WORLD OF BUSIN ESS A Yen for Vending Machines Japan faces a steady drop in the number of working-age people. Here are three reasons why: (1) Japan’s birthrate has dropped to a record low; (2) Japan allows little immigration; and (3) Japan’s population is aging. As a result, unemployment has usually been lower in Japan than in other countries. For example, Japan’s unemployment rate in late 2015 was only 3.4 percent, compared to 5.1 percent in the United States and 11.0 percent in Europe. Because labor is relatively scarce in Japan, it is relatively costly. To sell products, Japanese retailers rely more on physical capital, particularly vending machines, which obviously eliminate the need for sales clerks. Japan has more vending machines per capita than any other country on the planet—twice as many as the United States and nearly 10 times as many as Europe. And vending machines in Japan sell a wider range of products than elsewhere, including beer, sake, whiskey, rice, fresh eggs, beef, vegetables, pizza, entire meals, fried foods, fresh flowers, clothes, toilet paper, fishing supplies including bait, video games, software, ebooks, toys, DVDs, mobile phone recharging, and even X-rated comic books. Japan’s vending machines are also more sophisticated. Newer models come with video monitors and touch-pad screens. Wireless chips alert vendors when supplies run low. Some cigarette and liquor machines have electronic vision that reportedly is better at estimating age than are nightclub bouncers. Sanyo makes a giant machine that sells up to 200 different items at three different temperatures. Some cold-drink dispensers automatically raise prices in hot weather. Thousands of machines allow cell phone users to pay by pressing a few buttons on their phones. As noted in the chapter, it is common practice in the United States to shake down vending machines that malfunction. Such abuse increases the probability the
BK-CHE-MCEACHERN11E-150035-Online Ch1.indd 1
machines will fail again, leading to a cycle of abuse. Vending machines in Japan are less abused, in part because they are more sophisticated and more reliable and because the Japanese generally have greater respect for private property and, consequently, a lower crime rate (e.g., Japan’s theft rate is about half the U.S. rate). Forty percent of all soft-drink sales in Japan are through vending machines, compared to only 12 percent of U.S. sales. Japanese sales per machine are double the U.S. rate. Research shows that most Japanese consumers prefer an anonymous machine to a salesperson. Despite the abundance of vending machines in Japan, more growth is forecast, spurred on by a shrinking labor pool, technological innovations, and a wide acceptance of machines there. This case study makes two points. First, producers combine resources in a way that conserves, or economizes on, the resource that is more costly—in this case, labor. Second, the customs and conventions of the marketplace can differ across countries, and this variance can result in different types of economic arrangements, such as the more extensive use of vending machines in Japan. Sources: “Economic and Financial Indicators,” The Economist, 24 October 2015; Hiroko Tabuchi, “Beef Bowl Economics,” New York Times, 30 January 2010; and “40 Things You Don’t Expect to Find in Vending Machines,” at http://www.hongkiat. com/blog/bizarre-vending-machines/. For a photo gallery of vending machines in Japan go to http://www.photomann.com/index.php?dest=machines.
Case Study Discussion Questions: Do vending machines conserve any resources other than labor? Does your answer offer any additional insight into the widespread use of vending machines in Japan? Suppose you had the choice of purchasing identically priced lunches from a vending machine or at a cafeteria. Which would you choose? Why?
25/11/15 4:41 PM
PU BLIC POLIC Y Rules of the Game and Economic Development Rules of the game can affect the Production Possibilities Frontier by either nurturing or discouraging economic development. Businesses supply jobs, tax revenue, and consumer products, but owning and operating a business is risky even in the best of times. How hard is it for an entrepreneur to start a business, import products for sale, comply with tax laws, and settle business disputes? The World Bank, a nonprofit international organization, has developed a composite measure that rolls answers to all these questions into a single measure and ranks 189 countries from best to worst based on their ease of doing business. Exhibit 4 lists the best 10 and the worst 10 countries in terms of the ease of doing business. The countries with the friendliest business climate all have a high standard of living and a sophisticated economy. The United States ranks seventh. The 10 most difficult countries all have a low standard of living, a poor economy, and eight are in Africa. Consider, for example, the complications in Eritrea, a small African country, where starting a business requires 13 procedures and takes 84 days. In contrast, to start a business in Singapore takes only 4 procedures and 2.5 days. Eritrea is one of the poorest countries on earth based on per capita income. Singapore is among the richest. How does the burden imposed by business taxes differ across countries? In Eritrea, businesses are subject EXHIBIT 3
Best 10 and Worst 10 Among 189 Coun tries Based on Ease of Doing Business
Best 10
Worst 10
1. Singapore 2. New Zealand 3. Denmark 4. South Korea 5. Hong Kong, China 6. United Kingdom 7. United States 8. Sweden 9. Norway 10. Finland
180. Equatorial Guinea 181. Angola 182. Haiti 183. Chad 184. Democratic Republic of Congo 185. Central African Republic 186. Venezuela 187. South Sudan 188. Libya 189. Eritrea
Source: Doing Business 2016: Measuring Regulatory Quality and Efficiency (World Bank Publications, 2016) at http://www. doingbusiness.org/.
