Chapter 18

In large part, this chapter seemed to be a clever repackaging of different ideas that we've already seen throughout the year. Specifically, this chapter analyzes the market for labor, and Mankiw states that the main differentiation between this chapter and the chapters that has preceded it, is that the demand for factors of production is derived demand. That means that the demand for a factor of production, in the biggest case labor, is determined by its decision to supply a good in another market. One thing that I thought was interesting is that firms hire labor until the marginal profit is 0. This allows me to make an easy comparison to a profit maximizing firms decision to produce where price is equal to marginal cost. In this case, price multiplied by the value of the marginal product equals wage, and so wage divided by the value of the marginal product equals price, or P=MC. That link to something that we've already learned in the past helped me to better understand this chapter in context. I also was interested in learning about the different factors that shifted the labor supply or the labor demand curves. A big factor in the markets is technology, which can take two forms. Either it can be labor-augmenting, which raises the marginal product of labor and increases its demand, or labor-saving, which reduces the marginal product of labor and decreases demand. Overall, I thought this chapter was pretty easy and would rate it a 1/3 in terms of difficulty.

Chapter 17

While the previous chapter introduced oligopolies, this chapter greatly expanded upon them. It first introduced the example of the market for tennis balls, which has four main competitors. The essence of this market is that there are only a few sellers. In analyzing oligopolies, we come across game theory, the study of how people behave in strategic situations or how people react when faced with alternative courses of action in relation to how others might respond to the action they take. Later in the chapter, we get fun buzz words like collusion and cartel. Collusion is the act of cooperating over production and price charged, and a cartel is the name for the group of firms acting in unison. Unfortunately, legal restrictions often prevent firms from working together, and people operating in their own self-interest often leads the end market outcome to not maximize total market profit, but for an individual firm to try and get a bigger piece of the pie. When all firms operate in their own self-interest, they reach what's called a Nash equilibrium, where the best strategy is chosen based on the strategies that others have chosen. Each decision made is made with two concepts in mind, the output effect, and the price effect. The output effect says that selling an extra gallon of water will raise profit, but the price effect says that an additional unit into the market will decrease the price of the good and decrease the price on all the other goods in the market. You have to identify the trade-offs before you make a decision. Overall, this chapter was very interesting, I would rate it 2/3 in terms of difficulty.

Chapter 16

Finally, we are beginning to define economics in less broad strokes and are getting into details and the nitty gritty. This chapter delves into another type of market, the monopolistically competitive market. Monopolistically competitive markets are defined by imperfect competition, where firms have some degree of control over their prices, and had some degree of market power, but not so much so that the firms can be defined as a monopoly. This chapter also brings up the concept of an oligopoly, which is a market with only a few sellers, each offering a product similar or identical to the products offered by other sellers. Some examples of oligopolies in the market include breakfast cereal, aircraft manufacturing, electric lamp bulbs, household laundry equipment and cigarettes. The problem I have with all of this is that everything is very loosely defined and up for debate. "Few firms" from "many firms" is very hard to distinguish between. A monopolistically competitive firm works in the same way a monopoly does, producing where marginal revenue equals marginal cost, and then using the demand curve to find what to price their good at. In the long run, monopolistically competitive firms have to reach an economic profit of zero for the same reasons a perfectly competitive firms must. The maximum profit is zero only if the ATC and the demand curves touch each other without crossing. This touching is called "tangency". Overall, this chapter was pretty easy to read, I would give it a 1:4 in terms of difficulty.

Chapter 15

Whereas last chapter was all about the price takers and perfectly competitive markets, chapter 15 is all about price makers and monopolies. The introduction provides a clear, if a bit outdated example of Microsoft having a monopoly on the Windows operating system. A key concept, introduced early, that separates perfectly competitive markets from monopolies are barriers to entry. These fall into three categories, monopoly resources, government regulation, and the production process. We had already talked a little bit about government regulation in the form of patents and copyrights, but thinking about specific examples like authors and pharmaceutical companies helped drive home the point. Natural monopolies also received a better definition in this chapter, and we learned that something like a bridge can be a natural monopoly because as more and more people use the bridge, the average total cost goes down because marginal cost in negligible. One important thing to remember is that for a monopoly, marginal revenue is not the same for each additional unit of output. A monopolist's marginal revenue is always less than the price of the good. Obviously, the lower the price, the more that is sold, increasing total revenue, but the price is lower, so it decreases total revenue. To maximize revenue for a monopolistic corporation, you need to determine where the marginal revenue curve and the marginal cost curve intersect. Overall, this chapter was okay in terms of difficulty. I would rate it a 2/3.

