This chapter discussed the factors of production, or the inputs used to produce goods and services. Labor is the most important factor of production because workers receive most of the total income earned in the U.S. economy. When deciding how many workers a firm will hire, we first make two assumptions: the firm is competitive (or a price taker with little influence in the market) and the firm is profit-maximizing. A competitive, profit maximizing firm hires workers up to the point where the value of the marginal product of labor(MP*P), where P=price of output, equals wage. Therefore, the value-of-marginal-product curve is the labor-demand curve for this firm (because it is used to decide how many workers to hire).
I think this chapter is a bit weird, since we're thinking of what is needed to create a tangible product (a derivative demand). I think after reading it several times, it's starting to make sense; however, I would like to practice finding value of marginal product, et cetera.
Question:
1.) Because the demand curve is the value-of-marginal-product curve what is the supply curve? (Since normally, we find where demand and supply cross?) Would this be the wage, since the firm hires workers up to the point where the VMPL=W?
2.) How does a graph for market of laborers translate into a graph for market of the product?
Sunday, December 6, 2015
Sunday, November 29, 2015
Chapter 17: Oligopoly
Chapter 17 discussed the market structure oligopoly, in which there are only a few sellers that offer similar or identical products. A main characteristic of an oligopoly is the tension between cooperation and self interest. The profit maximization (characteristic of a monopoly) can be achieved through a collusion, but it is almost impossible to uphold/create due to dominant strategy/disagreements in production levels. Thus an oligopoly operates at levels in-between those of a monopoly and perfectly competitive market.
I thought the idea of prisoner's dilemma was really interesting and how there is always a dominant strategy; especially when they related it to the arms race and common resources (it all makes sense now). I think Mankiw did a fantastic job relating this to oligopolies.
Some questions:
1.) Why are there antitrust laws that prohibit explicit agreements among oligopolists as a matter of public policy? (I know it would be like a monopoly, in that it maximizes profits, and therefore is socially inefficient...but then OPEC is legal; what are the exceptions?) Perhaps this is later in the chapter
2.) What is the difference between dominant strategy and game theory?
I thought the idea of prisoner's dilemma was really interesting and how there is always a dominant strategy; especially when they related it to the arms race and common resources (it all makes sense now). I think Mankiw did a fantastic job relating this to oligopolies.
Some questions:
1.) Why are there antitrust laws that prohibit explicit agreements among oligopolists as a matter of public policy? (I know it would be like a monopoly, in that it maximizes profits, and therefore is socially inefficient...but then OPEC is legal; what are the exceptions?) Perhaps this is later in the chapter
2.) What is the difference between dominant strategy and game theory?
Tuesday, November 17, 2015
Chapter 16: Monopolistic Competition
The previous chapters discussed two market extremes: competitive markets and monopolies. However, this is rarely seen in the real world. Most of the time, markets are imperfectly competitive; falling between the plan cases of perfect competition and monopoly. Two scenarios of imperfect monopoly are oligopolies (a market structure in which only a few sellers offer similar or identical products) and a monopolistic competition (a market structure in which many firms sell products that are similar but not identical).
This chapter discussed a monopolistic competition in detail. A monopolistic competitive market differs from a perfectly competitive market in that it operates on the downward-sloping portion of the average-total cost curve. Also, each firm charges a price above marginal cost (like a monopoly).
I have a question about the concentration ratio. What is it calculated? Is it used to determine when governments intervene (as they sometimes do in monopolies?) Also, I was looking at the ratios and the highest ones are for markets that I see little correlation between: breakfast cereal, aircraft manufacturing, etc; how does one gain more market power in a monopolistic competition?
I also hate how all of this is up for debate. One cannot finitely answer how many firms are considered "many", etc.
This chapter discussed a monopolistic competition in detail. A monopolistic competitive market differs from a perfectly competitive market in that it operates on the downward-sloping portion of the average-total cost curve. Also, each firm charges a price above marginal cost (like a monopoly).
I have a question about the concentration ratio. What is it calculated? Is it used to determine when governments intervene (as they sometimes do in monopolies?) Also, I was looking at the ratios and the highest ones are for markets that I see little correlation between: breakfast cereal, aircraft manufacturing, etc; how does one gain more market power in a monopolistic competition?
I also hate how all of this is up for debate. One cannot finitely answer how many firms are considered "many", etc.
