Over in New Zealanad, there’s heavy discussion over whether the Government should promote rail use, or stick with roads as the primary traffic medium. But when Mayor Les Probert of Wairoa was asked about the issue, he responded that the whole problem boils down to plain economics. What did he mean?

Well, in the A-Level syllabus, two main concepts are relevant. The first describes why rail use is desirable over road traffic: Negative externalities. Heavy road traffic is generally deemed as less desirable if compared to rail traffic - cost or environment-wise - as it generates negative externalities, i.e. costs related to road traffic that spillover to others besides road users (e.g. air pollution, sound pollution, etc.). This is why most governments would like to transfer heavy road traffic onto rail.

The second directly answers our question: Cost-Benefit Analysis. But even though rail traffic is desirable over road traffic, the government has to analyse the cost and benefits from any action taken. If the cost of promoting rail use is greater than its benefits, then it wouldn’t make economic sense to do so. This is exactly what was meant when Mayor Probert said the issue “…will come down to a matter of economics.”

Yep, it’s as simple as that.

Fundamental demand and supply theory implies that the final price of a good displays the value placed on it (and thus, satisfaction gained) by consumers. If the retail price of a good is higher than the value placed on it by consumers, quantity demanded will fall, and thus, in theory, price would automatically fall to reignite quantity demanded.

So, we could say that, in general, the higher the final price of a good, the higher its satisfaction to consumers. After all, why would you pay so damn much for something unless it’ll be more satisfying than cheaper stuff which you could purchase in greater quantities? In many cases, this does hold. A mansion may cost tens of times more than an apartment, but usually, the mansion will provide greater satisfaction - whether from the sheer size of the residence, or the prestige that comes with a large house.

But like most aspects of economics, there are exceptions. Take for example a recent article on video games, where the author argues that:

Not every game that gets released with a $49.99 or $59.99 price tag is a good game. By the same token, not every game released with a bargain price is a piece of junk.

The author is, in fact, correct. Even our expensive mansion may end up being less satisfactory compared to the relatively cheap apartment if the mansion’s water supply breaks down every other day or if woodwork collapses every month. How is this rationalized in A-Level Economics?

Well, there is one simple explanation for this: Imperfect/incomplete information. At the point of purchase, it is rare that you would know whether a particular game is good or not. Unless you’ve already read a review by a gaming magazine, you have far too little information to make a perfect decision. So, more often than not, consumer judge by the price of the good. If the game is as expensive as that bestseller you played last month, then it’s surely of (nearly) equivalent standard. To an extent, this is rational. But as we’ve seen, it is not always correct.

So, clearly not every economic principle holds in every situation. Most of the time, the assumptions underlying the principle have to be examined.

In A-Level Economics, we learn about the relationship between labour and their employers (firms). We learn about labour unions and monopsonies. More specific to today’s theme, we learnt that labour unions command substantial power when they form a majority and can make credible threats to firms.

When workers deem as a whole that they are compensated far too low if compared to their contribution to revenue, then they tend use labour unions as a means of “convincing” their employers to pay up - or see zero production, and thus, zero revenue (in a simplistic sense). In theory, this works because labour unions have ensured that they are the only major source of labour for the firms concerned. Firms have little to no choice in the matter if they intend to continue production.

Let us try extending this to the Formula 1 circuit. It might seem absurd at first, but if you think of labour unions in a more general context, you will probably get what we mean.

“Labour” Theory on the Circuit

In a deal signed between the various F1 teams, F1 chief Bernie Ecclestone and the International Automobile Federation (FIA) in 1997, all the participating teams would receive about a quarter of F1’s income, while the rest would go to the FIA and the company holding the rights to F1 (controlled primarily by Mr. Ecclestone).

But in recent years, F1 teams have deemed Mr. Ecclestone’s cut of the F1 pie being far too large for mere marketing and prize provision. As a result, many of the major teams formed the Grand Prix Manufacturer’s Association (GPMA) and threatened to form an alternative racing series to the F1 in 2008.

Do you see how to apply simple A-Level labour economics to this scenario? I think so, but here’s the answer anyway. For starters, you could label Mr. Ecclestone as the firm (employer) and the GPMA as the labour union. Then, note that the GPMA has ensured that it is the only major source of participants (a.k.a. labour) in the Formula 1 series (a.k.a. production), and can thus make a credible threat to the owner(s) of F1 (a.k.a. employers) to leave if they are not given a greater cut of F1 income.

