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.