Sunday, November 15, 2015
Scott Adam's Secret of Success: Failure
Article Review #5
Scott Adams humorously writes about the secret of success; that he has surprisingly learned from countless failures. I found his article very intriguing, in that it counteracts the normal rationale of the starting employee. Scott Adams says that one should not follow passion (rather passion changes with success), and to be systems-oriented instead of goals-oriented. What I find most enjoyable about this article was when Adams wrote,"it [leaving out failures] leaves the impression that they [successful people] have some magic you don't."Most of the time, billionaires are idolized; how they got there seems like climbing the Alps to the average Joe. Yet, it is important to know that everyone experiences failure; and it is the successful people that use it as a tool.
Some kind of side track stuff:
When Scott Adam's wrote 'the most dangerous thing was when successful people directly give advice' was a bit ironic. Is he not a successful person giving advice? Does this cancel everything he said? Does his generalness cover all cases?
"What doesn't kill you makes you stronger" came from a famous philosopher Nietzche. Yet, Kelly Clarkson made it popular. It proves his point that all good ideas are already out there, just being rehashed.
Scott Adams humorously writes about the secret of success; that he has surprisingly learned from countless failures. I found his article very intriguing, in that it counteracts the normal rationale of the starting employee. Scott Adams says that one should not follow passion (rather passion changes with success), and to be systems-oriented instead of goals-oriented. What I find most enjoyable about this article was when Adams wrote,"it [leaving out failures] leaves the impression that they [successful people] have some magic you don't."Most of the time, billionaires are idolized; how they got there seems like climbing the Alps to the average Joe. Yet, it is important to know that everyone experiences failure; and it is the successful people that use it as a tool.
Some kind of side track stuff:
When Scott Adam's wrote 'the most dangerous thing was when successful people directly give advice' was a bit ironic. Is he not a successful person giving advice? Does this cancel everything he said? Does his generalness cover all cases?
"What doesn't kill you makes you stronger" came from a famous philosopher Nietzche. Yet, Kelly Clarkson made it popular. It proves his point that all good ideas are already out there, just being rehashed.
Sunday, November 8, 2015
Chapter 15: Monopoly
Chapter 15 discussed the behavior of firms that have control over the prices they charge, or monopolies (which is different than the last chapter which discussed firms in competitive markets, or price-takers). A monopoly arises when a single firm owns a key resource (monopoly resources), when the government gives a firm the exclusive right to produce a good (government-created monopolies), or when a single firm can supply the entire market at a smaller cost than many firms could (natural monopolies). These are called barriers to entry.
Because a monopoly sets its own price, its demand curve is downward sloping (if it wants to sell more output it must accept a lower price. Why is that?) Monopolies are limited in that they can only pick a point (price and quantity outputted) on the demand curve; therefore, is a monopoly really desirable? How does this affect profit, as it is assumed a firm's main goal is to maximize profit?
Because a monopoly sets its own price, its demand curve is downward sloping (if it wants to sell more output it must accept a lower price. Why is that?) Monopolies are limited in that they can only pick a point (price and quantity outputted) on the demand curve; therefore, is a monopoly really desirable? How does this affect profit, as it is assumed a firm's main goal is to maximize profit?
Sunday, November 1, 2015
Chapter 14: Firms in Competitive Markets
This chapter discussed firms' decisions in competitive markets. A market is competitive if it is a price taker, there are many buyers and sellers in the market, and the good they produce is largely the same. Firms in cometitve markets want to maximize profit, which can be found at the intersection of the price (which is interchangeable with average revenue and marginal value in a competitive market) and marginal cost. If the marginal cost is greater than the marginal revenue (price, AR), then the firm should decrease its output. If MC>P, then the firm should increase its output to reach profit-maximizing level.
The chapter also discussed the idea of shutdowns and exits, which I thought was interneting. A shutdown is a short run decision where firms still have to pay for fixed costs. An exit is a long run decision where no costs are paid.
Some things that were a bit unclear: When one is trying to find maximizing profit levels on a table, can one either look at profit OR compare marginal cost or revenue? Also how is this a characteristic of perfectly competitive markets: "firms can freely enter or exit a market?"
The chapter also discussed the idea of shutdowns and exits, which I thought was interneting. A shutdown is a short run decision where firms still have to pay for fixed costs. An exit is a long run decision where no costs are paid.
Some things that were a bit unclear: When one is trying to find maximizing profit levels on a table, can one either look at profit OR compare marginal cost or revenue? Also how is this a characteristic of perfectly competitive markets: "firms can freely enter or exit a market?"
