it
  2. Everyone has it
  3. There something I said positive about it so

 

……. I’m going to purchase it.

Do you agree with any of the above? Yeah? but why do we do this? Why do we always make our minds to buy something for the reasons that are not even connected to our values or uses?  Well the answer is simple because I am a human, you are  a human.    

As an individual I usually want to think of myself as a rational thinker and decision maker just like each and everyone of us assume we are. When we make a decision to buy, we make the a rational and informed evaluation of the product considering the factors of comparisons and the alternative choices we could have selected. And these choices we made and make comes from the satisfied purchases we made from our selections.

A minor change in our lives such as drinking a cup of coffee from one place to another alters our and variable conclusions. For say, one day you notice a different coffee shop (B) for your daily coffee rather than main coffee joint (A) and you decide to walk in. This new place has different prices and is more expensive and a completely different theme than your dominant shop, but instead of leaving empty handed you decide to further your decision on buying your main go to coffee. Meanwhile, after this step your interpretation of you previous step shows that you decision from before was finalized because that coffee place is your coffee style.  Making you continue to revisit the shop constantly shop there. Causing you to make an initial decision with a stream of decisions which becomes a habit.  The shop (B) outlook is to convince the customers that is was not like another shop including shop A by illusions. So now anything that was different than the new shop becomes irrelevant.

Anchoring Effect

The way individuals value an object when a first piece of information offered to them and that information is the bias that is heavily relied on. What you pay for the same item that is old under two companies won’t be the same due to the anchor. What you knew before on the coffee shop you used to go to become irrelevant. Once decision making comes along. Anchoring come to role play to use that information and make a judgment that would benefit us under whatever position you are at.

Supply and Demand

 

The graph above shows us that at (300,1.00) the item reaches equilibrium.  The equilibrium price is determined by both the supply and demand.

The basic foundation: Many factors determine the supply and demand called determinants.                                                                                                                                         Supply determinants; number of sellers, seller’s expectations, cost of factors of production, technology and prices/profits of other goods.                                                              Demand determinants; number of buyers,  buyer’s expectation, buyer’s income, buyer’s preferences/consumer taste and the price of other goods.

But the real question is can goods be overpriced?  This is when there is a point above the equilibrium. For say, if there is a point at (1.25, 200) the good is not only over priced the supply of the good decreases. A good cannot be overpriced because it is dependant on the whole market price. So once the equilibrium changes there will be a shift in the market.

To clear things up a bit, if you decide to go shopping at any store, one of your favourite preferably, at a chilly day, you walk into a store with employers that assist you and one helps you out and suggest you to to take a look at a limited edition beautiful coat. When going into the store you might have not thought of specifically going for the new limited edition coat. But with the push of the seller you are tempted or even forced to look at it. And with the given factors you decide it’s a nice coat because it’s on sale, limited edition, and it’s the perfect season. You try it on and the buyer compliments you on how it’s the total fit and colour matched your complexion. And you buy it.

We can relate this decision to 6 factors which  Dr. Robert Cialdini describes (https://www.influenceatwork.com/wp-content/uploads/2012/02/E_Brand_principles.pdf ) that make us decide what we decide:

  1. Liking;  the influence of the people we think positive of.
  2. Reciprocity – we are ready to do something and or give something to someone who has already done to you.(At the offing, they paid me you compliment. That affects your decision, they gave you something, engaging the principle of reciprocity.. Now it creates the scene that it was time you to give something back: buying something from them perhaps to neutralize)
  3. Social Proof – we do thing that people like or do which make us feel better and when we think of it if everyone is doing something we tend to follow it assuming there’s good reasons for it.
  4. Consistency – behaviors and attitudes that are kept stable and constantly comminuted and are inclined to fulfil of.
  5. Scarcity  –  the thought of something being less of makes us want to have it more. (the coat was limited edition making the buyers expectation of the product to be sold out faster and for a limited time)
  6. Authority – looking for guidance for our decisions from someone who you think is more knowledge on the topic than you. (with the assistance of the seller in the tore it opens the door of some who has knowledge in the fashion industry may have a better view on what’s right with their input of opinions)

All in all, Are the prices we pay for goods rational? Can a good be overpriced? According to what we pay are rational compared to the market. So what makes us irrational overall? Even though the prices aren’t the irrational part it’s the decision maker’s. Being human it’s in our natural habitat to make imperfect decisions.

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Is Scarborough Subway the way to go?

My family first moved to Scarborough after immigrating to Canada. To this day, I still prefer living in Scarborough over North York. One of the things that saddened me about this city was that there were no options of reaching downtown from Scarborough by the subway. Scarborough is a fairly large city with many people living in it. So it’s not surprising if people wondered why the subway system was limited to Downtown Toronto and the North York area. Therefore, like other people, I thought the city was finally doing a good job when they decided to build a subway to connect Scarborough to the other subway line. But honestly, dreams aside, with the cost going up to $3.36 billion to make this subway, I began to wonder if this subway construction is worth it or not.