Chapter 14

Chapter 14 examines firms and their decision-making processes in perfectly competitive markets. The important conditions to remember when looking at firms in perfectly competitive markets are that individual buyers and sellers have a negligible impact on the market, and that the goods offered  by various sellers are largely the same. This means that largely, no single buyer or seller has the power to control market prices, so they are referred to as price takers. This is important because it helps understand that because price is fixed, when Q rises by 1 unit, the total revenue rises by a fixed amount of dollars, or in other words, for competitive firms, marginal revenue equals the price of the good. It was also interesting to note that rational people think at the margin, and in terms of maximizing profit, so they will only produce goods where the marginal revenue is greater than or equal to the marginal cost. To understand this, you need to know that a firm is under-producing when its marginal cost curve is below marginal revenue and that a firm is over-producing when the marginal cost curve is above marginal revenue. The ideal profit-maximizing quantity comes where marginal cost equals marginal revenue. In essence, because the marginal cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal cost curve is also the competitive firm's supply curve. Overall, this chapter was relatively straightforward, and I understood it pretty well. I'd rate it a 2/3 in terms of difficulty.

Chapter 13

Ah, Chapter 13, filled with information about production costs and boatloads of terminology. Mankiw warned us at the beginning of the chapter that the material would be boring, the topic being dry and technical, but I thought the ideas were actually pretty interesting, and it helps to break down the supply curve to get a more complete understanding of the reasons individual firms stay in or leave the marketplace. The first interesting bit I found with Chapter 13 came when Mankiw defined explicit and implicit costs being key to an economist's evaluation of the profitability of a business. Before, I hadn't really thought about the implications of opportunity costs on how a business makes their decisions, but now I see it as a very real factor. The difference between economists and accountants was a bit of a belabored point, but because it was drilled into my head, it helped me understand the concept of implicit costs better. One thing I didn't understand until we talked about it in class was why marginal product diminished from the get-go. The reason I didn't get it was because that wasn't correct. Marginal product initially increases, then levels out and THEN starts to diminish. That's what Mr. Waller talked about as the three stages of production, and it helped to clarify my understanding of the chapter. Overall, this chapter was one of the most difficult in terms of terminology so far, and I would give it a 3/3 in terms of difficulty.

Chapter 11

Mankiw begins the chapter with the age-old adage that the best things in life are free. He relates that to goods that are free to the public to enjoy- rivers, mountains, beaches, playgrounds and parks to name a few. This chapter examines how the government can provide goods that the private sector cannot, and how they ration those goods. Mankiw further breaks down various goods in the market using two characteristics, excludability and if the good is rival in consumption. With private goods, the consumption of a good leads to another person not being able to consume it, and it's possible to prevent people from consuming a private good. A public good is the complete opposite. Public goods promote people who are free riders, people who receive the benefit of a good without paying for it. It's hard, and near impossible, for the private market to supply a good in a market largely dominated by free riders. Once people figure out the good is not excludable, they will not be willing to pay for a ticket. Then, Mankiw goes on to list examples of important public goods, including national defense, basic research, and fighting poverty. He also argues that a free rider problem emerges when the number of beneficiaries is large and the exclusion of any one of them is impossible. All in all, this chapter wasn't too difficult, but it was a little clunky without any graphs to help along the way. I would rate it a 2/3 in terms of difficulty. 

Chapter 10

Chapter 10 is all about externalities, that is, the unintended consequences/benefits of various economic processes. With positive and negative externalities, society's interest in the market goes beyond the marketplace and instead extends to include the well-being of the bystanders affected indirectly. The book gives a few examples of positive and negative externalities, and it helped to paint a clearer picture in my head. Essentially, Mankiw argues that unlike a standard market, when externalities are involved, the government must consider its role and provide some sort of regulation to adjust the market for maximum social well-being. One possible way to regulate the market is through taxes on markets with negative externalities and subsidies on markets with positive externalities. These are called corrective taxes. With standard taxes in an efficient market with no externalities, the market operates inefficiently. But in a market with externalities, because consumers and producers don't take into account the effects of their actions on bystanders, the market isn't reacting at peak efficiency when it comes to societal well-being. Taxes and subsidies help shift the supply and demand curves in a more positive direction. Then, the positive gain usually outweighs the deadweight loss. But while taxes and subsidies are one way to handle externalities, they can also be handle through the marketplace. This is explained with the pollution permits example, and it was clear to see how again, the people with the most to lose valued the permits the most. Overall, this chapter was pretty easy, and I'd rate it 2/3 in terms of difficulty. 