BK-CHE-MCEACHERN11E-150035-Online Ch2.indd 1
to a tax rate totalling 84 percent of profits. So, nearly all business profits are eaten up by taxes, in the process destroying the primary reason to even open a business. Meanwhile, a business in Singapore pays a tax rate amounting to only 18 percent of profit. Of course, some level of business regulation and taxation is necessary to ensure public health and safety and to nurture market competition. Few would argue, however, that the world’s most prosperous economies have allowed businesses to go wild. But why would a country impose taxes and regulations so severe as to kill business development, thereby choking off the jobs, taxes, and consumer products that go with it? One possible explanation is that many countries with the worst business climate were once under colonial rule and have not yet developed the ability to operate government efficiently. Another possibility is that governments in poor countries usually offer the most attractive jobs around. Politicians create government jobs for friends, relatives, and supporters. Overseeing bureaucratic regulations gives all these people something to do, and high tax rates are needed to pay the salaries of all these political cronies. Perhaps the darkest explanation for the bad business climate in some countries is that business regulations and tax laws provide government bureaucrats with more opportunities for graft and corruption. For example, the more government documents needed to execute a business transaction, the more opportunities to seek bribes. In other words, obstacles are put in the way of business so government bureaucrats can demand bribes to circumvent those obstacles. Even Irish rocker Bono, a longtime supporter of aid to Africa, has called for “advances in fighting the evils of corruption in Africa.” Regardless of the explanation, poor countries are poor in part because they have not yet developed the rules of the game that nurture a prosperous economy. Source: Doing Business 2016: Measuring Regulatory Quality and Efficiency (World Bank Publications, 2016) at http://www.doingbusiness.org/; and Bono, “A Time for Miracles,” Time, 2 April 2007.
Case Study Discussion Questions: Why is the standard of living higher in countries where doing business is easier? Why do governments collect any business taxes or impose any business regulations at all?
25/11/15 8:32 PM
T H E IN FOR M ATION ECONO M Y The Electronic Cottage The Industrial Revolution shifted production from rural cottages to urban factories. But the Information Revolution spawned by the microchip and the Internet has decentralized the acquisition, analysis, and transmission of information. These days, someone who claims to work at a home office is not necessarily referring to corporate headquarters but perhaps to a spare bedroom. According to a recent survey, the number of telecommuters, or “remote workers,” has more than doubled in the last decade. Pushing the trend are worsening traffic, higher gas prices, wider access to broadband, growing self-employment after the Great Recession, and even the threat of terrorism. The average commute is 23 miles, and eliminating that can save about $1,000 a year in gas and can avoid putting more than 6,000 pounds of carbon dioxide into the atmosphere. What’s more, it often makes sense to try a new business at home before moving to a separate, more costly, location. Most small businesses are home-based, at least at the start. From home, people can write a document with coworkers scattered throughout the world, then discuss the project online in real time or have a videoconference on Skype (McDonald’s saves millions in travel costs by videoconferencing). Software allows thousands of employees to share electronic files. According to a recent survey, the majority of those who use computers for most of their work believe they could work at home. When Accenture moved headquarters from Boston to a suburb, the company replaced 120 tons of paper records with an online database accessible anytime from anywhere in the world.