Over Whelming Cost

City council of Toronto has been going on for years now on whether or not to build a subway in Scarborough. It first started with Transit City wanting to build Light-Rail Transit (LRT) which would have been connected to the Scarborough RT and would have made seven more stations throughout Scarborough. But all of that went to drain when Rob Ford stepped up and scrapped this idea so he can build a “subway” which later became an “one-way subway” to replace the Scarborough light rail line. And till this day, City Staff are still debating over building the LRT or the subway.

I mean it is a hard decision considering both options have great benefits. By implementing the subway,

  • The citizens of Scarborough can get themselves a faster and easier transit from scarborough to downtown
  • The citizens will also finally get results from paying their fair share of taxes
  • The subway sytem will last longer
  • It will be a great long-term investment for jobs and
  • Scarborough will become a great economic hub with greater job opportunities.

So you may ask, why haven’t we started building this thing yet? But that’s before you know what the estimated cost of building this one-stop subway will be. In 2016, the estimated cost  was $2 billion which have now spiked up to $3.36 billions. Wait, did someone say $3.36 billion? And that’s not all. Researchers say that the estimated cost could even jump to $5.5 billion by the time they finish building this subway. Frankly to me, the cost seems outrageous compared to the fact that the city is only building a one-stop subway. And along with the cost, the number of new riders this subway is attracting keeps going down. Last summer, the number was 4500 riders which went down to 2300. So then really, why is building this subway even an option?

It maybe Equitable but is it Efficient?

Equity means that everybody get’s his/her fair share. By building this “one-way subway,” the citizens of Scarborough will finally be getting their fair share of fast transit. According to The Star, one of the reasons Mayor John Tory is so pinned to building this subway is because he thinks “Scarborough subway is long overdue.”  It’s good that he is finally thinking of the citizens in Scarborough, but is this idea going to result in an efficient economy?

An economy is efficient if it takes all opportunities to make some people better off without making other people worse of. Most of the cost of this “one-way subway” that is still continuously rising, will be paid by the money of the tax-payers in Canada. It’s good that this subway will help the citizens of Scarborough travelling downtown but it’s cost is also halting some of the projects that will fulfill other citizens stated goal. For example, Zuzana Betkova, a former resident of Scarborough told the star:

“I’m wondering, though, about the people in Scarborough who do not want to go downtown Toronto, who want to live and work in Scarborough and who do not have transit options within Scarborough and I don’t see how this one-stop Scarborough extension will help those people,”

Data referred by the city also backed up her point as they mentioned that ” 23 per cent of all transit trips that begin in Scarborough are destined for downtown and 48 per cent of trips started in Scarborough end in Scarborough.” Which is why Zuzana Betkova, like many is also in favor of the LRT option. And in my opinion I believe that the opportunity cost of building this “one-stop subway” is the LRT option that many citizens want.

Opportunity cost is the value of the benefit of the next best alternative that could have been chosen but was not. A seven-stop LRT is the next best alternative that is being forgone by our Mayor. If the seven-stop LRT is built, it can connect from Scarborough Town Centre and end up at Sheppard Ave. This will give many citizens a chance to walk  to different stations and allow them to stay in subway for longer route instead of taking a crowded, delayed bus. To further elaborate, the Star even had a quote of a petition that read:

“It’s time for our politicians to understand that we do not just want one stop on the subway; we want transit that takes us to work, school and all the opportunities this city has to offer.”

Another great thing about the seven-stop LRT is it’s cost, which is estimated to be about $1.6 billion and way cheaper than building the one-stop subway. This also gives the TTC the chance to use tax-payers money for other service. Since it will cost around $1.6 billion, the city can make the seven-stop LRT using the provincial government’s money and use the rest of the federal governments contribution to make the 18-stop Eglinton East LRT that the city has also planned to make. If not, they can always use the money to invest in more buses so that the bus services can stop getting delayed and buses stop getting overcrowded during rush hour.

In the end, the Mayor needs to make a mindful decision on what to build and what not to. He needs to clearly see which option is going to benefit the citizens the most and work his way from it. The Star, representing most citizen’s voices said:

“The right thing is to serve the residents of Scarborough and the rest of Toronto with the best available rapid transit, while being mindful of overall costs.”

I think that way everyone will be treated fairly. But ultimately seeing how hard Mayor Tory is trying to convince others to build the one-stop subway, Councillor Josh Matlow opinion stood out to me the most as he said:

“Considering the options, if a multi-billion dollar subway station actually made any sense, they wouldn’t have to sell it as hard.”

 

Are we paying too much for products?

