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.