Chapter 18

Chapter 18 is all about the market for factors of production. There are four factors of production: land, labor, capital, and entrepreneurship. The market for these factors deals with marginal revenue and marginal cost, but in a different sense. The marginal revenue is now the MRP (marginal revenue product) and is diminishing as more workers are added. The factors of production are necessary for a firm to maximize profit.

Chapter 17: Oligopoly

Chapter 16 introduces the idea of oligopolies. An oligopoly is market with only few sellers. An oligopoly lies in between a monopoly and a competitive market since there are few sellers. An oligopoly is similar to a competitive market since the products are identical, and is similar to a monopoly since the firms have more market power. A key concept dealing with oligopolies is the idea of a Nash Equilibrium. The oligopoly firms will pursue their self interests, arriving at the Nash Equilibrium.

Chapter 15

Chapter 15 is all about monopolies. A monopoly is completely different from a competitive market. In a competitive market, there are many buyers and sellers, but in a monopoly, there is only one seller. Also, a monopoly is a price maker. As a price maker, the monopoly is the only seller, so they are able to set the price in the market with no competition.

However, being the only seller means a monopoly is subject to regulation. If there was no regulation, the monopoly could charge outrageous prices and make a ton of profit. In order to prevent this from happening, monopolies are regulated by the government.

Chapter 14

Chapter 14 deals primarily with a perfectly competitive market. So far in microeconomics, we have assumed that all markets are perfectly competitive. For the sake of the supply and demand models we have been dealing with, the markets have been perfectly competitive. Chapter 14 describes how a perfectly competitive market has many buyers and sellers, equivalent products, and no barriers to entry or exit. As we learned of all firms last chapter, a perfectly competitive firm's goal is to maximize profit.

What we learn in this chapter is how a firm reaches maximum profit. A firm maximizes profit when its marginal cost of producing a good is equal to its marginal revenue. When this happens, profit is maximized because an additional output will not increase the marginal benefit. The firm's price is set at the point where marginal revenue is equal to marginal cost.

Article Review 4

This next article is written by Carmen Reinhart, who seems to have the same overall idea as David Stockman. Reinhart believes the market is moving towards a collapse or downfall. The debts which are being underestimated and they are ultimately being accumulated into larger debts. These overloaded debts will possibly lead to a large economic crisis. As we have seen in the U.S., we are trillions in debt and counting.

Chapter 13

Chapter 13 deals primarily with a firm's overall costs and revenue. What a firm collects from sales is gross revenue. What it costs a firm to make a product is its total cost. In order to find profit, the firm subtracts the cost from the revenue. The profit does not have to be positive, if a firm is operating at a loss, they will have a negative profit. A firm essentially tries to maximize profit, but different people see it in different ways. An economist will include all implicit and explicit costs, such as opportunity costs, whereas an accountant will only include explicit costs: the costs of materials required to produce/sell the good.

A cost to a firm can come in many different formats. A cost can be classified as a fixed cost or a variable cost. When adding the two together, the firm comes up with total cost. A fixed cost is one that does not change with the level of output, while a variable cost does change with the level of output. A firm's goal is to minimize total cost.

Chapter 11: Public Goods and Common Resources

Chapter 11 essentially answers the question: who produces/distributes the good? The chapter compares two ends of the spectrum regarding the distribution of goods: private goods and public goods. To categorize whether a good is private or public, the two determinants are whether the good is excludable or a rival in consumption. If a good is excludable, consumers can be prevented from buying the good due to their willingness to pay. If a good is a rival in consumption, consumers only have a limited quantity available, a good example is sports tickets (Cubs tickets if we really want to emphasize a rival in consumption). Tying these two concepts back to public and private goods, we use them to see how to classify a good. If a good is neither a rival or excludable, it is a public good because the government can provide it to the entire public. If a good is excludable or a rival, then a private company will provide the good to make profits.

Chapter 10: Externalities

Chapter 10 continues the subject of market failures. We now are dealing with a common form of market failure: an externality. An externality is when the interactions of two parties affect a third party. So if the interaction between two parties unintentionally affect a third party, what results is a market failure. The reason there is a market failure is because the cost (or benefit) to the third party is not taken into account. If the interaction negatively affects a third party, there is a negative externality and there will be a social cost to the supply side of the deal. If the third party is positively affected, there will be a social benefit to the demand side. Externalities do not always have a negative impact. If for example, a company develops new technology, the general public will have access to the technology even though they were not involved in the transaction.