Tuesday, October 27, 2015
Chapter 13: The Costs of Production
The costs of production are what firms take into consideration. They look at fixed costs, variable costs, average cost per unit, and marginal cost when deciding the quantity produced of a good. The chapter then went on to explain/analyze the graphs of each, later showing how social optimum (Qo) could be found from their intersections.
The graphs of each measurement are as follows:
The total cost graph (fixed cost+variable cost) increases. As we produce more, total cost is higher. It is also important to note that TC is the minimum cost of producing the output and it includes a reasonable profit.
Average cost per unit graphs (TC/q) are "U" shaped. As quantity increases, average cost decreases. This downward slope continues until a high level quantity is reached; where variable costs are larger (as the resource gets more scarce).
The Marginal cost (extra cost of producing one extra unit) also increases. For high output levels, MC usually rises w/ output. For low outputs, the curve is flatter and might even decrease due to worker's knowledge, etc. What do they mean by higher and lower output?
This chapter confused me quite a bit. I want to talk more about what happens when the graphs intersect. Also, how to find total cost on different graphs.
The graphs of each measurement are as follows:
The total cost graph (fixed cost+variable cost) increases. As we produce more, total cost is higher. It is also important to note that TC is the minimum cost of producing the output and it includes a reasonable profit.
Average cost per unit graphs (TC/q) are "U" shaped. As quantity increases, average cost decreases. This downward slope continues until a high level quantity is reached; where variable costs are larger (as the resource gets more scarce).
The Marginal cost (extra cost of producing one extra unit) also increases. For high output levels, MC usually rises w/ output. For low outputs, the curve is flatter and might even decrease due to worker's knowledge, etc. What do they mean by higher and lower output?
This chapter confused me quite a bit. I want to talk more about what happens when the graphs intersect. Also, how to find total cost on different graphs.
Monday, October 26, 2015
Article 4 Review
While emerging economies may appear to have moderate debts (to China), the data could actually be a major misrepresentation; and if it were, then the IMF would certainly have a lot to discuss over a possible crisis (similar to the one in 2008). The data, states Stockman, can be unreliable due to hidden debt in the form of off-balance-sheet borrowing. Hidden debt is rarely found before it is too late.
The data cannot be trusted because it does not include some projects {funded by China}, lenders, or borrowers, trade finance (domestic and international trade transactions), and currency-swap agreements (a foreign exchange derivative between two institutions to exchange the principal and/or interest payments of a loan in one currency for equivalent amounts, in net present value forms, in another currency). This last bit is a bit confusing to me..if the amounts are set in currency exchanges, why are there hidden costs?
I personally liked this reading because it was clear and short. However, I wish Stockman talked about the similarities of emerging economies' financial crises. He briefly stated them (significant slowdown in economic growth and exports, unwinding of asset price booms, growing current account and fiscal deficits, etc), but did not expand. Why are hidden costs so much more important? By how much does he think the debt could be off?
The last question I have regards China's economy. Obviously, China's collapse is hurting the global economy more but how so? I hope that we read an article devoted entirely to the Chinese economy since it has had major impacts in the last decade, plus. Why would China lend so much money to now be in a tough spot? Were Chinese Economists wrong? Will the Chinese economy "bounce back"- it's not as bad as we thought, because of hidden debts to China? Was my sister's four years of studying Mandarin for nothing?
The data cannot be trusted because it does not include some projects {funded by China}, lenders, or borrowers, trade finance (domestic and international trade transactions), and currency-swap agreements (a foreign exchange derivative between two institutions to exchange the principal and/or interest payments of a loan in one currency for equivalent amounts, in net present value forms, in another currency). This last bit is a bit confusing to me..if the amounts are set in currency exchanges, why are there hidden costs?
I personally liked this reading because it was clear and short. However, I wish Stockman talked about the similarities of emerging economies' financial crises. He briefly stated them (significant slowdown in economic growth and exports, unwinding of asset price booms, growing current account and fiscal deficits, etc), but did not expand. Why are hidden costs so much more important? By how much does he think the debt could be off?
The last question I have regards China's economy. Obviously, China's collapse is hurting the global economy more but how so? I hope that we read an article devoted entirely to the Chinese economy since it has had major impacts in the last decade, plus. Why would China lend so much money to now be in a tough spot? Were Chinese Economists wrong? Will the Chinese economy "bounce back"- it's not as bad as we thought, because of hidden debts to China? Was my sister's four years of studying Mandarin for nothing?
