Economics

Oil Price Lesson Plan for Economic Principles

Joy BuchananLeave a comment

Alex Tabarrok noted in Oil versus Ice Cream that he and Tyler, as textbook authors, “chose the oil market as our central example. Oil is always in the news…”

when a student sees that the price of crude has surged past $100 a barrel because Iran closed the Strait of Hormuz—choking off 20% of the world’s oil supply—they have the framework to understand what is happening. Supply shock, inelastic demand, expectations and speculation, the macroeconomic transmission to GDP—it’s all right there in the headlines.

In a classroom, a good way to begin is to ask the students to tell you what they have noticed recently about oil or gas prices. Having the students obtain the oil price data themselves could be fun, if you are in an environment with screens/computers.

A data source for undergrads is the FRED chart for WTI crude oil prices. It is clean and easy to explain in class. An instructor with slides could pull this up in real time. https://fred.stlouisfed.org/series/DCOILWTICO

Ask students: “Is this price change primarily explained by

  1. Increase in demand
  2. Decrease in demand
  3. Increase in supply
  4. Decrease in supply

Correct answer: d. Decrease in supply

If you cover elasticity, this is especially helpful as an example. “Why would the price jump more when demand is inelastic?”

It’s not too late to work this into a lesson plan for the Spring 2026 semester, economic teachers. I might use it to illustrate supply shocks next week.

This event is a classic example of a negative supply shock: a disruption in the Strait of Hormuz would reduce the amount of oil reaching world markets, pushing energy prices sharply upward. Because oil is an important input for transportation, manufacturing, and heating, higher oil prices raise costs across much of the economy. Firms may cut production, households may spend more on gasoline and utilities and less on other goods, and overall economic activity can slow. That is why economists worry that large oil supply shocks can contribute to recessions. They do not just make one product more expensive; they can ripple outward, reducing real income, lowering consumer confidence, and weakening GDP growth while inflation rises.

Related posts. The whole crew showed up this month:

James from March 12: Is a US Oil Export Ban Coming?

Jeremy from March 18: Gasoline Prices Have Increased at Record Rates, but Remain At About Average Levels of Affordability

Tyler from March 22: How much more will oil prices have to go up?

MattY from March 24: Why hasn’t oil gotten even more expensive?

Austin Vernon: https://www.austinvernon.site/blog/thestrait.html

Cournot & Stackelberg Math

Zachary BartschLeave a comment

This post solves for the equilibrium quantity of production with quadratic total cost under Cournot and Stackelberg competition.

Say that there are two firms. They produce the exact same quality and type of goods and sell them at the same price. Let’s also assume that the market clears at one price. Finally, let’s assume increasing marginal costs.

Let’s say that they face the following demand curve:

The firms have a total cost of:

The marginal cost is the derivative with respect to the choice variable for each firm, or their respective quantities produced:

The total revenue is just the price times the quantity sold.

This is all standard fare for economic modeling. You’re free to make different assumptions. You can even adopt different slopes in the demand curve to reflect goods with different characteristics.

Cournot Competition

If you imagine a lengthy production process, or otherwise that they physically attend the same market, then it’s reasonable to assume that they don’t know one another’s choice of quantity produced.

We know how firms maximize profit: They produce the quantity at which the marginal revenue equals the marginal cost. But, what is marginal revenue? The derivative of total revenue with respect to the choice variable:

Now we can set the marginal revenue equal to marginal cost and solve for the optimal level of output:

Notice that the optimal level of output depends on the production decision of the other firm. These are called response functions. If we solve for the quantities at which they intersect, then we are solving for where both firms are producing the best response to one another. This is known as a Pure Strategy Nash Equilibrium (PSNE).

Luckily, in many applications, one or more of the above terms are zeros, which makes things much simpler.