BK-CHE-MCEACHERN11E-150035-Online Ch3.indd 1
To support those who work at home, an entire industry has sprung up, with magazines, newsletters, Web sites, and national conferences. In fact, an office need not even be in a specific place. Some people now work in virtual offices, which have no permanent locations. With smartphones, laptops, or other online links remote workers can conduct business on the road—literally, “deals on wheels.” Chip technology is decentralizing production, shifting work from a central office either back to the household or to no place in particular. The Internet has reduced transaction costs, whether it’s a market report authored jointly by researchers from around the world or a new computer system assembled from parts ordered over the Internet. Easier communication has even increased contact among distant research scholars. For example, economists living in distant cities are four times more likely to collaborate on research now than they were two decades ago. Sources: Sara Sutton Fell, “Lessons Learned from Three Companies That Have Long Embraced Remote Work,” Fortune, 12 February 2015, at http://fortune. com/2015/02/12/lessons-learned-from-3-companies-that-have-long-embracedremote-work/; Colleen DeBaise, “For More Workers, Home is Where the Office Is,” Wall Street Journal, 3 January 2010; and Daniel Hamermesh and Sharon Oster, “Tools or Toys? The Impact of High Technology on Scholarly Productivity,” Economic Inquiry, 40 (October 2002): 539–555. For information about how to run a business from home, go to http://www.ows.doleta.gov/unemploy/self.asp.
Case Study Discussion Question: How has the development of personal computer hardware and software reversed some of the trends brought on by the Industrial Revolution?
25/11/15 7:11 PM
T H E IN FOR M ATION ECONO M Y
BK-CHE-MCEACHERN11E-150035-Online Ch4.indd 1
high school at least one year. So, talented players started turning pro after their first year of college.) E X H I B I T 11
NBA Pay Leaps S2016
$6.0
5.0
D2016
4.0 Average pay per season (millions)
The Market for Professional Basketball Toward the end of the 1970s, the NBA seemed on the brink of collapse. Attendance had sunk to little more than half the capacity. Some teams were nearly bankrupt. Championship games didn’t even merit prime-time television coverage. But in the 1980s, three superstars turned things around. Michael Jordan, Larry Bird, and Magic Johnson added millions of fans and breathed new life into the sagging league. Successive generations of stars, including Stephen Curry, Kevin Durant, and LeBron James, continue to fuel interest. Since 1980 the league has expanded from 22 to 30 teams and attendance has more than doubled. More importantly, league revenue from broadcast rights jumped 140-fold from $19 million per year in the 1978–1982 contract to $2.7 billion per year in the current contract, which runs to 2025. Popularity also increased around the world as international players, such as Dirk Nowitzki from Germany and and the Gasol brothers from Spain, joined the league. (Basketball is now the most widely played team sport in China.) NBA rosters include more about 100 international players. The NBA formed marketing alliances with global companies such as CocaCola and McDonald’s, and league playoffs are now televised in more than 200 countries in 45 languages to a potential market of 3 billion people. What’s the key resource in the production of NBA games? Talented players. Exhibit 11 shows the market for NBA players, with demand and supply in 1980 as D1980 and S1980. The intersection of these two curves generated an average pay in 1980 of $170,000, or $0.17 million, for the 300 or so players then in the league. Since 1980, the talent pool expanded somewhat, so the supply curve in 2016 was more like S2016 (almost by definition, the supply of the top few hundred players in the world is limited). But demand exploded from D1980 to D2016. With supply relatively fixed, the greater demand boosted average pay to $6.0 million by 2016 for the 450 or so players in the league. Such pay attracts younger players. Stars who entered the NBA right out of high school include Kobe Bryant, Kevin Garnett, and LeBron James. (After nine players entered the NBA draft right out of high school in 2005, the league, to stem the flow, required draft candidates to be at least 19 years old and out of
3.0
2.0
1.0
D1980
S1980
0.17 0
100
200
300
400 450
Players per season
Because the supply of the world’s top few hundred basketball players is relatively fixed by definition, the big jump in the demand for such talent caused average league pay to explode. Average pay increased from $170,000 in 1980 to $6,000,000 in 2016. Because the number of teams in the NBA increased, the number of players in the league grew from about 300 to about 450. Sources: “NBA Player Salaries: 2015-2016,” ESPN at http://espn.go.com/nba/ salaries; and “Silver Sees Healthy NBA, Expects Shorter Season,” New York Times, 23 October 2015, at http://www.nytimes.com/aponline/2015/10/23/ sports/basketball/ap-bkn-board-of-governors.html.
Case Study Discussion Questions: In what sense can we speak of a market for professional basketball? Who are the demanders and who are the suppliers? What are some examples of how changes in supply or demand conditions have affected this market?