Imagine walking into your local Tim Horton’s and ordering your usual hot cup of coffee, the barista rings you up and tells you that your total comes out to be $100.00. Taken aback by this ludicrous price you decide to walk across the street to the Starbucks where you order your Venti chai latte with extra foam for $7.99. Many people would agree that the $100.00 coffee at Tim Horton’s is ridiculously overpriced and that no sane person would spend that much for a coffee but as an economist it is interesting to ask oneself if there even is a possibility for something to be overpriced. In order to answer this seemingly straightforward question one must first ask oneself what constitutes something for being overpriced in the first place, or even more general question as to how prices are set.

You may think that as long as the price is set above costs a profit is made and even more in depth when looking at classical economics the desired price is one that meets the price of which the demand and supply will support an equal quantity of units sold.

Using the supply and demand chart in this context, if a price is set higher than what its customers demand then the company would be lead with an excess quantity of product, being faced with the need to lower its price to its equilibrium for maximum efficiency.

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Seems simple enough right? But that does not explain how some companies are allowed to sell seemingly overpriced products and still ‘get away with it,’ the solution to this puzzles relies on the most complex piece of them all… human nature!

In reality, when determining the price for an item much more decision making is necessary and a large portion of it relies on psychological factors of spending when it comes to consumers. The bottom line is this: when we buy something we don’t usually see what we pay for.

 

Before you start scratching your head, try asking yourself why popcorn at movie theaters cost far more than ones at the store but cease to fail in drawing customers. Assuming that both quality and quantity of store bought popcorn and movie popcorn are the same then there must be something more that is driving up the price and that being one of the unseen factors of convenience. Areas in which people are more likely to pay more for products at their earliest convenience are those in which you can observe some of the highest prices. Many items in which are highly regarded in being ‘overpriced’ ride exactly on this bandwagon of being in the exact atmosphere such as movie theatre popcorn, hotel minibars, and coffee (from a cafe).  A large percentage of people simply do not want to be bothered enough to take greater measures for a lower price.

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This still doesn’t explain for the products that don’t offer such services but still manage to be considered ‘overpriced.’ Going back to the idea of our strange human nature, tests have shown that people actually enjoy spending more money(!). This isn’t to say that you will be happier if I am now charging you $100.00 for this cup of coffee instead of $7.99 but more to do with the notion that since you are spending more you believe that you should be experiencing an equal or greater amount of pleasure. Economist and author Tim Harford explains this phenomena when discussing the topic for which priced wine should a consumer buy, he writes:

 

“You assume that the price of the wine and its quality can be neatly separated out. This seems reasonable, but is wrong. Price changes the very experience of quality. Neuro-economists have found, for instance, that while placebo painkillers work, they work best if the subject thinks they are expensive. Energy drinks give you less energy if you buy them at a discount. (Yes, really.) And of course, wine tastes better if you believe that it is expensive.

If this all starts to be making sense then you may be asking then how come everything in our world isn’t priced higher? It’s important to remember that people will only buy things they feel that is worth spending, what in question is though is how people decide on that value. Although we think we may rationally decide this value based on cost of production of the product, in reality we far more reference arbitrary benchmarks from past experience than anything else. Researchers call this the “anchoring effect” and it refers to the human tendency to fixate ourselves on initial values (anchor points) and estimate from that point on. This tendency is used and abused by companies all the time as we never truly know the true value of the items produced, like the cost of all the parts in a car, or total manufacturing process of a handbag; instead we’re simply given a carefully thought out number to help manipulate our decision making process. This doesn’t mean that Walmart should be selling $400 bags in order to be able to raise the demand of their other bags. The reason some companies are able to set their benchmark so high is due to luxury marketing philosophies that seem counter intuitive at first glance, but work very effectively to appeal to our irrational human nature. Vincent Bastien, a marketing professor, who worked with companies such as Louis Vuitton regard these “anti-laws of marketing” as powerful strategies to increase brand recognition. By making products associated with factors such as being difficult to buy,Increase in value over time, unresponsive to rising demand and being known to consumers who are not target market, a brand name is made and desire is formed.

 

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So even though the economic model of supply and demand says that equilibrium price is most optimal in reality, it isn’t necessarily the best choice. Products cannot be overpriced but they can only do so in the right context. Before you go running to make your $100 a cup cafe remember that high prices with low costs still have meaning and reason behind it. By pinpointing external factors such as location, comfortability, or internal such as brand recognition, or imitated experience, a company can effectively increase the cost of any product and it would not be overpriced.  

 

Is The Scarborough Subway Extension A Mistake?

The Scarborough Subway Extension is one of TTC’s many “improvements” to our subway system, if it can be called that. What does this extension entail, exactly? According to their website, the SSE is a one-stop, 6.2 km subway that will connect Kennedy station to the Scarborough Town Centre.