The general process for solving for the Cournot equilibrium is:

  1. Set MR=MC to find the response functions.
  2. Find where the response functions intersect.

Stackelberg Competition

Continue reading →

Experimental Banking Reveals the Value of Leisure

James Bailey1 Comment

In 2014 India required banks to offer no-cost accounts. This led hundreds of millions of people to open bank accounts for the first time, and more than doubled the number of Indian women who had a bank account:

This increased households’ collective ability to save and borrow, but didn’t shift decision-making power towards women despite the larger change for them. That is the finding of a paper by Tarana Chauhan, a Brown University postdoc who is currently on the job market. The paper is a well-executed example of a difference-in-difference analysis of observational data- that is, carefully examining data that other people generated to examine events that help establish causality. But the validity of difference-in-difference strategies in separating correlation from causation can always be questioned, and always is in economics seminars.

So Dr. Chauhan, this time with coauthors Berber Kramer, Patrick Ward and Subhransu Pattnaik, followed up by directly running an experiment. They got a company to offer subsidized loans to hundreds of randomly selected Indian farmers, then surveyed the farmers to see if they behaved differently than a control group that didn’t get loans. The loans carried a 14% interest rate, which seems high to Americans but was apparently 10pp lower than the other options available in India. They wanted to know whether farmers would use the loans to improve farm productivity, and whether this would have any differential effects on women.

The first stage of the experiment worked: households took the loans and got more engaged with the financial system.

Some used the money for smartphones:

But for the most part they seem not to have spent the money on farming- they didn’t buy significantly more land, seeds, fertilizer, or farm equipment. They did spend more on “non-farm business equipment” and “large consumer durables”. Despite not producing more food themselves, they reported higher food security. Income stayed flat, but women were able to shift some time away from work and toward leisure:

I find these results surprising given how poor the households receiving the loans are. They earn the equivalent of about $1,000/yr, putting them around the global “extreme poverty” line. At that income level I’d think they would value additional income highly relative to leisure, and yet when they get the loan, work time goes down and leisure time increases. Could it really be the case that they’ve already hit their income target, and are on the backward bending part of the labor supply curve? Some other possibilities are that they don’t expect that investing in farming would increase yields enough to be worthwhile, or that they worry any increased income would be taken away through explicit or implicit taxes. But the households generally seem better off as a result of the loan.

The other surprise- enough of the loans were paid back that the lenders made a profit despite the research pushing the interest rate below-market.

Average Wealth for Younger Generations Continues To Exceed Past Generations

Jeremy Horpedahl1 Comment

Today I am posting an update to the generational wealth chart that I have posted many times in the past. This update brings the data through the 3rd quarter of 2025 for the youngest cohort, which includes both Millennials and a growing part of Gen Z in the data from the Federal Reserve. I am somehow hesitant to post this chart, as it is starting to be data that is less useful as the younger generations age, for two reasons.

The first problem with the data is that the Fed is lumping everyone from ages 18-43 together as one generation. Given that the youngest Millennials were 29 in 2025, we are now including a significant part of Gen Z, which is OK in itself, but it becomes harder to compare with generations that encompass only 16 or 17 years of birth cohorts. Secondly, the data from the Fed’s Distributional Financial Accounts is only benchmarked every three years with the Fed’s more detailed Survey of Consumer Finances. Currently only the 2022 version of the survey is available, which is now probably a bit out of date. Based on past updates, it is entirely possible that it is underestimating wealth for the youngest cohort. But I think we will have much more certainty about this data once the 2025 SCF is available and used as a benchmark for the DFA data.

With all of those caveats aside, here is the updated chart:

As I am currently working on a book manuscript using the Survey of Consumer Finances, I will be very excited to finally have the 2025 data available. Until then, this is probably the best intergenerational comparison we can do, and it continues to look very positive for the youngest cohorts. With an average of almost $146,000 of wealth for the combined Millennial/Gen Z cohort, they are well ahead of where Gen X was even in their late 30s, and ahead of Boomers at around age 37 as well. All of this bodes well for young people, despite frequent expressions of pessimism, but we should hold off judgement until the 2025 data is fully updated.