Tuesday, October 20, 2015
Chapter 11: Public Goods and Common Resources
Normally prices determine efficient allocation of resources. However there are goods without prices that need government intervention. These goods can either be excludable (when the property of a good prevents another from using it), rival in consumption (when the property of a good diminishes other people's uses), both, or neither. They are grouped into four categories: private goods, public goods, common resources, and naturalistic monopolies. A problem faced by private markets is the free rider, or the person who receives the benefit without actually paying. For example, someone who watches fireworks shows without actually paying because fireworks are not excludable or rival in consumption.
The government intervenes and creates public goods when private markets are inefficient (from not taking into consideration the externality). Some examples are national defense, basic research (not to be confused with patents!, this instead refers to general knowledge), and fighting poverty via the welfare system, subsidizing the cost of food for those with low income, etc.
This chapter was not that awful. The vocab might be the killer, but not the definitions/concepts. However, I want to go over categorizing different goods as I feel the line often gets hazy.
The government intervenes and creates public goods when private markets are inefficient (from not taking into consideration the externality). Some examples are national defense, basic research (not to be confused with patents!, this instead refers to general knowledge), and fighting poverty via the welfare system, subsidizing the cost of food for those with low income, etc.
This chapter was not that awful. The vocab might be the killer, but not the definitions/concepts. However, I want to go over categorizing different goods as I feel the line often gets hazy.
Sunday, October 18, 2015
Chapter 10:Externalities
Chapter 10 discussed externalities, which are the uncompensated impacts of a person's actions on the well being of a bystander. When there are externalities, market equilibrium is inefficient because it fails to maximize the total benefit to society as a whole (not just the buyer and seller). To provide efficiency, governments create policies. Governments internalize the externality by moving the allocation of resources closer to the social optimum (though taxing or subsidizing). Activities with a negative externality (adverse impacts on the bystander) are taxed to create a negative incentive. Activities with a positive externality (beneficial impacts on the bystander) are subsidized.
When graphing negative externalities, the private costs of the producers plus bystanders affected adversely are taken into consideration. The social-cost curve is above the supply curve and the difference between the two curves shows the cost of the negative externality. The optimal quantity is where demand intersects the social-cost curve. When graphing positive externalities, the social value is greater than the private value, so the social value curve lies above the demand curve. Optimal quantity is where the social value curve and the supply curve intersect.
When graphing negative externalities, the private costs of the producers plus bystanders affected adversely are taken into consideration. The social-cost curve is above the supply curve and the difference between the two curves shows the cost of the negative externality. The optimal quantity is where demand intersects the social-cost curve. When graphing positive externalities, the social value is greater than the private value, so the social value curve lies above the demand curve. Optimal quantity is where the social value curve and the supply curve intersect.
I wish we did not skip Chapter 9 because I don't really understand what subsidies are. Also, why do negative externalities affect supply, while positive externalities affect demand?
Wednesday, October 14, 2015
Article #3 Review
David Stockman once again explores the questionable decisions of the government. National debt has gone through the roof because banks can borrow money at relatively no cost (due to ZIRP, zero interest rate policy). Also, quantitive easing has caused a mad dash of printing money that is practically being given to Goldman Sachs (why is this happening?). Yet, we are all being told lies about the "growing" economy from people like Bernanke who leads the "Keynesian" chorus (talked about in the last article); while Stockman is able to dispute all of Bernanke's so-called facts.
I feel like I am starting to understand the economy a little bit more; but that means I am starting to see just how corrupt it is. I don't understand why we buy treasury bonds from Goldman Sachs and not the treasury. I don't understand why people like Bernanke or William Dudley are in charge (who elected them?). I don't understand why there was a quantitive easing 2 when the first had literally no significant results in economic growth. I don't understand why the government insists that we are in a deflation, when in fact it is an inflation (as pointed out by Stockman in Bernanke's little slip-> "By keeping inflation low and stable,..").
I did have some technical questions like what is a DM economy? Isn't excess capacity good (as that means more efficiency)? What is Bullard Rip?
I feel like David Stockman is really opinionated, and so I am curious to know the other side's views. How do they justify what is going on in the economy? If Stockman is against Keynesian economics, what kind of economics does he side with? Which one is being taught in schools?
I feel like I am starting to understand the economy a little bit more; but that means I am starting to see just how corrupt it is. I don't understand why we buy treasury bonds from Goldman Sachs and not the treasury. I don't understand why people like Bernanke or William Dudley are in charge (who elected them?). I don't understand why there was a quantitive easing 2 when the first had literally no significant results in economic growth. I don't understand why the government insists that we are in a deflation, when in fact it is an inflation (as pointed out by Stockman in Bernanke's little slip-> "By keeping inflation low and stable,..").