Simple, no?

Conclusion

If you have been keeping up with the news, you would notice that most labour unions have lost considerable power over firms as free market economics proliferates. In particular, the threat of cheaper labour from outside the country (immigrants or outsourcing), or plain relocation of production overseas have forced labour unions to concede to the demands of firms.

In the case of our F1 series, the GPMA managed to get what they wanted. In a recent agreement signed between all the involved parties, F1 teams would receive around half of the F1 income pie - double their previous cut. So, why is it that when labour unions all over the world have been losing power, the F1 circuit has managed to adhere to theoretical conditions? Because unlike conventional labour unions where their constituents can be replaced by similarly trained and equally able workers overseas, F1 teams or rather, F1 automobile manufacturers and their drivers cannot be.

As such, the theoretical requirement that labour unions must be the primary source of labour is adherred to, and the predictive ability of the simple A-Level labour theory model holds.

Part and parcel of studying or having studied economics, whether at A-Level or in university, is being involved in an ongoing debate of whether economics is more art or science. But unlike many decades back, modern day detractors of orthodox economic principles (i.e. “standard economic theory”) no longer simply say that economics is too abstract and inconcrete, and harp on the fact that there are no set-in-stone rules in economics like there are for the natural sciences such as physics (e.g. Newton Laws).

Instead, the latest trend is automatically assuming that economics is insufficiently unscientific (a.k.a. insufficiently correct), and arguing that economics needs to be made more “scientific” - even if just by an inch - in the light of newly discovered scientific rules from other disciplines, whether psychology, neuroscience or engineering.

But there really isn’t anything to worry about since any well-read A-Level Economics students can effectively rebutt the sheer uhmm… crap these sort of arguments depend on. In fact, a recent article by Robert Murphy does just that.

Let’s look at one example relevant to A-Level Economics. A specialist in psychology at Carnegie Mellon University has “discovered” that, “the mere information that you’re about to feel pain seems to be a source of misery,” or more simply, expected future pleasures and pains has effects on currently experienced pleasures and pains. But don’t we all (through “standard economic principles”) know this already?

We see this very principle in one of the most common examples in A-Level Economics textbooks: investment. We know very well that the expected pleasure (i.e. greater production or spending capacity) from investing provides us sufficient pleasure now to encourage us to actually defer our purchases today (which is generally a Bad Thing).

Of course, no one is saying that the various scientific disciplines cannot and will not yield improvements to economic theory. It’s just that there is great need to actually take a deep look at all the noise abundant in so-called intellectual circles today, and derive some sort of clear signal from it. Students especially cannot be allowed to absorb “pollution” of this kind, especially students in high school or a pre-university course. Imagine if every student thought economics was “not enough”. Who would read economics in university then?

As I refresh my knowledge on the vast, yet somehow focused subject that is economics, I’ve often wondered whether I could answer what the hell economics actually is off the top of my head. When I think about it, I’ve actually studied Economics at O-Levels, and recently, A-Levels, and am about to embark upon a mathematically-intensive economics degree in some university in September 2006. A question as basic as this should be second nature. Yes… should.

But while this topic is probably the very first one any economics student will encounter, few actually pay attention to it in lectures, or bother to even glance at the corresponding topic in textbooks. Heck, I know I didn’t bother at least. To me, economics, then, was an academic subject of its own, separate from history and moral studies (unlike pre-Smith and Marshallian times), that focused exclusively on money, money, and yet more money. Yes, this is the most oft-used, yet incomplete definition applied to economics.

So, what is economics?

Well, we’ve started our first Library topic just to answer this question (plus a host of other related questions actually). The topic is entitled Introduction to Economics, and it will cover issues such as the modern definition of economics, positive vs. normative economics, macro vs. microeconomics, and economic agents.

While it might not answer every question you may have on the topic, it’ll definitely be able to answer most of the more popular ones for A-Level Economics students. Don’t believe me? Here’s a snippet of our whole answer for the question I posed earlier:

economics - one accepted by many academics is that economics is the study of how people manage scarce economic resources in their daily routine of living in a society. In other words, economics concerns the decisions we make in the face of scarcity.

So, why are you still here? Get moving to our first Library topic now!