Supply and Demand

When I first met the supply-and-demand diagram, I was a junior high school student. I was then too young to know how to use the diagram. I didn't know even which curve the supply is. (Of course, the blue line is a supply curve, while the red line a demand curve.) When I came to know how the diagram is used among economists, I was a third grade university student. Until then I hadn't known the usage of the supply-and-demand diagram.

If you were a junior high or high school teacher, how would you teach it as easily to your pretty students as possible?

This might be a little hard request. If I were the teacher, I would teach like that:

First, I teach you the way demand is described. Suppose you were in the grocery store. There you meet apples. It is cheap. Since you know that they are good for your health, you buy some. Next day you are again in the same store. You meet again apples. But you notice they're a little more expensive. Though they're good for your health, you don't buy any. You buy some oranges, instead, because they're less expensive and also as good for your health as apples. So the demand for an apple decreases as the price is higher, and vice versa. That's why a demand curve slopes downward.

Second, I teach the way supply is described. Before you know that, you have to note that the supply is the other side of the same market while the demand is the one side.

Suppose you were also in the grocery store. There you sell (not buy)apples. Since you know that it is good for your business to sell them for higher price, you tend to sell for higher price. Next day you are again in the same store. You sell apples. But you notice they're a little more cheap. Since it is bad for your business, you don't sell any. You sell oranges, instead, because they're less inexpensive and also as good for your business as apples. So the supply of an apple decreases as the price is lower, and vice versa. That's why a supply curve slopes upward.

You like it? Let me know what you would like to tell if you taught the suppy-and demand diagram.

* The above diagram is from Wikipedia.

One Japanese Blog

Huuzokusanpo is a well-organized blog. I like and enjoy it very much. So I'll introduce it to you. It's written all in Japanese. It's no problem to non- Japanese speakers, however. Most of parts of the blog are pictures. You can enjoy seeing it, but not reading it. The primary thing that we think of is what picture it takes. And what does it tell?

This blogger visits many remains of red-light districts all over Japan. And it takes and collects the pictures. It tells the history of these regions with a few Japanese words. However, I don't think you need reading them. It has good pictures. You can see them.They are worth seeing. Most of them could be seen only in Japan. You can know some true aspects of the Japanese cultures.You can know the other side of Japan, that is never reported by the press. You can see the present red-light street scenes without walking along there. I can see the sights of the red-light towns in Japan these days.

It's a reasonable journey. I hope you can enjoy it. However it seems to be the blog that men are more interested in than women. If you are an anthropologist or geographer, you can be more interested in this blog.

Economics Can Save Me?

Recently I have spent a little too much money on books. I like having and reading them. But I often sell some books I bought before to a used-book store near my house. It is at the cheaper price than I bought them that the store master usually buys. I sometimes don't know why I buy books. It seems that I make him happier to sell him my books at the lower price. I wonder if I am also happy with such myself. So I might be a little sick and need some mental care. It seems that I might be unsatisfied with my present situation.

That's why I can't save money. It is one of my problems that I have been worried about. I know I have to tell myself to change my financial management. In this case, economics tells me how to save money: Not to spend! Hummm,...Exactly!

I know I must save money for my future life and some uncertain emergency needs. I might have a higher rate of time preference, which means I prefer the future life to present life. However I can't tell the rationality of my preference and book-buying behavior. Anyway I decide not to buy more books but to put more attention into reading them. Save money and time for my own future life! That's what I am saying to myself.

BOJ Keeps Rates the Same

The Bank of Japan decided Thursday to keep interest rates unchanged. Where will the Japanese economy go? Will BOJ raise rates later?

Bank of Japan keeps benchmark interest rate unchanged
Mainichi Shimbun, January 18, 2007

......The central bank is independent, but political opinion has been known to influence policy in the past. Bank of Japan Gov. Toshihiko Fukui brushed off such concerns, saying the bank was only looking at economic factors, and denied a media report that the bank had informed the government of its decision in advance. "There is no change in our stance that we will gradually adjust interest rate levels depending on changes in the economy and prices," Fukui told reporters.

While it said the economy was "expanding moderately," the bank's report pointed out that both economic growth and consumer prices have fallen below its last forecast, in October, mainly because of weaker-than-expected consumption.

.......Economy Minister Hiroko Ota also sounded a cautionary note, noting that Japan was still trying to beat deflation, or falling prices, which dragged on Japan's economy for years. The nationwide core consumer price index rose 0.2 percent on year in November, the sixth monthly increase. The Bank of Japan faced similar political warnings last July -- but went ahead and raised interest rates for the first time in six years to 0.25 percent from virtually zero. Government officials repeatedly denied that the government had placed any pressure on the bank.