I did have some technical questions like what is a DM economy? Isn't excess capacity good (as that means more efficiency)? What is Bullard Rip?
I feel like David Stockman is really opinionated, and so I am curious to know the other side's views. How do they justify what is going on in the economy? If Stockman is against Keynesian economics, what kind of economics does he side with? Which one is being taught in schools?
Monday, October 12, 2015
Chapter 8, Application: The Costs of Taxation
Mankiw discussed how taxes affect welfare. Taxation leads to a shrinkage in the market, or deadweight loss from a lower incentive to participate in a market. The total surplus therefore decreases which means a loss in potential surplus (this accurately called a"deadweight"). The government gains revenue by T (size of tax) * Q ( quantity sold) but not at an efficient ratio to the loss of buyers and sellers. Elasticity of the supply and demand curve affects the size of the deadweight loss.
I thought this chapter was easy to understand and I liked the size of the explanations. It didn't ramble on like last chapters ( which I think I am starting to understand better from this chapter emphasizing key pints like how the demand curve shows consumer willingness, supply curve shows producer willingness, how to find total consumer surplus on a graph, etc)
Some things I don't understand are the following:
1.) The book said welfare determines how high the price of civilized society can be. What exactly does this mean?
2.) Taxation can still be good, right? Even though there is a deadweight loss the trade off is better roads, police, etc? Or is there a better alternative to increasing the standard of living?
3.) I would like to talk about elasticity a bit more. It's one of the harder concepts for me.
I thought this chapter was easy to understand and I liked the size of the explanations. It didn't ramble on like last chapters ( which I think I am starting to understand better from this chapter emphasizing key pints like how the demand curve shows consumer willingness, supply curve shows producer willingness, how to find total consumer surplus on a graph, etc)
Some things I don't understand are the following:
1.) The book said welfare determines how high the price of civilized society can be. What exactly does this mean?
2.) Taxation can still be good, right? Even though there is a deadweight loss the trade off is better roads, police, etc? Or is there a better alternative to increasing the standard of living?
3.) I would like to talk about elasticity a bit more. It's one of the harder concepts for me.
Monday, October 5, 2015
Chapter 7: Consumers, Producers, and The Efficiency of Markets
Chapter 7 defined consumer and producer surplus and then used these tools to evaluate the efficiency of free markets. A consumer surplus measures the willingness of the buyer to pay for a certain good, while a producer surplus measures the willingness to sell a certain good. These tools were used to show free markets are the most efficient choice for a number of reasons: free markets allocate the supply of goods to the buyers and sellers with a higher willingness and the quantity of goods produced maximizes the total surplus.
I thought this chapter was pretty well paced, stopping to explain concepts that would otherwise be frustrating. I appreciate the graphs and examples comparing one condition to the other (like a price drop or raise). I also thought the section on an organ market was extremely interesting. I agree that it is fair to sell/trade organs with ones consent because not everyone is born with a healthy liver. However, price does pose a problem because someone will definitely not sell their organ for cheap but it promotes inequality between the rich and poor.
Some questions I have for this chapter are:
How is consumer and producer surplus measures on a larger scale? It seems hard to quantify willingness.
How exactly do market powers and externalities affect the market?
I thought this chapter was pretty well paced, stopping to explain concepts that would otherwise be frustrating. I appreciate the graphs and examples comparing one condition to the other (like a price drop or raise). I also thought the section on an organ market was extremely interesting. I agree that it is fair to sell/trade organs with ones consent because not everyone is born with a healthy liver. However, price does pose a problem because someone will definitely not sell their organ for cheap but it promotes inequality between the rich and poor.
Some questions I have for this chapter are:
How is consumer and producer surplus measures on a larger scale? It seems hard to quantify willingness.
How exactly do market powers and externalities affect the market?
Saturday, October 3, 2015
Review: David Stockman's Contra Corner
David Stockman predicts a global recession. His article starts with the vivid image of a bull crashing; where the bull represents the "coddled" and "intravenous liquidity injected" stock market that has been kept nearly alive for two decades. The instability of the U.S. stock market is not alone, but one of the many in a long list facing the effects of the decaying Chinese economy. As Stockman often sarcastically points out, we are not "decoupled" from the global deflation that is occurring. Our S&P conditions are similar to that of 2007, just prior to the 2008 recession. Stockman warns that this recession will be worse due to its global effects on "every significant central bank on the planet."
