Chapter 18: The Markets for the Factors of Production

The economy's income is distributed in the markets for the factors of production. The three most important factors of production are labor, land, and capital. The demand for factors, such as labor, is derived demand that comes from firms that use the factors to produced goods and services. Competitive, profit-maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price. The supply of labor arises from individuals' trade-off between work and leisure. An upward sloping labor-supply curve means that people respond to an increase in the wage by working more hours and enjoying less leisure. The price paid to each factor adjusts to balance the supply and demand for that factor. Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginal contribution to the production of goods and services. Because factors of production are used together, the marginal product of any one factor depends on the quantities of all factors that are available. As a result, a change in the supply of one factor alters the equilibrium earnings of all the factors. This chapter was relatively easy to read and I would give it a 1 out of 3.

Chapter 17: Oligopoly

Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels that would prevail under competition. The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual interest. The logic of the prisoners’ dilemma applies in many situations, including arms races, advertising, common-resource problems, and oligopolies. Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. The application of these laws can be controversial, because some behavior that may seem to reduce competition may in fact have legitimate business purposes. Overall I think this chapter was relatively easy to understand since it is somewhat related to monopolistic competition.

Chapter 16: Monopolistic Competition

This chapter discussed monopolies and competition. A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry. The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways. First, each firm in a monopolistically competitive market has excess capacity. That is, it operates on the downward-sloping portion of the average-total-cost curve. Second, each firm charges a price above marginal cost. Monopolistic competition does not have all the desirable properties of a perfect competition. There is the standard deadweight loss of monopoly caused by the markup price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policymakers to correct these inefficiencies is limited. The product diffrentiation inherent in monopolistic competition leads to the use of advertising and brand names. Critics of advertising and brand names argue that firms use the to manipulate consumers' tastes and to reduce competition. Defenders of advertising and brand names argue that firms use them to inform consumers and to compete more vigorously on price and product quality. Overall the chapter the relatively easy to understand and I would give it a 1 out of 3 difficulty rating.

Chapter 15: Monopoly

This chapter discussed monopolies. A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost  than many firms could. Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units is produced. As a result, a monopoly's marginal revenue is always below the price of the good. Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. Unlike the competitive firm, a monopoly firm's price exceeds its marginal revenue, so its price exceeds marginal cost. Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. The regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all. A monopolist often can raise its profits by charging different prices for the same good based on a buyer's willingness to pay. The practice can raise economic welfare by getting the good to some consumers who otherwise would not buy it.

Chapter 14: Firms in Competitive Markets

Chapter 14 discusses firms in competitive markets. Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. The price of the good equals both the firm's average revenue and its marginal revenue. To maximize profit, a firm chooses a quantity of output such that marginal revenue equals marginal cost. Because marginal revenue for a competitive firm equals the market price, the firm chooses quantity so that price equals marginal cost. Thus, the firm's marginal-cost curve is its supply curve. In the short run when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost. In a market with free entry and exit, profits are driven to zero in the long run. In this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price. Changes in demand have different effects over different time horizons. In the short run, an increase in demand raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses. However if firms can freely enter and exit the market, then in the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium.

Chapter 13: Costs of Production

The goal of firms is to maximize profit, which equals total revenue minus total cost. When analyzing a firm’s behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job, are implicit. A firm’s costs reflect its production process. A typical firm’s production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm’s total-cost curve gets steeper as the quantity produced rises. A firm’s total costs can be divided between fixed costs and variable costs. Fixed costs are costs that do not change when the firm alters the quantity of output produced. Variable costs are costs that do change when the firm alters the quantity of output produced. From a firm’s total cost, two related measures of cost are derived. Average total cost is total cost divided by the quantity of output. Marginal cost is the amount by which total cost would rise if output were increased by 1 unit. When analyzing firm behavior, it is often useful to graph average total cost and marginal cost. For a typical firm, marginal cost rises with the quantity of output. Average total cost first falls as output increases and then rises as output increases further. The marginal-cost curve always crosses the average-total-cost curve at the minimum of average total cost. A firm’s costs often depend on the time horizon being short run but variable in the long run. As a result, when the firm changes its level of production, average total cost may rise more in the short run than in the long run. Overall, I think this chapter was relatively easy to understand.

