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.