I think David Stockman got his point off very clearly. Though I am limited in sources, David Stockman establishes credibility and develops his argument for a global recession. How, then, are news channels like CNN broadcasting news at 2AM (or was it PM?) without a note of panic? Do most economists agree with Stockman?
From what I took away, stocks that were once considered giants in their fields are falling. An example is Glencore, a giant in the oil industry, with a hefty debt of $29.5 billion (which lead to decreases in the commodities market). The stock market is no doubtfully becoming unstable just like the Chinese economy and now economies worldwide.
Some questions I have are the following:
1.) How is the CDS market a way for traders to bet on a stock's collapse?
2.) Stockman said that China's largest steel company has led to price reductions in steel due to their idleness. This would cause a decrease in supply. How then, does this translate to price reductions? (similar to the graphs we've been analyzing in Chapters 4-5).
3.) How will the recession be the fall of "the cheap money era?" What exactly does this mean?
4.) Is Red Chip to the Chinese stock index as Dow Jones to the United State's stock index?
5.) Who will most likely be the next "Red Ponzi?"
I think David Stockman got his point off very clearly. Though I am limited in sources, David Stockman establishes credibility and develops his argument for a global recession. How, then, are news channels like CNN broadcasting news at 2AM (or was it PM?) without a note of panic? Do most economists agree with Stockman?
From what I took away, stocks that were once considered giants in their fields are falling. An example is Glencore, a giant in the oil industry, with a hefty debt of $29.5 billion (which lead to decreases in the commodities market). The stock market is no doubtfully becoming unstable just like the Chinese economy and now economies worldwide.
Some questions I have are the following:
1.) How is the CDS market a way for traders to bet on a stock's collapse?
2.) Stockman said that China's largest steel company has led to price reductions in steel due to their idleness. This would cause a decrease in supply. How then, does this translate to price reductions? (similar to the graphs we've been analyzing in Chapters 4-5).
3.) How will the recession be the fall of "the cheap money era?" What exactly does this mean?
4.) Is Red Chip to the Chinese stock index as Dow Jones to the United State's stock index?
5.) Who will most likely be the next "Red Ponzi?"
Wednesday, September 30, 2015
Chapter 6: Supply, Demand, & Government Policies
Chapter 6 discussed what happens to a free market when government intervenes. The government will intervene when policymakers believe that the price of a good or service is unfair to buyers and sellers (where buyers and sellers always have opposing interests). A price ceiling (legal maximum of the price at which a good can be sold) is normally created to benefit the buyers, while a price floor (legal minimum) is created to help the sellers. Both of these can lead to inequities and a disruption of the equilibrium.
Shortages can occur when the equilibrium price is above the price ceiling. This leads to long lines, a biased preference towards buyers, etc. A real world example is when gasoline prices rose. This was due to the government imposing a price ceiling, thus causing a shortage. The textbook also talked about rent control and its adverse effects: low prices mean landlords build less houses, there is a greater demand to live in apartments, housing is lower quality, etc.
Price floors, though with good intent, also has adverse effects; if the price floor is above the equilibrium price, a surplus can occur. One controversial example is minimum wage, where the standard of living is increased for working individuals. On the other hand, teenage drop out rate is increased and the wage is barely enough to live an adequate lifestyle.
I enjoyed this chapter a lot. The ideas were easy to follow and it was interesting relating what we've been learning to controversial topics today. I would like to go over rationing a little more (how is there rationing in a surplus?) since it was briefly mentioned.
Thursday, September 24, 2015
Chapter 5: Elasticity and Its Application
Chapter 4 introduced us to the qualitative aspect of demand and supply (a shift or movement along the curve). This flowed into chapter 5, which talked about the quantitative aspect (exactly how much the curve moved). This change was measured in elasticity; where quantity demanded or quantity supplied was affected by one of its determinants. The determinants for demand are the change in the price of a good (price elasticity of demand), change in consumer's income (income elasticity of demand), and change in the price of another good (cross-price elasticity of demand). In all cases, "elastic" is used when the quantity demanded responds substantially to the change in determinant, while "inelastic" is used when the quantity demanded responds only slightly to changes in the determinant.
The general rules that determine price elasticity are the availability of substitutes, necessities versus luxuries, definition on the market, and time horizon. Price elasticity of demand is best calculated with the midpoint formula, as it remains the same between both points (it doesn't matter which one is Q1, and which is Q2). Why when you calculate it, is the answer not multiplied by 100? (since Q and P-quantity and price-are not in percentages?) Elasticity is measured in change in percentages.