Article Review #4:Hidden EM Debts To China Could Be Immense

Carmen Reinhart talks about how emerging economies might soon face a financial crisis. The blame this time goes to China. These emerging economies borrowed money from China. However, China itself is experiencing an economic slowdown. China's huge influence on the world economy has left everyone affected. The debt owed to China seems insignificant and small. However, Reinhart argues despite the debt reported is moderate from a historical view, there is probably a huge underestimate because there is a lot of debt that is not reported. One example was set on Thailand's central bank reporting a thirty-three billion dollar reserve, but they actually only had one billion left in the bank if they were to pay off their unaccounted debt. This article was short to start with and Carmen Reinhart didn't go into a huge rant like David Stockman would do. The idea of the unreported debt was simple and emphasized upon the entire article. However she does not explain why unreported debt exists, or how it is formed in the first place. Do countries just keep their mouth shut as they say they only owe a dollar instead a grand? This main question remains as Reinhart did not support her statement with as much facts and figures as David Stockman did. There was no mention how bad was the actual debt. She describes it as "moderate". If Stockman were to write this article out, I think he would definitely argue the same point, except actually throw in some extra numbers as evidence and argue the world will soon collapse after it.

Chapter 11: Public Goods and Common Resources

Goods differ in whether they are excludable and whether they are rival in consumption. A good is excludable if it is possible to prevent someone from using it. A good is rival in consumption if one person's use of the good reduces other people's ability to use the same unit of that good. Markets work best for private goods, which are both excludable and rival in consumption. Markets do not work as well for other types of goods. Public goods are neither rival in consumption nor excludable. Examples of public goods include firework displays, national defense, and the creation of fundamental knowledge. Because people are not charged for their use of the public good, they have an incentive to have the "free ride" when the good is provided privately. Therefore, the government provides public goods, making their decision about the quantity of each good based on cost-benefit analysis, a study that compares the costs and benefits to society while providing a public good. Private goods are both excludable and rival in consumption. Such examples are ice-cream cones, clothing, and congested toll roads. Common resources are rival in consumption but not excludable. Examples include common grazing land, clean air, and congested nontoll roads. Because people are not charged for their use of common resources, they tend to use them excessively. Therefore, governments use various methods to limit the use of these common resources. Overall, I would give this chapter a 2 out of 3 difficulty rating.

Chapter 10: Externalities

Chapter 10 talked about externalities. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality. If an activity yields negative externalities, such as pollution, the socially optimal quantity in a market is less than the equilibrium quantity. If an activity yields positive externalities, such as technology overflow, the socially optimal quantity is greater than the equilibrium quantity. Governments pursue various policies to fix the inefficiencies caused by these externalities. Sometimes the government prevents socially inefficient activity by regulating behavior. Other times it internalizes an externality by using corrective taxes. Another public policy is to issue permits. A such case is when government issues a limited number of pollution permits. The result of this policy is pretty much the same as imposing corrective taxes on the polluters. Those affected by externalities can sometimes solve the problem privately. For instance, when one business imposes an externality on another business, the two businesses can internalize the externality by merging. Alternatively, the interested parties can solve the problem by negotiating a contract. According to the Coase theorem, if people bargain without cost, then they can always reach an agreement in which resources are allocated efficiently. In many cases, however, reaching a bargain among the many interested parties is difficult, so the theorem does not apply to all cases. Overall, I would give this chapter a 1/3 difficulty rating because it was easy understanding how externalities work and what the government can do to internalize the externality.

Article Review 3

Stockman continues to talk about the impending recession. Spending and trade have all gone down after the 20 years of spending and using credit. The debt has gone up 3.7 times more than the GDP growth. However, this isn't even accurate because the growth of GDP is hidden by the growth of the credit bubble. Eventually, this growth will be liquidated. Bernanke had boasted about how successful the Feds were in ending the financial crisis and lowering unemployment to 5.1%. However, Stockman says that the Fed's ZIRP and Quantitative Easing policies aren't even related to the jobs that Bernanke was talking about. Stockman also mentions how the jobs aren't even new jobs, they're jobs that were "born-again". An example was when Du Pont had a sudden implosion and the got rid of their CEO as their sales started to fall extremely hard. This sudden implosion and extreme fall in sales was a surprise to both Wall Street Investors and the Du Pont CEO. The job market looks fine on the outside with 96,000 new jobs part of the US economy excluding government financed health, education, and social security areas. Of course, the job market is barely at the same amount of jobs before the repression. These new jobs were jobs that were already part of the economy but there was no person that filled it. Still, Bernanke boasts about the success of the Fed on creating new jobs to put the job market to where it was before the recession. Ultimately the US government has played around with the statistics to provide a favorable recovery.