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Map of the planned update (blue dotted line). Source

This long, unnecessary extension is still in the planning phase, and it needs to be known to the public that it is a complete waste of time and resources. Here’s why:

COSTS

According to a news article by The Star, the planned costs of the subway extension rose to $3.35 billion. This cost has gone up from the original estimate of 2 billion in early 2016. and that estimate could be off by over 50%, which means that the overall extension could cost as much as $5.02 billion! With the cost continuously rising like this, there’s still not a concrete price. The price could continue to skyrocket into the ~$6 billion range, and all of that money is coming out of taxpayer’s pockets. This money could be used to actually give the Residents of Toronto and Scarborough some benefits, such as cleaner and more reliable buses.

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Many people are forced to wait in the cold for the TTC due to its unreliable service. Source

In addition to this, the ridership of the Scarborough line is extremely low compared to the rest of the TTC. The Toronto Star compared ridership numbers between various 6 kilometre segments of the subway, and they found that the Kennedy to Scarborough Centre section had the lowest amount of riders at 64,000, while the Museum to Bloor-Yonge section had over 755,000. Having a multi-billion dollar extension for the lowest amount of riders seems like a very poor use of money.

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Graph comparing the amount of riders of various 6km sections of the TTC Subway. Source

Benefits

As The Star reports:

“City staff have estimated up to five minutes will be saved by replacing the existing Scarborough RT with a one-stop subway extension. That doesn’t include the elimination of a transfer at Kennedy Station. It also doesn’t factor in the bus trips for individual users, who may spend more time on a bus getting to a rapid transit station with the one-stop plan. It also doesn’t consider or compare the travel time of the original plan to build a seven-stop LRT to replace the SRT.”

Saving five minutes of time seems to definitely be worth the billions of dollars that the extension costs. The one fact that really tops the cake, however, is that this five-minute quote doesn’t factor in the external travel time, which would end up costing people more time in the long run.

The Scarborough Subway Expansion will still benefit the residents of Scarborough by providing them with an easier way to get from Kennedy Station to Scarborough Town Centre.

In Summary:

Costs:

  • Possible $5 billion or more to build one stop
  • Might hinder more people than it benefits
  • Not enough riders to be considered viable
  • Spends money that could be used elsewhere, such as the Eglinton LRT

Benefits

  • Possible time-save for most Scarborough residents
  • Better transportation experience (less traffic, less garbage, etc) for riders

 

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Breakdown of subway costs. Source

Is This Extension Efficient/Equitable/Fair?

To put it simply: no.

According to Investopedia, efficiency is defined as “…a process that uses the lowest amount of inputs to create the greatest amount of outputs.” This extension already costs $3.35 billion dollars, and it only affects ~64,000 riders. This is definitely not an efficient solution to the “problem” that the Scarborough line has.

Equity is defined as a fair distribution amongst everyone in a society. Even though the Scarborough Subway Extension benefits the residents of Scarborough, it does not benefit the taxpayers. According to this article, there is a special property tax that was approved in 2013 in order to pay for the city’s $910 million share. That $910 million, over 30 years, is coming out of taxpayer’s pockets. This is definitely not a fair distribution amongst society, because the entire city has to pay for an extension that will only affect the residents of Scarborough.

What Opportunity Costs Are There For This Expansion?

Investopedia describes opportunity costs as: “a benefit that a person could have received, but gave up, to take another course of action.”

The major opportunity that is lost while constructing the SSE is the loss of funding for a light rail along Eglinton Avenue. This light rail proposed 17 stops for only $9.1 billion dollars, which sounds like a much better deal than 1 stop for $3.35 billion.

Another opportunity that is lost is the LRT network that was previously proposed. This LRT would have 25 stops, over 2 light rail lines; one seven stops, the other 18 stops. The 25 stop LRT was proposed to be $1.67 billion in 2010 dollars, which would be an amazing improvement over the 1 stop $3.35 billion SSE. If the SSE goes through, we will have missed out on an amazing opportunity for less money.

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Source

Other Options For The TTC

The TTC, instead of constructing the SSE, could spend the money on more worthwhile endeavours. They could:

  1. Improve the quality of most trains and upgrade the tracks for higher trafficked areas, such as line 1 and the downtown portion of line 2
  2. Improve the reliability of most bus times, since many people have to wait for long periods of time outside in the cold
  3. Fund the Eglinton LRT (even though it costs more money at $9.1 billion, it still provides more for the city)
  4. Fund the Scarborough LRT network, which costs less and provides more for the residents of Scarborough
  5. Put more funding into the SmartTrack, which will provide new options and choices for people to get around the city

Even though the SSE might seem like a decent idea to John Tory, it is not something that should be considered for the residents of Scarborough. I feel like John Tory is pulling some strings to get the Scarborough Subway Extension through, especially after this report of him being investigated by the auditor general for the approval of the extension. Mayor John Tory promised residents both the one-stop subway and the Eglinton East LRT line with the $3.56 billion cost, which is a blatant lie. I think that the mayor only wants to complete this subway expansion because he wants to be the mayor that completes an endeavour.