I think Mankiw did a good job clarifying and expanding on topics that would otherwise be very challenging. Some things I think are important to note from this chapter are:
-When demand is inelastic (the price elasticity < 1), price and total revenue move in the same direction
-When demand is elastic (price elasticity >1), price and total revenue move in the same direction
-If demand is unit elastic (price elasticiy=1), total revenue remains constant when the price changes
-Revenue: P*Q (price of good*the quantity sold)
-Even though the slope of a linear demand curve is constant, the elasticity is not (I was a little confused at why it would change throughout)
-Positive elasticities (in normal goods and substitutes)-> quantity demanded and determinant move in the same direction
-Negative elasticities (in inferior goods and complements) -> inversely affected
The general rules that determine price elasticity are the availability of substitutes, necessities versus luxuries, definition on the market, and time horizon. Price elasticity of demand is best calculated with the midpoint formula, as it remains the same between both points (it doesn't matter which one is Q1, and which is Q2). Why when you calculate it, is the answer not multiplied by 100? (since Q and P-quantity and price-are not in percentages?) Elasticity is measured in change in percentages.
I think Mankiw did a good job clarifying and expanding on topics that would otherwise be very challenging. Some things I think are important to note from this chapter are:
-When demand is inelastic (the price elasticity < 1), price and total revenue move in the same direction
-When demand is elastic (price elasticity >1), price and total revenue move in the same direction
-If demand is unit elastic (price elasticiy=1), total revenue remains constant when the price changes
-Revenue: P*Q (price of good*the quantity sold)
-Even though the slope of a linear demand curve is constant, the elasticity is not (I was a little confused at why it would change throughout)
-Positive elasticities (in normal goods and substitutes)-> quantity demanded and determinant move in the same direction
-Negative elasticities (in inferior goods and complements) -> inversely affected
Sunday, September 20, 2015
Article Review: Why the Keynesian Chorus is Cackling Like Chicken Little
In his article, "Why the Keynesian Chorus is Cackling Like Chicken Little", David Stockman mocks Keynesian Economics; however, there is also a very serious undertone. He fears that if the Feds listen to their chorus, it will lead to an even more destructive collapse of the "economic bubble". This inevitable collapse is due to the government "pumping free money into Wall Street for 80 years" (in an attempt to resurrect the economy during the 2008 recession-now). From what I understand, Keynesian Economists believe the pumping of free money is "too tight" and want interest rates to remain at zero (because of aggregate demand), while Stockman wants feds to raise rates.
I thought this article was pretty hard to understand. I spent a fair amount of time googling words and acronyms (probably longer than it took to read the actual article). I am a little confused about how the pumping of free money has created a bubble around Wall Street. David Stockman refers to gamblers on "full risk" and casinos (references I believe to stockholders). How does ZIRP enhance this behavior?
I think I understand the concept of aggregate demand. Keynesian Economists want zero interest rates in hopes that it will increase demand. When interest rates are low, firms can borrow money to increase factors of production (better long run). Also, when interest rates on deposits (in banks) are low, people will be less inlined to put money into saving; instead they will turn to spending on goods+services. However, Stockman says that aggregate demanding isn't effective. He says that if you look at the data/charts (given), "nominal borrowing+spending show no elevation in aggregate demand. "
Before I even started this article, I researched Kenyesian Economists. Basically, it was started by Maynard Keynes as a solution to the Great Depression. It is also referred to as 'modern economics'. However, Stockman throws out their principes of low rates and aggregate demand, which makes me wonder why have we kept this standard so long? Why has this been effective in the Great Depression but not now? What does Stockman propose as an alternative?
I thought this article was pretty hard to understand. I spent a fair amount of time googling words and acronyms (probably longer than it took to read the actual article). I am a little confused about how the pumping of free money has created a bubble around Wall Street. David Stockman refers to gamblers on "full risk" and casinos (references I believe to stockholders). How does ZIRP enhance this behavior?
I think I understand the concept of aggregate demand. Keynesian Economists want zero interest rates in hopes that it will increase demand. When interest rates are low, firms can borrow money to increase factors of production (better long run). Also, when interest rates on deposits (in banks) are low, people will be less inlined to put money into saving; instead they will turn to spending on goods+services. However, Stockman says that aggregate demanding isn't effective. He says that if you look at the data/charts (given), "nominal borrowing+spending show no elevation in aggregate demand. "
Before I even started this article, I researched Kenyesian Economists. Basically, it was started by Maynard Keynes as a solution to the Great Depression. It is also referred to as 'modern economics'. However, Stockman throws out their principes of low rates and aggregate demand, which makes me wonder why have we kept this standard so long? Why has this been effective in the Great Depression but not now? What does Stockman propose as an alternative?