......Chief Cabinet Secretary Yasuhisa Shiozaki stressed the autonomy of the central bank. Politicians were just exercising "freedom of speech," he told reporters. "Various people are saying various things in their positions," Shiozaki said. "How the central bank can maintain its independence is ensured by law." But analysts warned that the perception of political meddling in monetary policy could make international investors reluctant to commit money to Japan. Still, given the recent less-than-robust price and consumption figures, he believed the bank made the right decision.

Considering low price and low consumption in Japan, the decision of BOJ is right. The problem I think most important is when the Japan will recover from a still-stagnant economy. As long as a groomy economy continues, BOJ will keep interest rates unchanged. But as Mr.Fukui said, BOJ will raise the rates if the Japanese economy recovers in the future. In this regard, it is the problem when the economy gets stronger.

What makes the economy stagnant? The low demand does. Or the low consumer's confidence does. What would stimulate the confidence? Much money supply would do.

In this point, I don't intend to imitate the Krugman's treatment for the stagnation of the Japanese economy, but I think one of the policy measures is for BOJ to supply more money into the economy until it recovers. As a macro textbook says, it will work. Now the government can't cut tax rates any longer because it has a large budget deficit and debt. In this case, if the government spends more, the people will fear the health of the budget and the future tax increase. This would be a negative effect on the economy. This situation is not hopeful. And then BOJ has no reason to do nothing. BOJ should conduct actively expansionary monetary policy to kill the deflationary pressures on the economy. Now is the time not to raise the rates.

Moreover I don't hope the government will say about whether and when BOJ should raise the rates. Many people might become doubtful about the independence of BOJ and thus the health of the financial system in Japan.

How to Promote Happiness

I found an interesting post in a famous American blog, Freakonomics Blog, "The secret of Happiness". Today I'll introduce it and my thought about it to you. Here's the excerpt:

Among the most intriguing happiness theories I've come across,... asserts that the citizens of Denmark are happier than their European counterparts, even though they rank high in the kind of things that are typically affiliated with a low happiness rank, like bad weather, bad food, and high alcohol consumption. So what’s their secret?

Low expectations. ... If you’re a big guy, you expect to be on the top all the time and you’re disappointed when things don’t go well. But when you’re down at the bottom like us, you hang on, you don’t expect much, and once in a while you win, and it’s that much better.”

This theory makes sense to me, just as it makes sense that people who earn a few thousand dollars more than their colleagues say they are happier than if they were earning more money but less than their colleagues. As with many things in life, relative happiness may be far more important, or at least measurable, than absolute happiness.

This is a very interesting post. When I saw this, I wondered if the government could promote the people's happiness by using the policy tools. How can it do that? Is this a ridiculous imagination, isn't it?

Happiness is, in my view, thought to be greatly related to an economic gap between the poor and the rich, as once John Kenneth Galbraith, an American economic thinker, wrote in the book, "The Affluent Society". Some politicians in Japan say that the most serious economic problem we now face is an increasing economic gap. Certainly many people dislike to find their income lower than their neighbors and tend to think that an economic gap is a problematic issue.

But this wouldn't be always the problem that harms our social life.(Some economic researches report that a widespread economic gap would cause a decreasing economic growth and our welfare, however.*1)

I wouldn't like to conclude here that an increasing gap leads to lower economic growth and it is the most serious problem, because this view depends greatly on either how the economic model will be built or what people value more in their society. If our policymakers were worried about how happy we were, they might try to decrease an income gap among us by manipulating the tax system as long as our happiness was more related to an income gap. However, if our wise policymakers found out that happiness was not related to an income gap but, for example, low expectations, they might try not to remedy the gap but to force the people to get satisfied with their present social life by controlling the minds as once conducted in most Socialist countries.

When I hear the voices that our policymakers should try to remedy the income gap, for what should they do? For our happiness? It is very unclear, I think. If it is for happiness, should they remedy the gap? After all, can the policy promote our happiness?

*1 A quotation from the Wikipedia:
Robert Barro wrote a paper arguing that inequality reduces growth in poor countries and promotes growth in rich ones. A number of other researchers have derived conflicting results, some concluding there is a negative effect of inequality on growth and others a positive. Patrizio Pagano's research suggested that inequality had a negative effect on growth while growth increased inequality.