Overall, I think that the Scarborough Subway Extension should not be continued. The costs outweigh the benefits (there are barely any benefits anyway), it is not fair/equitable/efficient, and there are better things that the government and the TTC could spend their money on, that would affect everyone positively. It’s not too late to cancel the Scarborough Subway Extension, so that is exactly what we must do. This extension is definitely a mistake.

Does Capitalism Give Us Too Much Freedom To Make Our Own Choices?

Capitalism, also known as the market system, is one of four prominent economic systems used in the world. The market economic system uses the underlying principles that everyone has the freedom to choose and all businesses are exempt from government control. Yay freedom! But is this complete freedom good for us?

Due to the lack of government control, it is up to each individual business’s own discretion to set their prices. Thus, the effects of prices are heavily dependent on the simple concepts of supply and demand. If people want more of a certain product, the businesses will increase the price of that product in order to maximize their profit. If people want less of a good, producers will lower the price of that good or turn towards manufacturing another good in hopes of generating better sales.

The most capitalist countries in the world include Hong Kong, Singapore and Australia and the United States. Let’s take a closer look at the market structure of Hong Kong. Dr. Milton Friedman explains that Hong Kong has become a haven for people who seek economic freedom. In Hong Kong, there are few business and government regulations, which gives business owners the freedom to choose and produce whatever they would like. The main question that should be asked is whether this capitalist economy in Hong Kong is the best choice? In a country that is rapidly expanding like Hong Kong, there is a drastic divide between the social classes. In the case of a country like Hong Kong, capitalism is the best economic system because of one pertinent idea that Milton Friedman presented – the freer the system, the better off the poor people are. This helps explain why Hong Kong has a high standard of living. The capitalist economy enables the poor to generate enough money for themselves to be able to live fairly well and be happy with what they have.

Another important question to ask is whether capitalism is the ideal economic system for every country and circumstance in the world? To answer this question, we would need to first examine the three other major market systems and weigh the benefits with the drawbacks.

traditional

Let’s first discuss the traditional economic system. Found mainly in the Middle East, Africa and Latin America, the traditional economic system employs the same economic concepts as used by the Europeans when they first traded with the First Nations. The traditional economy operates on the idea of bartering. In other terms, instead of exchanging money for goods, this economy uses the idea of trading products. For example, a hunter can trade the fish they catch in order to obtain vegetables that were grown by a farmer. Now, while this seems like a very out-dated, old-fashioned economic system, there are benefits to this.

  1. You only produce what you need so there isn’t much surplus. This is a sustainable, environmentally friendly economic system that seeks to only produce what you need and in the case of a surplus, you can trade it with others to get different goods.
  2. Through bartering, you are much more likely to receive a fair and acceptable compensation for giving up something. For example, in a mixed economy, once you drive a new car for a year, that car loses around 25% of it value. This means that you are losing a significant amount of money if you choose to sell a used car after driving it for just a short time. Meanwhile, in a traditional economy, there is no monetary value for cars so a car that has only been used for one year will not have lost 25% of its value. In a traditional economy, that car will still be seen as a “new” car, and you, as the owner, will still be able to receive a fair and adequate compensation if you decide to trade this for something else.
  3. The traditional economy is equitable and efficient as trading allows each person to decide whether they are getting a good deal in return. If you feel like you’re not, you can just decline the trade and go somewhere else.

The obvious drawback of the traditional economic system is that it is outdated and unpopular. In a world where every country has a currency than can be used to buy goods and services, bartering has become less common. In our current state, it is impossible to just eliminate all the money we use and revert to bartering. Thus when asked if the traditional economy is a better idea than a capitalist economy, it is obvious that a capitalist economy is much more reasonable and ideal than a traditional economy.

command

So now that we’ve established that the traditional economy isn’t the best economic system, we can move on to the next one – the command economy, or otherwise known as communism. The command economy is drastically different from the capitalist economy. Instead of giving people the freedom to choose, all the decisions in the command economy are decided by the government. The most obvious example that immediately pops up in my head when discussing the command economy is North Korea. In North Korea, all the decisions are made by the central government, headed by dictator Kim Jong-un. Here are some of the characteristics of the general command economy, not just those pertaining to North Korea.

  1. The government creates an economic plan and allocates its resources according to that plan. It tries to eliminate unemployment and distribute wealth accordingly among all the citizens based on their role in the economy.
  2. The government owns different monopolies in specific sectors of the economy (finance, automotive etc) to eliminate competition within these sectors.
  3. The country emphasizes on relying on itself and discourages international trade.