Chapter 8: Taxation and Economic Welfare

Whereas chapter 6 was explaining how taxes affected the market, chapter 8 depicts how taxes affect economic welfare, and the two together form a bigger picture. An important thing to remember is that it doesn't matter who the tax is levied on, the determinant of who bears the tax burden between the producers and buyers depends on the elasticities of supply and demand. That leads us to learn that upon taxation, the losses to buyers and sellers from a tax exceed the revenue raised by the government. That fall in total surplus when a market outcome is distorted is called deadweight loss, as a result of people responding to incentives. It's also clear to see that the most dangerous effect of taxation is the canceling of transactions between buyers and sellers, resulting in no increase in revenue for the government (the intended effect) and a decrease in the size of the market. I got a little confused when Mankiw started talking about figure 4 and explaining that taxation caused a loss of benefit at every point on the graph, not because I didn't understand the concept, but because it wasn't depicted well on the graph. Mankiw's next lesson was pretty simple though, the greater the elasticities of supply and demand, the greater the deadweight loss of a tax. This makes sense because elasticity is a measure of how willing producers and buyers are to stay in the market in response to a price change, and a tax is nothing more than a price change. I also found it interesting that the labor tax debate can basically be boiled down to if one thinks the supply of labor is elastic or inelastic. All in all, this chapter was somewhat difficult at points, but nowhere close to a Stockman article. 2/3 for difficulty. 

Chapter 7: Consumers, Producers, and the Efficiency of Markets

This chapter is all about welfare economics, that is the study of how the allocation of resources affects economic well-being. We understand from previous chapters that the market tends to head towards equilibrium because of the laws of supply and demand, but now we understand better WHY that equilibrium is best for both the buyer and the seller. There's a whole lot about willingness to pay and consumer surplus, but the really interesting part is the use of the Beatles as example people. Coincidentally, listed in order of greatness. Surplus seems like a relatively simple concept as well, because more buyers will enter the market as the price goes down, and buyers whose willingness to pay was higher gain more individual consumer surplus. With the exception of heroin addicts, policymakers generally take into account buyer behavior when making policy decisions. Producer surplus works the same way as buyer surplus, except in reverse. Both of these concepts together combine to form "the Benevolent Social Planner". The hypothetical benevolent social planner is in charge of analyzing the total surplus of the market, which is the value of the goods to the buyers - the cost to the sellers. Overall, I couldn't really get into this chapter as I found it repeating some of the same concepts over and over again. I would rate this a 2/3 in terms of difficulty.

Article Review #2

Well, Stockman's at it again. Making economics more and more confusing, one obscure word at a time. Luckily, this article was a little bit easier than the last one, and I was able to determine what he was in fact talking about. Essentially, the point Stockman is trying to make is that the economy is not merely being retested as it was last October, but in fact heading towards another recession. When Stockman references "a bull market", he's talking about a market in which share prices are rising, encouraging buying. Stockman argues that this market, "battered and bloodied" so as to artificially remain a bull market, will finally "give up the ghost" and become a bear market in which prices fall, encouraging selling. Stockman also explains that the reason there has been the false sense of growth for so long is that their was hope for China as the great hope for expansion. But in the midst of the United States's quarter-trillion dollar capital outflow, it's clear that the market isn't expanding in the ways we would like it to. That, coupled with China increasing production of commodities, specifically steel, and the increase in supply will make it even harder for US suppliers to keep up. While I appreciate a lot of the points Stockman makes and agree with them too, I dislike how he presents them in such an arrogant, condescending way. Overall, I thought that the article was informative, but I would still rate it 3/3 in terms of difficulty.

Chapter 6: Supply, Demand, and Government Policies

Whereas the last two chapters examined the role of an economist as a scientist, chapter six delved into the role of an economist as a policy adviser. The first thing I found interesting in this chapter were the concepts of price ceiling and price floor because I had never put too much thought into how much influence the government often has over the market. Mankiw clearly opposes binding price ceilings, judging by how he argues against their restriction of the market early in the chapter. The examples confused me a little bit, but I understand the concept: the more restrictions, the less the free market principles and the invisible hand can guide the market towards prosperity. That seems to be the goal of this chapter: drill in the concept that binding price ceilings are bad for the economy and for free market values. Basically the same old lesson with price floors, except price floors lead to surpluses if they are binding. The most relevant part of this chapter was when Mankiw talked about the group that was most affected by minimum wage laws: the market for teenage labor. I had never thought about that before, and it's very interesting to think that the jobs I could hold throughout the rest of high school and in college could be dictated by the minimum wage laws. All in all, this chapter was not very difficult to read or understand. I would give it a 1/3 for difficulty.