Thursday, September 17, 2015
Chapter 4: The Market Forces of Supply and Demand
This chapter really focused on the idea of supply and demand; or the behavior of people as they interact with each other in competitive markets. Inside a competitive market, price and quantity are determined by all buyers and sellers. This relates to the famous "Invisible hand" we read about in previous chapters. I think the book could have done a better job clarifying what a perfectly competitive market is, because I'm still a bit fuzzy on this topic.
The first section talked about demand. Correlational data for demand is organized through a demand schedule and demand curve (they both represent the same variables, so what are the benefits of using each? What are the disadvantages? Also, why is it linear?). The factors that can shift the demand curve are income, prices of related goods, tastes, expectations, and number of buyers.
One thing I found interesting was the idea of complements and substitutes, especially in reference to the prevention of smoking. There was a tidbit that said by raising the cost of cigarettes, thus causing demand and production to lower, people would have a higher chance of turning to tobacco or marijuana (which are supplements of each other). This just sparked my interest because no one really thinks about the downside/consequences of trying to get people to stop smoking.
The other section was, not surprising, about supply. Correlational data is organized through a supply schedule and supply curve. Meanwhile, factors that could cause a shift in market curve are input prices, technology, expectations, and number of sellers. I found this a bit dull since it was like Déjà Vu but with small tweaks in vocabulary.
The first section talked about demand. Correlational data for demand is organized through a demand schedule and demand curve (they both represent the same variables, so what are the benefits of using each? What are the disadvantages? Also, why is it linear?). The factors that can shift the demand curve are income, prices of related goods, tastes, expectations, and number of buyers.
One thing I found interesting was the idea of complements and substitutes, especially in reference to the prevention of smoking. There was a tidbit that said by raising the cost of cigarettes, thus causing demand and production to lower, people would have a higher chance of turning to tobacco or marijuana (which are supplements of each other). This just sparked my interest because no one really thinks about the downside/consequences of trying to get people to stop smoking.
The other section was, not surprising, about supply. Correlational data is organized through a supply schedule and supply curve. Meanwhile, factors that could cause a shift in market curve are input prices, technology, expectations, and number of sellers. I found this a bit dull since it was like Déjà Vu but with small tweaks in vocabulary.
Sunday, September 13, 2015
Chapter Three: Interdependence and the Gains from Trade
Chapter three explained why trade was more beneficial than self-sustenance. Even though a party has absolute advantage, they can also gain from interdependence. Originally, I thought that someone with absolute advantage would not want to trade (since there would be the most outputs in a limited time frame). What I did not understand was that trade is based on comparative advantage. Sure, someone with absolute advantage will produce more outputs; however this does not mean there is an efficient balance in opportunity costs. Through trade, this does not become a problem; each party can focus on the production of a good with the least opportunity cost, thus being able to trade greater amounts.
Some questions I have for this chapter are the following:
1.) I see how quantity is a main factor of the production possibility frontier. Does quality also play a role, as I am sure it affects trade? (Though quality may be immeasurable)
2.) The book stated that for both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. How would you compare the two opportunity costs, between say, the farmer (who produces 1 oz potatoes at 1/4 oz of meat) and an urban worker who wants to purchase the potato but does not produce the same goods? (that would serve as a comparison)
3.) "International trade can make some individuals worse off...but greater prosperity for all countries." Will the greater prosperity of the nation help in the long-run the automaker that was put out of business (in the example that the U.S. should focus on food production instead of auto)?
Some questions I have for this chapter are the following:
1.) I see how quantity is a main factor of the production possibility frontier. Does quality also play a role, as I am sure it affects trade? (Though quality may be immeasurable)
2.) The book stated that for both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. How would you compare the two opportunity costs, between say, the farmer (who produces 1 oz potatoes at 1/4 oz of meat) and an urban worker who wants to purchase the potato but does not produce the same goods? (that would serve as a comparison)
3.) "International trade can make some individuals worse off...but greater prosperity for all countries." Will the greater prosperity of the nation help in the long-run the automaker that was put out of business (in the example that the U.S. should focus on food production instead of auto)?
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