How to Install Drywall

Scott Buchanan1 Comment

Nearly every interior wall and ceiling in every home in America is covered with sheetrock = drywall = gypsum board. Sheetrock (a brand name for drywall) consists of an interior layer of rigid gypsum (a mineral composed of calcium sulfate dihydrate) plus some additives, with outside layers of strong paper or fiberglass. It normally comes in 4 ft x 8 ft sheets.

Normal houses have a framework of mainly 2×4 or larger wood lumber. Each wall has vertical 2×4 studs, spaced every 16”. Sheetrock is trimmed to size, and nailed or (these days) screwed into the studs.

That is the theory, anyway.

I have never done this stuff at large scale before, other than clumsily patching occasional small dings in a wall. A little while ago, I got to experience the process, hands-on. I was part of a team that helped someone whose basement had flooded. We cut out the lower ~4 ft of drywall, and replaced it with fresh drywall.

First, how to you cut drywall? A long, straight cut is accomplished by drawing a straight line and cutting along it, all the way through one layer of the facing paper. Then you hang the drywall sheet on the edge of a table, and crack the interior gypsum layer. Then you cut the other side of the paper. The end result of such a cut is like this:

Typically, you install drywall on the ceiling first. Then the top 4 ft of the walls, then the bottom 4 ft of the walls. You butt the pieces close to each other. For the lowest piece of drywall, you insert a curved metal wedge under it, and step on the wedge with your foot to lift that drywall piece to butt its top edge up against the upper piece. If you look carefully near the middle of the following photo, you can see the red wedge I used to jack up that small lower piece of drywall. It’s OK to leave a gap between the floor and the lower edge of the bottom drywall, since that gap will be covered by baseboard.

This was in a bathroom. I cut the lower green pieces with a little hand power saw, and screwed them into the studs, using the green and black driver visible on the stand in the left foreground.

The next two photos are before and after of a bedroom wall, again showing the bottom course of sheetrock we installed.

Filling in Cracks and Holes

As you can see, at this stage, there are like ¼” cracks between the installed sheets of sheetrock, and the mounting screw holes are visible. These imperfections are filled in with goo called joint compound, or “mud.” The mud is applied with a “knife” like this:

Cracks are covered with paper or fiberglass tape, with mud smeared over the tape. Typically, three layers of mud are needed to achieve perfect, smooth coverage. Each layer must dry hard before applying the next layer. Each layer may be sanded lightly as needed.

 A key technique is to tilt the knife so the mud is maybe 1/16” thick over the tape or over a screw, but taper the mud to zero thickness on the wall away from the tape or screw. This feathering is essential; if your mud layer ends with appreciable thickness instead of feathering, you have to do a lot of sanding to get a smooth blending into the plain drywall at that edge. Pro tip: carefully stir more water into the joint compound as needed to keep it wet and flowing, especially for overnight storage. This video from Vancouver Carpenter displays mudding technique.

That is mainly it. For perspective and confidence building, it is helpful to work with an expert, as I was able to do.

Does Broadband Bring Jobs?

James BaileyLeave a comment

No, according to a new paper from the University of Georgia’s Michael Kotrous.

Many people expected it to, partly by thinking about the jobs that could benefit from faster internet, and partly by looking at the experience of Chattanooga, Tennessee. Chattanooga was the first major city to get gigabit-speed broadband, and they did see a huge improvement in the labor market right afterwards:

But as the graph shows, the introduction of broadband there coincides with the end of the nationwide Great Recession. Was the boom in jobs after 2009 because of the broadband, or would it have happened anyway as party of the recovery from recession? A synthetic control strategy shows that Chattanooga’s recovery was pretty typical for cities like it, so the broadband angle probably didn’t do much:

This might seem like a historical curiosity about one city, but the federal government is currently trying to spend $42 billion to expand broadband to more places, partly motivated by the idea of bringing jobs. I thought the Broadband Equity Access and Deployment Program‘s big problem is how slow it is- Congress created with the Infrastructure Investment and Jobs Act of 2021, but money didn’t start getting sent out until late 2025, and it could be many more years before it leads to any useable broadband. Even then it now seems unlikely to bring jobs, though there could be other benefits.