What are the advantages of a command economy? Well in a command economy, the economic plan created by the government answers the three economic questions. Therefore, the citizens do not have to worry about anything other than following the plan. As well, as there is limited unemployment, you are more likely to find a job, albeit it might not be what you want to do. Another benefit of the command economy is that it tries to eliminate the barriers that would created against people with disabilities or the less fortunate in a market economy. In a command economy, you will still be given a role in the economy even if you are born with a disability that prevents you from doing certain jobs. Everyone is given an “equal” chance at helping the country towards achieving its economic plan.

However, the command economy is neither efficient nor equitable. Since there is no true command economy, everyone is still paid differently based on their skills and contribution to the economy. Hence, by giving some people more money than others, you are in effect making them better off.  Furthermore, as seen in many command economies in the past, they are not built to last on their own. The collapse of the command economy in the USSR as well as the transition to a mixed economy in the countries of China and Cuba have signified that more and more countries are adopting capitalist views.

An easy comparison can be made between North Korea and South Korea. North Korea’s command economy generates a significantly lower GDP ($28 billion) than South Korea’s mixed, bordering capitalist, economy ($1 trillion). Back in the 1960s, South Korea was regarded as one of the economically poorest countries in the world. Following its transition from a command economy to a more market oriented economy, South Korea was able to increase its GDP by a huge amount.

Due to the lack of successful command economies, it is safe to say that adopting a command economy is obviously not the best idea. While current command economies are moving towards becoming more capitalistic, it is unwise to go in the opposite direction.

mixed

The last prominent economic system that deserves a long look is the mixed economy. A mixed economy is essentially the combination of the traditional, command and capitalist economies. The mixed economy allows people to have a general freedom to choose, while the government regulates certain aspects of the economy in order to protect the people and the market. The mixed economy is the most widely found type of economy in the world, with most countries having a mixed economy to a certain extent. In fact, even Hong Kong, considered the most capitalist country in the world, can be considered as having a mixed economy because there is still some government interference in their economy. Here are some of the advantages of a mixed economy:

  1. The laws of supply and demand help dictate the prices of goods so customers get the best value for their purchases and producers still generate as much profit as they can.
  2. The government has the role of improving defense and technology, which will help increase the safety of the country.
  3. The three economic questions are still given to the people to answer as they have the freedom to choose what, how and whom to produce to.

Of course, there are still disadvantages when it comes to the mixed economy. One disadvantage largely depends on how big of a role the government has on the economy. For example, if the government creates too many restrictions, the freedom for the people will decrease. As well, the government could invest too much money into technology or defense, which will in turn put the country in debt. Unfortunately, the mixed economy is neither efficient nor equitable. As there is still freedom of choice for producers, there will always be those who will be well off while others are struggling. The freedom to choose means that if the demand just isn’t there for your good, then you will become worse and worse off as time passes. .

Overall, the mixed economy is still considered a viable option as the best economic system. It takes into consideration the best factors from the market, command and traditional systems and uses them to create a well-rounded economic system.

So now that I have mentioned each economic system, it is time to determine what is truly the best system. Based on pure economic systems, there is no best out of the three. Each pure system has its flaws:

  1. A pure traditional economy completely neglects the use of money as a medium of exchange and it completely depends on each person’s ability to be able to create what they need for trading (If a growing season is bad, then there aren’t many vegetables you can trade).
  2. A pure command economy completely neglects the freedom of choice for people and is very restrictive. People are not given the opportunity to sell whatever they would like and this often leads to an overproduction of one good and underproduction of another.
  3. A pure market economy completely opposes any interference from the government. Without any regulations, it is impossible to control the market if something fishy is going on and no advances in government controlled fields would occur.

When looking at the best economic system, I think of a mixed economy that is slightly more capitalist and less traditional. It is important to give people the freedom to choose whatever they want to produce but at the same time, people are greedy, so it is important to have just enough government regulation to ensure that everyone and everything is operating fairly. As our society develops and new technology and ideas are being introduced, the importance of the traditional economy continually decreases, therefore in my opinion, there really isn’t that much of a need for traditional ideals other than trying to make the economy efficient and equitable. A combination of the different economic systems ultimately trumps each individual system by itself.

 

Rational Economics: Think We Make Rational Decisions? Think Again

Why are some people willing to purchase designer purses, watches and shoes for thousands of dollars from names such as Louis Vuitton, Gucci and Rolex, when similar products that have the same functionality for fractions of the price are neglected? While many of us may think we make rational decisions as a consumer, it turns out, humans tend to make irrational decisions on a rather consistent basis.

Image result for fashion brand name vs regular

http://www.thebrandchecker.com/news

Before I explain why humans are not rational decision makers, we must first examine the definition of ‘rational decision making’. For a decision to be deemed as rational, all emotional contents from the decision making process must be removed and must solely be based on the facts presented.