Chapter 8: The Costs of Taxation

Chapter 8 discussed the costs of taxation. It goes back to what we discussed in Chapter 6, how taxes affect quantity sold and the burden of the tax. In this chapter it extends the analysis to how taxes affect welfare. Tax revenue is the size of the tax multiplied by the quantity sold. Deadweight loss is introduced in this chapter, and it is the fall in total surplus that results from a market distortion, such as a tax. It is the area between the supply and demand curves from the new quantity with tax to the equilibrium quantity without tax. When the supply or demand are inelastic, the deadweight loss is small. However when the supply or demand are elastic, the deadweight loss is large. Buyers and sellers will respond to a change in price more dramatically when it is elastic, so there would be more deadweight loss. The opposite can be said of inelastic goods. As the size of the tax increases, the deadweight loss also increases but varies directly to the square of the tax size. As the size of the tax increases, tax revenue first increases but will decrease. This is because the revenue is the tax times the quantity sold, and if the quantity decreases past the point where tax times quantity is maximized, revenue decreases. This chapter was pretty easy to understand and connects back to what they've discussed in previous chapters, so I would give this chapter a 1 difficulty rating.

Chapter 7: The Costs of Taxation

This chapter was about the consumer surplus and producer surplus. Consumer surplus is the maximum amount they are willing to pay subtracted by the amount they are actually paid. This is their willingness to pay. Producer surplus is the amount the seller receives subtracted by the production cost. The consumer and seller actually want to have higher surpluses so the consumer would prefer to have things cheaper and the producer would have have the products at a higher price. On a demand curve, the consumer surplus is actually the area of the curve (under), while still above the price. If the price of an item was lowered, more area is created for new consumers to enter the market. On a supply curve, the producer surplus is calculated by finding the area above the curve but below the curve. Yet if the price is raised, then the total producer surplus would go up since the area is added to the existing area and more is created by the new suppliers entering the market. This chapter connects back to chapter 1 where the invisible hand guides the markets back to equilibrium where it can be most efficient. Efficient means the total surplus would be at the maximum. The chapter also talked about equity where the total surplus would be fair to both consumers and producers. There are externalities that will cause market failure, but that is when the government steps in to fix it.

Article Review #2: David Stockman's Contra Corner

According to Mr. David Stockman, he fears that the global market economy will collapse. Recently in the past couple of weeks, the market has plunged downward and got many to fear we are heading into another recession. Investors are afraid that the economic slowdown in China, represented by a diminished demand in China, was bad news. Coupled with the uncertainty of Fed interest rate hike, this sent the market into a selling frenzy and left many investors fearing a recession. However, some do not see it that way. On CNBC, 3 economists gathered around just to say the economy is fine in America and that China was the real problem. Despite China's efforts to reform their market driven economics, their Shanghai composite sits a well 42% of its June 13 high. To try to turn this around, China gave the yuan exchange rate greater exposure to the market forces. While China appears to be everyone's problem, the business back in the US is also giving investors panic attacks. Alcoa Inc would break itself into two companies, Shell would give up its $7 billion dollar project to drill for oil in the Arctic, and Glencore Plc fell by 31% in London trading. The reason why he suspects an impending market collapse with China is based on what happened with Brazil. We are on the brink of global deflation and the only thing that is holding back recession and market collapse is by the Fed's constant assurance everything is the way it needs to be.

Chapter 6: Supply, Demand, and Government Policies

This chapter talks about how the government can control the competitive market and the positive and negative effects of it. They can set price ceilings, price floors, and taxes. For a price ceiling, if the equilibrium price is lower than the ceiling, that is a price ceiling that is not binding. However, if the price ceiling is lower than the equilibrium price, that is binding and will cause a shortage. Although the price ceiling was set to help buyers, sometimes because of low prices more demand and less supply mean some people don't even get to buy the good. That is when sellers also start to ration the scarce goods among the large number of buyers. One example of a real life shortage was when OPEC raised the price of oil and US regulations limited the price of oil sold in the US. The result was a reduced supply in gasoline from raised prices. But the ceiling prevented gas from reaching its equilibrium point, therefore causing a shortage. An opposite situation would happen if the price floor raised prices. Obviously if the price floor was below the equilibrium point the price floor is not binding. However when the price floor was above the equilibrium point, it would raise the prices and cause a surplus. A real life example of price floor is minimum wage. The minimum wage is above equilibrium level which means the quantity of labor supplied was greater than the quantity demanded. That meant more unemployment. It raises the incomes of the workers who have jobs, but it lowers the incomes of workers who can't find jobs. Taxes also play a huge role of government control in the market. A tax on the sellers makes the business less profitable so the supply curve shifts to the left or upward. Ultimately, taxes make the sellers sell less and buyers buy less so the size of the market is smaller. A tax on the buyers makes the demand shift downward. Often when a good is taxed, buyers and sellers don't share the the same burden on the tax and it is divided. The burden of the tax falls more on the side that is inelastic. Overall this chapter can be given a difficulty rating of 2, it introduces new concepts while still using connections to previous chapters.