Article Review #3

The article by David Stockman immediately jumps into his argument regarding the U.S. economy. Stockman argues the economy is going to enter into another recession and it is virtually not going to be stopped. The reason we are entering another recession is because of what he calls a "credit binge," with essentially a falsified economy. The bank's false economy led to too much borrowing ending in inflation in China and economies. Not only did the banks falsify the borrowing, but they also falsified prices, which resulted in a major growth in debt.

Stockman continues on by criticizing Ben Bernanke: the former head of the Federal Reserve. Stockman's idea of falsification is evident in his argument against Bernanke as he accuses him of presenting the data in ways which make the situation seem under control, when really he is ruining the Fed. He also blames Bernanke for the rise in inflation. Ultimately, David Stockman feels the economy will enter into a recession largely in part to the impact of Ben Bernanke.

Chapter 8: The Costs of Taxation

Chapter 8 builds on the concept of tax wedges presented in Chapter 6. When a tax is imposed in a market, it drops a wedge between the buyers and the sellers. As we already learned, the buyers pay a higher price, and the sellers receive a lower price. The price difference represents the size of the tax, which is collected by the government. The size of the tax represents the price of the tax collected by the government, and the price multiplied by the quantity is the tax revenue collected by the government. Although the tax revenue decreases the consumer and producer surplus, the tax revenue is still a part of the total surplus. Although the tax revenue is a part of total surplus, the total surplus reduces due to the tax. With the tax in place, there is a deadweight loss, which are the transactions which don't take place because of an inefficiency in the market. The deadweight loss is larger with a more elastic curve, and it grows larger with the size of the tax.

Chapter 7

In chapter 7, we learn about a pretty straightforward concept in the idea of surpluses. A surplus is the willingness to buy or sell, minus the actual price. In class, we used an example of Air Jordan shoes. If someone is willing to purchase the shoes at a price of $190, but the shoes only end up costing $150, the consumer has a consumer surplus of $40. Similarly, if a supplier is willing to supply the shoes at a price of $130, but they are able to charge a price of $150, the producer will have a producer surplus of $20. Surplus can be helpful because it can ultimately decide which side is better off. Normally, whichever side, consumers or producers, has a higher surplus will end up with a greater benefit. In the case of a tax or government intervention, producers and consumers will see a decrease in their overall surplus. As we learned in chapter 6, a tax levied on either the buyers or the sellers will increase the price to buyers as well as the cost to sellers. So if the price and cost rise, sellers will receive less and buyers will pay more, therefore their surplus will decrease.

Chapter 6

Chapter 6 deals with intervention in a competitive market. The chapter introduces new concepts on how the market does not achieve an ideal outcome. In chapter six, this is explained through price ceiling, floors, and taxes. In all three cases, the market does not reach an efficient equilibrium. A price floor is a minimum price for a good. For example, minimum wage is the most popular example of a price floor. With minimum wage, the price is set above equilibrium, therefore the market cannot reach below the minimum wage, or floor, and does not reach equilibrium. The same concept applies with a price ceiling. A price ceiling is put in place to prevent firms from charging the good at a price too high. In the textbook, the example used was the idea of rent control. Rent control puts a maximum on the price landlords can charge. However, the market also becomes inefficient as it can not reach above the ceiling to achieve equilibrium. Eventually, it becomes a bad idea since landlords will not be able to maintain their property and may leave the market. Finally, the last intervention is a tax. With a tax, either the supply side or demand side has a curve shifted left. When this happens, the tax forces the buyers to pay a higher price, and the sellers to receive a smaller amount, therefore it is inefficient.

Chapter 5 Elasticity and its Application

Chapter 5 was another easy read for me, with a difficulty rating of 1. The chapter covers the topic of elasticity of both supply and demand. Elasticity is one of the most important concepts for microeconomics. It measures how much the quantity demanded or quantity supplied of a good changes in response to a change in price. Elasticity is generally a determinant of a good's necessity in a market. If a good is relatively inelastic, it must be a necessity since buyers are still willing to buy a higher quantity even if the price changes. With an inelastic curve, we see a steeper vertical curve because the price changes more than the quantity demanded or supplied of the good. On the other hand, when something is inelastic, it is not a necessity. If a good is relatively elastic, quantity responds more heavily to a change in price. So if the price of a good rises, the quantity supplied/demanded will react by not buying as much of the good. An elastic curve is more flat horizontally, since the quantity demanded will change more than the price of a good. With an elastic good, people will respond to a change in price by not buying the product, instead they will leave the market or buy a substitute for the good.

