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. 

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

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?

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.

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)?