Cotton Rises - One Dumb Economist's Students are Worse Off

One dumb economists is very sad having just read an article in the New York Times. The source of the sadness is indirectly floods in Pakistan and droughts in China. Only indirectly because of floods and the drought have destroyed the cotton crop. Not that we really care about the cotton crop, but when the supply of cotton goes down, the price of cotton goes up. And again, we don't really care that much about the price of cotton except that cotton is a major input into the production of my Levi's jeans. (Click here for article)

When the price of an input goes up supply the product goes down. And when the supply of the product goes down its price goes up. And when the price of a product goes up consumer surplus goes down. And anyone that knows me knows that I live in my Levi's. So when the price of Levi's goes up my consumer surplus goes down.

Consumer surplus is the difference between the value received in the amount paid into purchase. So, for example, if you value an item at $50 and the price of the product is only $40 then when you purchase it you capture a consumer surplus of $10 you are $10 better off by making exchange. If the price rises to $45 you will still make the exchange but you will only capture five dollars in consumer surplus. A reduction in consumer surplus makes consumers less happy.

So this one dumb economist is now worse off and has to make up exams for his classes. And now his students will be worse off just because of floods in Pakistan and droughts in China. Unless, of course, his intermediate students can figure out what an compensating variation is.