The concept of elasticity is very important for models in economics. The amount of elasticity can affect total revenue, the amount of tax received, and the size of a market. In order to develop economic models throughout the rest of the school year, we will need to apply our understanding of elasticity to supply and demand graphs.

Article Review #1: Why The Keynesian Chorus Is Cackling Like Chicken Little

This article was a difficult read as I was unfamiliar with key terms in relation to the basis of the article. However, the author was trying to argue that the Fed (the Federal Reserve Bank) is not in fact as "tightened" as Keynesian Economics would suggest. He argues against the Keynesian point that "the Fed has already tightened too much." The author explains how the tightening of rates has come as a result to the 2008 collapse in the Fed's bubble. Now, in response to the 2008 collapse, he feels Goldman Sachs and potentially other economic indexes have illegitimate ratings since they believe rates in the casinos indicate the market has already been tightened. But in his opinion, the market is not tight enough because Goldman Sachs leads us to believe it already is. He ultimately thinks that with a loose Federal Bank, there will be another crash as there was in 2008. He backs up this argument by explaining how the past implication of ZIRP (Zero Interest Rate Policy) will collapse since it is an artificial bubble.

David Stockman essentially is proving Keynesian Economics wrong by highlighting the collapse of the artificial bubble known as ZIRP. He feels that among other factors, Goldman Sachs and economic indexes are simply going to contribute to the collapse of the economic bubble. Stockman argues the point that if the Fed gives into the theories of Keynesian Economics, they will be led to a collapse. However, my question is: what is the expectation if the Fed does tighten up, as David Stockman suggests?

Chapter 4 Supply and Demand

Chapter 4 was a very easy chapter to read and comprehend, and I would give it a difficulty rating of 1. Chapter four builds on how a market economy works, and how it is driven to equilibrium. Topics covered in this chapter are the demand curve, supply curve, and the market equilibrium: the intersection of the two curves. As we already learned in the first chapter, everyone pursues their self-interest, and as a society, the market responds to balance supply and demand.

A supply curve reflects the side of the producers. As the price of a good increases, firms will want to produce more, therefore they will increase their quantity supplied. An change in the quantity supplied of a good is reflected by movement along a supply curve, however, in order for a supply curve to shift, a change in production must occur. A shift is a result of four different factors: input prices, expectations for a good, number of sellers in a market, or changes in technology. The supply curve shift demonstrates the firm's efficiency: if it shifts upward, the firm is likely more efficient, whereas if it shifts down, the firm is less efficient.  

The demand curve represents the willingness to pay of the consumer. It is much easier to think as a consumer because when the price of a good rises, a consumer will not be as likely to buy the product, and as the price falls, more consumers will want to buy the good. As price rises, the quantity demanded decreases, resulting in a downward sloping demand curve. The willingness to pay is represented by movement along the demand curve. 

When the supply curve and demand curve meet, the result is an efficient equilibrium. At the market equilibrium, the quantity demanded equals the quantity supplied, and all resources are being allocated efficiently. In a market economy, equilibrium is normally achieved except in some cases: government intervention or taxes. However, when a market is efficient, their position is in equilibrium.

Chapter 3 Journal

Chapter 3 was not too difficult to comprehend. I would give it a rating of 1, as it is pretty straightforward in narrowing down the benefits of trade. The chapter breaks down a very important prinicple of economics: trade can make everyone better off. I found the concept of absolute advantage to be the easiest part of the chapter to understand: if you have an absolute advantage, you are able to produce goods more efficiently. However, the interesting thing is the fact that trade is not based completely off of absolute advantage. Trade occurs if one party has a comparative advantage, meaning they have a lower opportunity cost. Trading parties will specialize in producing their comparative advantage, and can use the specialized goods to trade.

I feel the table between the farmer and rancher was very helpful in demonstrating the trading process. After an introduction to absolute advantage and comparative advantage, having the example of the farmer and the rancher breaks down how each party would specialize. With the table, it is clear to see how each party benefits by trading, as they increase their consumption of meat and potatoes.