This paper’s author Michael Kotrous is currently on the economics job market. As his former professor and coauthor, I recommend hiring him if your school gets the chance.

Gasoline Prices Have Increased at Record Rates, but Remain At About Average Levels of Affordability

Jeremy Horpedahl1 Comment

In the (so far) short military engagement with Iran, crude oil and gasoline prices have jumped significantly. The three-week change in gasoline prices at the pump for US consumers was 27 percent, the largest three-week increase consumers in the US have ever seen (with data back through the 1990s). The four-week increase is also a record.

Despite this sharp increase, gasoline prices remain near the long-run average in terms of affordability: it takes about 7 minutes of work at the average wage to purchase a gallon of gasoline. To be sure, this is a big jump of where it had been earlier in 2026, at about 5 minutes of labor. Nonetheless, gasoline is still (for now!) more affordable than it was, relative to wages, for almost all of 2022 and 2023.

The Economic Story of Mike Mulligan and His Steam Shovel

Zachary Bartsch1 Comment

Mike Mulligan and His Steam Shovel, by Virginia Lee Burton, is a classic 1939 children’s book about a man, Mike Mulligan, and his beloved steam shovel, Mary Anne, who are replaced by modern machinery. They get one last chance to demonstrate their worth by digging the cellar for a new town hall in a single day.

This book is more than just a nostalgic children’s story with a happy ending. This is a tale about economic history, comparative advantage, non-pecuniary benefits, labor and capital heterogeneity, and, of course, transaction costs.

Here’s some background. Historically, excavating or earth-moving equipment was powered by steam. Much like a steam engine locomotive (train), a steam shovel burns coal to heat water in a boiler, creating steam that can drive pistons that operate the mechanics. The result is machinery that can move a greater volume of soil at a faster speed than humans with simple hand shovels. Advancements in oil extraction and refining and internal combustion made the steam methods obsolete. Diesel or gasoline made earth movers safer, faster, and larger all because there was no need to build high pressures from boiling water. Steam pressure in the field takes a lot of time and is dangerous. 

Here is how the story goes. Mike enjoys his earth-moving work with his steam-shovel and is proud to be more productive than hand-shovels. One day, diesel, electric, and gasoline-powered shovels arrive. They’re bigger and better than Mary Anne. She is now obsolete. It’s unclear whether Mike’s skills are transferable to the newer equipment, but he implicitly prefers working with Mary Anne.  Together, they can’t compete in the urban areas where the value placed on quick excavation is high. So, they flee to the countryside.

The text doesn’t say why the newer shovels aren’t in the countryside. Let’s address that first. The new shovels haven’t spread to the rural areas because the opportunity cost is too high. Diesel Shovels are expensive and the owners/operators need revenue from many jobs in order to pay for their equipment in a reasonable amount of time and earn a positive return. Rural areas don’t have the same willingness to pay for as many projects, so less specialized capital is limited by the smaller extent of the market. Clearly, a higher cost of capital – the cost of the loan that pays for the diesel shovels or the alternative uses of the resources – accentuate the necessity for project volume.

Continue reading →

Is a US Oil Export Ban Coming?

James Bailey2 Comments

The Iran regime’s military strategy seems to be that by bombing the oil infrastructure of their neighbors and neutral shipping, US gasoline prices will go so high that Americans will demand an end to the war.

How many Americans would be willing to pay $6/gallon gas for months for a ~50% chance of toppling a regime that oppresses 90 million people and destabilizes its region on the other side of the world? Probably only a minority of voters, especially when the President didn’t make the case to the American people or Congress beforehand.