“A rational behavior decision-making process is based on making choices that result in the most optimal level of benefit or utility for the individual. Most conventional economic theories are created and used under the assumption all individuals taking part in an action/activity are behaving rationally. Rational behavior does not necessarily always involve receiving the most monetary or material benefit because the satisfaction received could be purely emotional. “

-According to Investopedia

On the contrary, an irrational decision is one that lacks logical thinking. Irrational decisions are often based on emotions and personal bias. To be specific, as person’s memory can take presence over analysis or consideration.

https://www.ucl.ac.uk/media/library/decisionbrain

Image result for irrational decision making

In traditional economics, supply and demand models demonstrate how supply and demand relate to quantity and price. On the model, the vertical axis is the price and the horizontal axis is the quantity.  The supply and demand curves both intersect at a point which represents the equilibrium price and quantity.

Image result for supply and demand graph

Since we are talking about the rational decision making that consumers exhibit, it is necessary to note the factors which effect consumer demand – it is not necessary to discuss the factors which effect supply. The five determinants which effect demand are: buyer’s income, buyer’s preferences/consumer’s taste, buyer’s expectations, other prices and number of buyers.

We refer to a lack of goods, due to a low price as a shortage. In this case, consumer demand more than what suppliers will produce. The supplier will counter this by increasing the price, until the equilibrium price is attained. However, if there is an excess in goods, due to a price that is just too high, we refer to this as a surplus. In this scenario, the suppliers will produce more than customers demand. The supplier will then decrease prices until the equilibrium price is reached. Supply and demand directly impact the market, which is then reflected on the price of a particular good. However, as it turns out, due to the irrational behavior we exhibit, the price actually determines the market. This is studied in behavioral economics.

https://www.youtube.com/watch?v=ptluv3didYI

A common example which demonstrates our irrational behavioral decisions as consumers is the purchasing of iPhones. A rational person might reckon that consumers are willing to pay anywhere around $500 for a smartphone. However, Apple has found a genius way to overprice there iPhones to nearly double the willing consumer price and still get remarkable sales. You might be wondering how this is possible. Well, it is simple. There are people out there willing to overpay for these smartphones!

Image result for why do people pay for overpriced iphones

Therefore, as this applies to the food and drink, automotive and particularly fashion industry, we can conclude that people are willing to make decisions, beyond reason, to purchase goods and services that are simply not worth it. Everyday, we constantly go against our reasoning and logic for decisions based on emotion and memory. In doing so, as a consumer, we can be deemed as irrational.

http://www.investopedia.com/terms/r/rational-behavior.asp#ixzz4dKpQg0dZ https://pdfs.semanticscholar.org/ace5/115e38d84696f745cbaa9647dc17a77a9734.pdf

https://www.emptywheel.net/2015/07/20/mankiws-principles-of-economics-part-3-rational-people-think-at-the-margin/

http://www.ase.tufts.edu/gdae/Pubs/te/MIC/3e/MIC_3e_Ch7.pdf

http://economictimes.indiatimes.com/definition/rational-behaviour

https://www.behavioraleconomics.com/rationality-and-affective-biases-do-you-know-what-they-are/

Is What You’re Paying Really What You’re Getting?

Many of you probably think that you spend your money wisely.  That when you buy something, you’re making a rational decision.  You probably think that the price you pay for goods makes sense.  Unfortunately, due to savvy marketing and factors that you probably never even considered, that may not be the case.  It turns out, we’ve all been fooled, and the way we value things may be extremely flawed.  Contrary to the traditional economics perspective, many goods can be, and it turns out, are, overpriced.  

According to supply and demand models of traditional economics, there is a demand curve, and supply curve on a graph. The vertical axis is the price, the horizontal is the quantity.  The intersection of the two lines determines the equilibrium price and quantity.  The factors that normally affect demand are buyer’s income, buyer’s preference/consumer taste, buyer’s expectations, other prices, and the number of buyers. The factors of demand, are cost of factors of production, technology, prices/profits of other goods, seller’s expectations, and number of sellers.

Supply and Demand Graph

It is expected that the price would be at the equilibrium of supply and demand.  If the price was too high, then there would be a larger supply than demand because more suppliers would be willing to supply at that price, but less people would be willing to purchase the good at such a high price. This would result in a surplus.  If the price was too low, then there would be more demand than supply, as more people would want to buy the product, but less suppliers would be willing to produce at that price.  This would result in a shortage.  

Therefore, the conclusion is drawn that supply and demand are separate forces and that the price is a result of the market.  However, according to behavioral economics, in many cases the price actually determines the market.  I know this sounds backwards, but let me explain.