Chapter 5

Where supply and demand seemed like an oversimplified way of measuring changes in market conditions, elasticity, which takes into account the magnitude of effects on the market, is a portal to a greater understanding of how the market really works. The key to understanding this chapter is to know the difference between elastic and inelastic goods, the former responding substantially to changes in price, and the latter responding only slightly to price changes. The factor of elasticity I found the most interesting was how the definition of the market had such a big impact on elasticity. The tighter the definition, the easier it is to find a substitute good. The toughest concept to remember is the difference between the five types of elastic/inelastic demand. I also enjoyed Mankiw breaking the fourth wall and talking directly to the reader about a trick to use on the next exam, very creative. I still need some time for the concepts to sink in though, it's a little more advanced than the last chapter. I'd rate this chapter a 2/3 in terms of difficulty, not too hard to understand. 

Article Review #1

When I wasn't spending time figuring out which thesaurus David Stockman used to make himself sound both obnoxiously intelligent and unquestionably biased, I read between the lines and learned a little bit about modern-day economics. Basically, the article examines the fault in the Goldman Sachs Financial Conditions Index, the lowering of interest rates, the Federal Reserve's mass printing of money, the lack of non-theoretical proof of economic growth, and the (non) effect of federal stimulus on household borrowing and spending. Stockman's main argument throughout the article is against the "Keynesian Chorus", who claims that federal monetary policy as of late has been too restrictive. Stockman claims that regardless of what 'real' interest rate (negative but still too tight) a corporate financial executive may have concocted, that thought never crosses the mind of any real-world borrowers. What they do think about, however, is how much debt they can afford to carry and their potential penalties based on their credit histories. The result of that thinking? Even though interest rates dropped to 0% in the wake of the recession, household debt has remained flat and has in fact decreased since 2008. What does that mean? All the federal monetary stimulus had no effect on household spending and borrowing. Stockman says all this to break down his main point at the end of the article, explaining the inflationary impact the lower rates have had in the "canyons of Wall Street". Stockman disputes that the interest rates have fueled the "third and greatest financial bubble of this century", going on to argue that if the government continues to heed the advice of the people who have let this bubble build up to this point, it will burst. My main question is, where is Stockman's evidence? Is it merely a process of elimination, because the growth hasn't been seen in the business or household sectors? Overall I'd rate this article 3/3 because Stockman's obtrusive language made it a difficult read on the first time through, but as I re-read it became easier to understand.

Chapter 4 Overview

Ah, supply and demand. The first two words the average person thinks of when they think about economics. I learned about the difference between less organised markets (standard ones we see in our everyday lives) and more organised markets (agricultural commodities, stock market). The idea of a competitive market also makes sense, because unless you're Andrew Carnegie, it's really hard to monopolise a marketplace on a large scale. When it comes to quantity demanded of a good, the most important factor is price. But other factors can be crucial when looking at shifts in the demand curve, like buyer's incomes, prices of related goods, tastes, expectations, and the number of buyers. One thing that's very important to remember is that to determine if you need to shift or move along the curve, all you need to do is examine both the vertical and horizontal axis, and if the variable being changed isn't on either axis, it results in a shift in the demand curve. I enjoyed the "real world application" of these theories with the hypothetical smoker problem, because it helped me to think about various ways policy makers might go about achieving the same goal. The laws of supply and demand are also interesting, because price and demand have an inverse correlation, while price and supply have a direct correlation. While price is the most factor when it comes to determining supply, other factors must be considered. When looking at shifts in the supply curve, we must look at changes in input prices, technology, expectations about the market, and the number of sellers. Overall, supply and demand was an interesting topic. I would rate it 2/3 in terms of difficulty. 

Chapter 3: Interdependence & Gains from Trade

This chapter really dove into the concept of comparative advantage, and explained it with a drawn-out example using a farmer and a rancher. Before reading it, I didn't really understand how if someone had an absolute advantage when producing two goods over another person, how they benefited from trade whatsoever. Now I understand that the real cost of an action has more to do with opportunity cost, and since the opportunity cost of producing one good is the inverse of producing another, one person will always have the comparative advantage while producing one good and likewise. It's impossible for someone to have a comparative advantage in both goods. However, it must be noted that for both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. This allows for specialization for people in activities in which they have a comparative advantage in. Question: When international trade is so clearly in the best interest of a country in relation to maximizing efficiency, why do countries so often restrict trade? Question: How can we determine our comparative advantages in a more complex economy (e.g. one that produces more than two goods). Although some concepts took a little bit to sink in, I would rate this chapter 2/3 in terms of difficulty.