But the US produces more than enough oil for its own needs. Why does the Strait of Hormuz being closed mean higher gas prices here? Only because US oil companies can sell to global markets, and they won’t choose to sell a barrel of oil to a US refiner for $60 when they could sell it to a foreign refiner for $100. If the government took away the foreign option, US oil producers would sell to US refiners at prices consistent with pre-war sub-$3/gallon gasoline.

Naturally there would be costs to an export ban. US oil producers would miss out on windfall profits, while Russian producers would benefit. Foreign customers of US oil, many of them in allied countries, would be angered by the missed shipments and global oil prices would soar further.

But if the US administration wants to avoid a midterm wipeout driven by high gas prices, I see only 3 options:

  1. Get lucky and see the Iranian regime fall quickly
  2. Negotiate an end to the war quickly (which might itself be unpopular if they can’t get a good deal) or just declare victory and go home (but its not clear whether Iran would re-open the strait now just because the US stopped bombing)
  3. Restrict Exports

I say “restrict” not “ban” because I don’t think a complete export ban is necessary to stabilize US prices. You could instead do an export tax (high enough to stop many exports but low enough to allow the buyers with the highest values / fewest alternatives to stay in the market), or you could do a ban but allow a few export waivers for favored buyers or sellers (which seems like Trump’s style), or similarly a quota limiting exports to a certain number (say, limit each company’s monthly exports to 90% of their volume in the same month last year).

This has an obvious precedent: the Biden administration stopped issuing new permits to export liquified natural gas in 2024 to prevent prices spiking here during the Ukraine war (which led to even higher prices for our European allies). But a total ban on oil exports would be a much bigger deal.

Will the Trump administration actually try something like this? It will be an interesting test of US political economy to see what happens when the interests of the military-industrial complex conflict with the interests of oil producers.

Ricardian Equivalence: Reasonable Assumption #2

Zachary BartschLeave a comment

There are several requirements for Ricardian Equivalence:

  1. Individuals or their families act as infinitely lived agents.
  2. All governments and agents can borrow and lend at a single rate.
  3. The path of government expenditures is independent of financing choices

Assumption 2) appears patently absurd on its face. I certainly cannot borrow at the same interest rate that the US Treasury can. QED. Do not pass go, do not collect $200. The yield on 1-year US treasuries is 3.58%. I can’t borrow at that rate… Or can I?

Let’s do some casuistry.

What is a loan?

It’s a contract that:

  • Provides the borrower with access to spending
  • with or without collateral
  • with a promise to repay the lender at defined times, usually with interest.

So, when you borrow $5 from a friend and pay it back on the same day, it’s a loan. The contract is verbal, there is no collateral, the repayment time is ‘soon’ with flexibility, and the interest rate is zero.

A mortgage is a collateralized loan. You borrow from a bank, make monthly payments for the term of the loan, and accrue interest on the principal. The contract is written, the house or a portion of its value is the collateral, and the interest rate is positive.

What about a Pawnshop loan? Most of us are probably unfamiliar with these. In this circumstance, a person has valuable non-assets that and the pawnshop has money.  They engage in a contractual asset swap. The borrower lends the non-money asset to the pawnshop as collateral and borrows money from the pawnshop. The pawnshop borrows the non-money asset and lends the money to the borrower. The borrower can use the money as they please, but the pawnshop can not use the non-money asset – they can simply hold it. They collect interest in order to cover their opportunity costs.

One outcome is that the borrower repays the loan and interest by the maturity date and reclaims their non-money asset. Another outcome is that the borrower retains the option to default without any further obligation. But they lose the right to reclaim their property according to the repayment terms. If the borrower exercises the option to default, then the pawnshop acquires full rights to the non-money asset. The pawnshop often resells the asset at a profit. The profit is relatively reliable because the illiquidity of the non-money asset allows the pawnshop to lend much less than its retail value. That illiquidity is also why the borrower is willing to accept the terms.

If we accept that the pawnshop contract is a loan, which is just a collateralized loan with a mostly standard default option, then get ready for this.

Continue reading →