A Great Thinker Knew Sunk Cost

09/10/2010 revised

A Great Thinker Knows Sunk Cost

I'll take up the word of Confucius. As you know, Confucius is a great Chinese thinker. In East Asia, he has greatly influenced the minds and thoughts of the people. Hearing his name, I always recall the following words:

At fifteen my heart was set on learning;
(十五向學)
At thirty I stood firm;
(三十而立)
At forty I had no more doubts;
(四十而不惑)
At fifty I knew the mandate of heaven;
(五十而知天命)
At sixty my ear was obedient;
(六十而耳順)
At seventy I could follow my heart's desire without transgressing the norm.
(七十而從心欲，不踰矩)

I believe that he had a special ability to know all the things governing the world, and that he was not only a philosopher but also an economist.

A philosopher clears up the laws governing the world and the society, whereas an economist finds out the ways of governing the economy and the market.

Let me show you the reason he was an economist: He knew the idea of sunk cost. Sunk cost is the one that has been committed and cannot be recovered. Most economists tell us to forget a sunk cost when we begin to do something new, because we cannot avoid it once we incur it.

The following word has been said for long in the Western society, "Don't cry over spilt milk"., whereas our Confucius gives us the next one, “Forget injuries, never forget kindnesses.” I like it better. This is the Eastern version of spilt milk.

A Small King

More than 2,000 years ago, there was a small country next to the Han Dynasty in ancient China. One day an ambassador of the Han went to see the king of that country. The king asked the ambassador one naive question:

Which is the larger country, mine or yours?

Then the ambassador said nothing.

This is the king who doesn't know the world. Who is the person like that king in our world?

Cakes and Puddings

A review for a crane-tortoise figure:

I bought cakes and puddings, which were 15 in all. And I paid $14.40. A cake was sold for $1.20, while a pudding for $0.90. How many cakes and puddings did I buy respectively.

Don't use the letters x and y.

Cranes and Tortoises

Recently I have been into arithmetic, a primary mathematics which is taught in most cram schools for the elementary school's students proposing to the prestigious junior-high schools in Japan. Don't make light of it! It is harder than we might first expect.

One of famous problems in arithmetic is on figuring the number of cranes and tortoises from the total of their legs. We call it a "crane-tortoise figure". (However I can't find the official translation of it.) This problem originally comes from a Chinese old math book written in more than 1,500 years ago. See the following problem:

The total number of cranes and tortoises that we have is 8. And the total of their legs is 26. When cranes have two legs and tortoises four legs, answer the number of cranes and of tortoises respectively.

By the way, I posted another problem related to a "crane-tortoise figure", an age figure. Of course, because it is a problem of arithmetic that the children under 12 would try, you mustn't solve it by using the first-order equation. Let's have a try!

Excercise: How Old Is My Brother?

I have two brothers. I would like you to answer the present age of the one of them:

In 8 years later, the age of my mother will be four times that of my brother. The difference of their ages is 37. Answer his present age.

Solution: How Old Am I?

On January 6th, I asked you how old I was. To solve this problem, you should keep in mind the following statement:

Now I am 32 years younger than my father. I will be half as old as my father in six years later.

According to the above, when I was born, my father was 32. When I am 32, my father will be 64 and then twice my age. It is 6 years later that the age of my father will be twice as old as my age. That is, I will be 32 in 6 years later. Here you'll be able to answer my present age;

32 - 6 = 26

Hence my present age is 26.

Have a Break!

Kit Kat is my favorite chocolate sweet. Here's the excerpt of the ad:

This product was developed as a four-finger wafer crisp, initially launched in London and the South East in September 1935 as 'Rowntree’s Chocolate Crisp' and re-named two years later as KitKat Chocolate Crisp. It became KitKat after the Second World War. No one is sure where the name KitKat came from but it’s thought the famous KitKat Club of the 1920s had some influence.

In Japan, Kit Kat is a lucky charm for the success in exam. The reason is that it rhymes with "Kitto Katu", a Japanese happy phrase, which means "you will surely win".

January is the month for the school entrance exam for all the proposed students. I hope they will be able to pass the exam happily. Before you take the exam, have a break and have a Kit Kat!

How Old Am I?

Today is my birthday.

Now I am 32 years younger than my father. I will be half as old as my father in six years later. Answer my present age. Don't use the first-order equation to solve this problem!

A New Year's Policy Requests

A new year has already come to us. In Japan today is a very fine day and the sunshine is brighter than usual. The future of the rising sun is also likely brighter than ever before.

However, I think we have many several serious problems to be solved as quickly as possible. Let me mention three solutions for them, especially: (1) BOJ should supply more money and (2) MOF should raise the tax rates and cut the expenditures. Moreover, (3) MOF should raise the consumption tax.