Chapter 5: Elasticity and its Application

Chapter 5 discusses elasticity, which is the measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. When the curve is elastic that means there was a huge response while inelastic means there was only a small response. The price elasticity of demand is dependent on availability of close substitutes, whether or not if its a necessity, whether or not its a narrow market or broadly defined market, and over the course of time. The price elasticity of demand measures how much the quantity of a good changes in response to the change in its price. Demand curves are more or less inelastic. If the curve is steeper or upright, the more inelastic it is. Total revenue is the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold. Total revenue is affected by how elastic/inelastic a curve is. A decrease in revenue is seen if the price increases in an elastic curve. If the curve is inelastic, a increase in price is an increase in revenue. There is also income elasticity of demand that measures how the quantity demanded changes as consumer income changes. Price elasticity of supply is a measure of how much of the quantity supplied of a good responds to a change in the price of that good. Supply of a good is elastic if the quantity supplied responds substantially to changes in price. It is inelastic if the quantity supplied responds slightly to changes in price. Overall, this chapter would be given a 2 considering it introduces changes in price based off supply and demand.

Article Review #1: Keynesian Chorus Cackling Like Chicken Little

David Stockman criticizes a bunch of panicked economists arguing the Fed had tightened too much. In other words, the Fed monetary policies make the cost of money "tight", raising short-term interest rates to increase the cost of borrowing and reduces the attractiveness of it. Even though today negative real interest rates are at -1.52% compared to 1990s +2.13%, a group of economists consider today's negative real interest rates to be tighter than 30 years ago. However, all their claims are based off the Goldman Sachs Financial Conditions Index, which is based off four factors: interest rates, credit spreads, equity market prices and the value of the US Dollar. This index was formed by a chief economist in Goldman Sachs who basically informed Alan Greenspan when his policies were in favor for the Wall Street's interests. Basically Goldman Sachs had created this relatively useless economic index to tell the Fed not to tighten so they can protect their own financial interests. This has played a large role in the Fed's actions, resulting in cutting or holding the market rates constant. Even as the Fed prints more money with each bubble cycle of the economy, the growth of the business system actually slowed down, because Washington plays with the numbers a little bit before coming out with a report that national income and product accounts is the real truth. It doesn't reflect the actual truth because playing with the numbers to create appearance of growth does not hide the numbers at the cash register. From this statistical nonsense, many households are stuck in debt and penalties based on what the powerful individuals on Wall Street want. In this situation, with no way out, an impending crash is waiting and it is caused by the artificial monetary bubble we created. It has happened in the spring of 2000 and the fall of 2008 and it will happen again. How can people stop that?

Chapter 4: The Market Forces of Supply and Demand

This chapter discusses supply and demand and how they affect the market. Both supply and demand should reach an equilibrium point. If not, there will be a surplus from excess supply or shortage due to high demand. Often when this happens for any good, the price of the good would fluctuate and rise or lower based on the quantity of supply or the demand of the good. In achieving equilibrium, there is a supply curve and a demand curve. The demand curve shifts right when there is an increase in demand, and shifts left when there is a decrease in demand. The supply curve shifts left when there is an decrease of supply, and shifts right when there is an increase of supply. When these two graphs of supply and demand go together, the point where they intersect is where the equilibrium price is. The equilibrium price is the price that balances quantity supplied and quantity demanded. As supply increases or decreases and demand increases or decreases, this shifts the lines which would produce a new equilibrium price. When these prices change, it has an affect on other goods as well. A substitute is where two goods for which an increase in the price of one would lead to an increase in demand for the other good. Meanwhile there are complements where two goods for which an increase in the price of one leads to a decrease in the demand for the other. Supply and Demand ultimately control market prices and play a large role in the way buyers and sellers think.

Chapter 3:Interdependence and the Gains from Trade

Trade is beneficial to everyone involved. It isn't a competition, and actually involves specialization, where people focus on one good to produce rather than many. If there were two people who both had to produce bread and butter, but if one has a comparative advantage, trade would benefit them both. This is true because when one specializes in producing a good when he/she has a comparative advantage, the total production in the economy rises. The thing about comparative advantage is if both can produce a good at the same opportunity cost, then there would be no advantage and therefore no incentive to trade. However, is trade beneficial to both sides trading if one side has no comparative advantage? Trade in the world right now is much more complex than this so this stumps me. Overall I would give this a 2 in difficulty because it is simple to understand the trading scenario of simple trade, but in a more complex world that's not the case.