25/11/15 8:33 PM
BE H AVIOR A L ECONO MICS Deterring Young Smokers As the U.S. Surgeon General warns on each pack of cigarettes, smoking can be hazardous to your health. Researchers estimate that cigarettes kill 440,000 Americans a year—10 times more than traffic accidents. Smoking is the overwhelming cause of lung cancer, the top cancer killer among women. Smoking is also the leading cause of heart disease, emphysema, and stroke. According to the U.S. Centers for Disease Control and Prevention, each pack of cigarettes sold in the United States costs society more than $7 in higher health care costs and lost worker productivity. These costs exceed $150 billion a year, which works out to be about $3,400 per smoker per year. Thus, smoking imposes major health and economic costs. Policy makers try to r educe these costs by discouraging smoking, especially among young people. About 80 percent of adult smokers began before the age of 18. Each day, about 3,500 U.S. teens under 18 try smoking for the first time, and about a third of those become regular smokers. One way to reduce youth smoking is to prohibit cigarette sales to minors. A second way is to raise the price through higher cigarette taxes (the price now tops $10 per pack in New York City). The amount by which a given price hike reduces teen smoking depends on the price elasticity of demand. This elasticity is higher for teens than for adults. Why are teenagers more sensitive to price changes than adults? First, recall from the chapter that one factor affecting elasticity is the importance of the item in the consumer’s budget. Because teen income is relatively low, the share of income spent on cigarettes usually exceeds the share spent by adult smokers. Second, peer pressure shapes a young person’s decision to smoke more than an adult’s decision to continue smoking (if anything, adults face negative peer pressure by smoking). Teens often begin smoking by mooching cigarettes from peers. Thus, the effect of a higher price gets magnified among young smokers because that higher price also reduces smoking by peers. With fewer peers smoking, teens face less pressure and fewer opportunities to mooch cigarettes from peers. Third, young people not yet
BK-CHE-MCEACHERN11E-150035-Online Ch5.indd 1
addicted to nicotine are more sensitive to price increases than are adult smokers, who are more likely to be already hooked. The experience from other countries supports the effectiveness of higher cigarette taxes in reducing teen smoking. For example, a large tax increase on cigarettes in Canada cut youth smoking by two-thirds. Another way to reduce smoking is to change consumer tastes through health warnings. In Canada, these warnings include photos showing how smoking can affect the brain, teeth, and gums, and a wilted cigarette depicts male impotence. In Australia, labels show gangrenous limbs, underweight babies, cancerous mouths, and blind eyes. Belgium adds corpses to the gallery of horrors. In California, a combination of higher cigarette taxes and an ambitious awareness program contributed to a 5 percent decline in lung cancer among women, even as the disease rose 13 percent in the rest of the country. (As of 2015, state taxes varied from a low of 30 cents per pack in Virginia to a high of $4.35 in New York.) But higher cigarette taxes can have unintended consequences. Researchers have found that smokers compensate for tax hikes by smoking each cigarette more intensively—that is, by sucking more smoke and nicotine from each cigarette. This poses an added health risk. The message about the dangers of smoking, which seem to work, along with the higher cost of cigarettes has had an impact over time. Only about 20 percent of American adults now smoke, down from more than half in the 1960s. Sources: Rosemary Avery et al., “Private Profits and Public Health: Does Advertising of Smoking Cessation Products Encourage Smokers to Quit?,” Journal of Political Economy, 115 (June 2007): 447-481. Petter Lundborg and Henrik Andersson, “Gender, Risk Perceptions, and Smoking Behavior,” Journal of Health Economics, 27 (September 2008): 1299–1311; Jerome Adda and Francesca Cornaglia, “Taxes, Cigarette Consumption, and Smoking Intensity,” American Economic Review, 96 (September 2006): 1013–1028; Lawrence Jin et al., “Retrospective and Prospective Benefit-Cost Analysis of U.S. Antismoking Policies,” NBER Working Paper 20998 (March 2015); and “State Cigarette Excise Tax Rates & Rankings,” at https://www.tobaccofreekids.org/research/factsheets/pdf/0097.pdf;
Case Study Discussion Question: List reasons why the price elasticity of demand for cigarettes among teenagers greater than it is among those 20 and over?
25/11/15 5:34 PM