Pony ponderings…

Have you ever overheard a small debate between children related to #economics? Some at theMarketSoul (c)1999 -2013 find themselves in Spain this weekend, relaxing with family and the following conversation between young siblings are worth repeating.
In some bizarre way, it relates to labour economics and the minimum wage:
Pony (Photo credit: Moyan_Brenn_BE_BACK_IN_SEPTEMBER)
We had just observed a single horse drawn carriage in the streets of Marbella, when the conversation kicked off.
C1 “What is the minimum wages?”
C2 “I don’t know, why should I?”
A1 “It currently is around €7.00 / hour or something very close”
C1 “Ok, so if one apple costs say €1, then the pony should get 7 apples an hour for working, right?”
C2 “Why?” [by the way C1 is 13 years old and C2 is 11 years old”
C1 “Because that is the minimum wage”
C2 “That doesn’t make any sense!”
C1 “What do you mean it does not make any sense, it is simple mathematics?”
C2 “Why should the pony get 7 apples per hour? What if it only wants 3 apples and something else?”
C1 “Because that is the minimum wage!”
C2 “Yes, but the pony might not want so many apples. The pony might want to choose for itself how many apples it wants”
C1 “Now you don’t make any sense to me at all!  The pony should get exactly what the minimum wage is, or more”
C2 “But the pony might not want or need all those apples. It might need fewer apples, but want more oats or something else. The pony should choose and not someone else…”
And thus we had a little insight into an economic debate between the ‘social cohesion’ leaning child and the ‘libertarian’ leaning child. No fisticuffs or bad mouthing, but different opinions and different attitudes to life. It will be interesting to listen into another conversation along these lines.
With a binding minimum wage of w the marginal ...
With a binding minimum wage of w the marginal cost to the firm becomes the horizontal black MC ‘ line, and the firm maximises profits at A with a higher employment L . However in this example the minimum wage is higher than the competitive one, leading to involuntary unemployment equal to the segment AB. (Photo credit: Wikipedia)
We agree with C2’s questions on where the choice for the minimum wage really lies. The wage level should be determined by the provider of the labour, whether individually or collectively bargained, but there should be no interference from government in this process.
Take note Europe, this is just one factor contributing to your long drawn out decline. Markets, not quasi-markets and constant political interference and distortions in the markets; should determine clearing prices or wages.
But this seems to be a lesson a child can learn, but not grown up political leaders…
theMarketSoul ©2013

Hidden ‘cost’ of Opportunity Cost

As economists (assuming that most of our readers have a vague interest in the subject matter we keep on harping on about most of the time) we should all be aware of, if not au fait with Opportunity Cost.

English: A production possibility frontier sho...
A production possibility frontier showing opportunity costs of moving between two of the points. (Photo: Wikipedia)

As a one line refresher: Opportunity Cost is the cost or value forgone by choice. Choosing one option or outcome over another, automatically leads to an alternative opportunity forgone, hence the cost element.

So the real challenge is to extract the ‘right’ amount of value or benefit from the chosen option versus the forgone option. This is the real difficulty when the counter-party does not share the same or a similar risk profile.

What is the answer then?

Well as vaguely competent economists our stock answer is: It depends!

Wieser coined the terms marginal utility and o...
Wieser coined the terms marginal utility and opportunity cost. (Photo: Wikipedia)

Lets peal this back one level and start with the this position: the very fact that you had a choice in the first place is a very good thing. A lot or market participants are never really afforded the luxury of this or any choice. They just have to lump it and get on with whatever activity keeps them sustained. Therefore, from this extreme position an answer might be that we should count our blessings and just accept the inevitable and get on with choosing and working through the consequences.

However, in a world driven by value maximisation, the fact that we have to make the optimum choice does become more significant and important. What tools can we employ in a world of Information overload, yet still Information Asymmetry to come up with the optimal solution?

Choices (Photo: Scarygami)

Answer on the back of a postcard please…