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.