(1) Raise the demand of the economy.

In terms of GDP, employment and consumer price, Japan is seemingly recovering from the long deflationary economy. But it is still stagnant. This new year is the striking year when many retires will come into the economy. Although some of them are expected to spend money and to create new demand in the economy, many of them might cut the spendings on goods and services to remain their standard of living. If so, the whole demand shrinks and the recession comes again. Such a problem of the aging economy is inevitable. What will we do?

I would like the Bank of Japan to rather increase the supply of money to keep the economy stable. Some economists fear that inflation comes if BOJ supplies more money. But rather I am afraid that deflation comes again if BOJ supplies no more money and raises the interest rates. Inflation is a terrible economic phenomenon, which devaluates the yen and loses the credibility of the BOJ and its monetary policy. At the same time, deflation is also a horrible one, which appreciates the yen and the debt and induces them to hold money and not to spend money. We must increase the demand to avoid any deflationary phenomenon.

(2) Cut the fiscal deficit.

The path of Japan's fiscal policy is unsustainable. At present, Mr. Abe tries to cut the corporation income tax to activate the operations of company. Some fiscal economists and policymakers say that the supply side of the economy would be strengthened if the tax was cut. That is, they say that companies would enhance the production ever more if tax was levied less. I hope that the demand will, to some extent, increase due to tax cut. In this point I agree to that tax cut plan. But when tax cut is done for the purpose of increasing the corporation production, I don't agree because it is uncertain whether the tax induces companies to raise the output.*

* Theoretically, whether the corporation tax cut boosts the production depends on the elasticity of the production supply, which means how many goods and services company would increase if one unit of tax rate was decreased.

Now the production supply in Japan doesn't need increasing as I've told before in this blog. If many policymakers cut the income tax to activate the supply side of the corporation activities, they should not do that, I suggest. Now policymakers should raise the tax rate to cut the fiscal deficit first. To raise the rate, the demand will decrease. This is an adverse effect. And so, as I told earlier, BOJ should increase more money not to keep the economy down.

If tax rate is raised, more people come to think the path of the present fiscal policy less unsustainable and worry less about their future. According to the life-cycle theory, they spend more money because they are less uncertain about their future. The main reason for the present stagnant Japanese economy is their anxieties about their future living. Their worry about future makes them tighten their purses. The Ministry of Finance of Japan needs to show up the health of the fiscal balance to the Japanese people to make them loose their purses. And so it should raise the tax rate and cut the expenditure in spite of the negative effect of these policies on the economy.

(3) Fix the public pension plan.

In the longer run, the present public pension system needs fixing. This topic is closely related to the above my policy requests in terms of saving more.

In Japan the amount of saving is decreasing due to more aging people. Saving is necessary for the economy to keep its growth stable. So my third policy request is to raise the saving in Japan. Raising the saving is neither more nor less than those ones of raising the tax rate and cutting the expenditure.

For them to save more, the present public pension plan should be revised. In our present pension plan, we have to send our money to the pension fund and in several decades later we will receive the benefit. However, these days the premium on the young is going up and the benefit for the old down. It is very natural because the present plan is the system of "pay-as-you-go", which forces the young to pay for the old through the fund.

The main problem of the system is, needless to say, that the number of young people to pay is decreasing and the number of old people to receive increasing. The old people can receive neither more nor present benefit unless we the young people pay more. To keep the system sustainable, the premium should be raised and the benefit should be cut. Such a system is unattractive and unsustainable in the aging society. That's why I suggest the pension plan should be fixed earlier.

The idea of the public pension plan is very nice because we can spend the money as we get old and retired. To remain the same plan, the new tax should be levied on the whole people in Japan for the pension plan. Some economists have already been suggesting such a policy to raise the consumption tax and I agree to the tax plan for the public pension plan.

I would like MOF to raise the consumption tax rate to keep the pension plan alive. By doing so, we don't have to fear that the pension fund might collect far more premium from the younger people and cut the benefit for the old people.* To put it precisely, the consumption tax rate should be raised not for the healthy fiscal balance but for the healthy pension plan. Moreover, if the consumption tax is increased, the saving increases and the economy grows enough for us to make a good and happy life.

*However, we will have to pay more tax and have some hardship if the consumption tax revenue compensates for the pension plan.

To sum up, I would like BOJ to supply more money and MOF to raise the tax rates including the consumption tax and cut the expenditures. It is the best policy mix that we now need most.