There is a factor which affects the way people value things called the anchoring effect. The gist of the theory is this:

Your first perception lingers in your mind, affecting later perceptions and decisions.”

The article attached to that quote explains that the initial value that you give to an object sticks with you and affects how you value that object. Even simple numbers that we associate with objects can affect how much we’re willing to pay for them.

The author of the article above, David McRaney, also explains how this technique is used to sell leather jackets.  If the initial price is around a thousand dollars you would most likely find this too expensive for a jacket and put it back on the shelf.  But imagine as you are put the jacket back on the shelf after trying it on, an employee at the store tells you it’s on sale for $400. Suddenly the jacket seems like a great deal.  $600 off a great looking jacket!

Leather Jacket Store PhotoHowever, the initial price of the jacket was simply an anchor.  A price that the store wanted you to feel the jacket was worth, and that changed the amount that you would be willing to pay for the jacket. $400 dollars is still a lot of money to pay for a jacket, but because you feel like you’re getting a good deal you’re more likely to buy it now. McRaney explains that this is an actual technique used by salespeople in this industry, and which he has used himself.

This effect is also illustrated by the black pearl market in the 1970s. A man named Salvador Assal attempted to sell black pearls in Manhattan, but there was no market for it at the time, and nobody purchased them.  He decided to place them in the window of a prestigious jewelry store with an extremely high price tag, as well as put them next to diamonds and rubies in ads.  All of a sudden, black pearls were being worn by the most elite in Manhattan.  Because they were presented as a status symbol and as extremely rare, the public adopted that view, and accepted the higher prices. The true value of the pearls became irrelevant.  

“This is all to do with anchoring. You see people cannot decide things in absolute terms, rather they compare it to others” 

Black Pearls for Blog Post.jpg

The conclusion we can draw from this is that anchors can seriously affect people’s judgement and how people value things, which proves that the way people value things is usually not a decision made with consideration for its true value, and therefore not very rational.   Also, this directly contradicts the theory that supply and demand determine the price, but implies rather that the price determines the demand.  But the irrationality doesn’t stop here.

Even a random number briefly associated with the price of a good that has nothing to do with the true value of a it can affect how you might value it.  This article explains an experiment which Dan Ariely conducted demonstrating this concept, named “arbitrary coherence”.  Ariely auctioned off items such as a bottle of wine, a cordless trackball, a cordless keyboard and mouse, and other items.  However, before beginning the auction the MIT students involved were asked to write the last two digits of their social security number as if it was the price of the item being auctioned off.  It turns out that those with higher numbers bid two or three times what those with lower numbers bid.

So even when the MIT students knew that the number was coming from a random source, they still used it as an anchor because they had no other way of valuing the item. This shows just how irrationally people can value things.

So, are things actually overpriced?

Overpriced Blog Post.jpg

Again, according to the theory of supply and demand, the price and quantity supplied is determined by the equilibrium price.  Therefore, it shouldn’t be possible for a good to be overpriced. But it turns out that there are numerous goods which have huge markups but are still bought very often. Examples include text messages (6000% markup), bottled water (4000% markup), movie theater popcorn (1,275% markup), coffee (300% markup) and more. So why do people accept these exorbitant prices? Simply put, anchors and irrational valuation of goods.

Why does it matter that these goods have large markups? Well, a markup is the percentage of payment for a good by the consumer which becomes profit. A markup of some sort is necessary because the aim of a business is to make profit, but when a large mark up occurs, it means people are paying a price that is much higher than what the cost to produce that good was.  This indicates that the good may be overpriced, because businesses don’t typically make markups this high.  Usually, they range from 10% to 100%. However, if the consumers accept such a high price, then the producer can continue to sell with an insanely high markup, which is why I feel it is irrational to buy these goods.  

In fact the price of a good not only affects how we value it and interpret it, it can also affect our satisfaction from that good.  People have a sense that something that costs more is automatically better or of a higher quality. This can be shown through a study which was conducted by the physiologists Fabian Christandl, Detlef Fetchenhauer, and Sebastian Lotz.  For the experiment all the participants were given the same wine. Some were told it cost 3 Euros, the others were told it cost 20 Euros. Those who ranked low on the materialism scale enjoyed both wines the same, and ranked both at an average of 60/100 in terms of satisfaction.  Those with a high materialism scale ranking gave the wines different ratings. (high for the higher price, low for the lower price)  This is completely irrational, but it’s simply the way some of our minds work.

In summary, tactics such as anchoring as well as the irrational way in which people value products results in overpricing.  Although it has been thought that supply and demand determine the price, it may actually be the price which drives the demand for a product in many cases.  Goods such as Starbucks’ coffee, bottled water, and text messages are overpriced because many people have valued them higher than they are truly worth.

So next time you see a seemingly great deal on something, or maybe you feel like you might be overpaying for something, ask yourself:

Is this really worth it?