Chapter 24 Journal

In this chapter, we encounter the concept of Consumer Price Index (CPI), which measures the cost of a basket of goods and services relative to the cost of that same, fixed basket of goods in a base year. This index is used to measure the overall level of prices in the economy, and the percentage change in the CPI also measures the inflation rate. The CPI is important in measuring the cost of living, but it is flawed in that it does not account for substitution bias, the introduction of new goods, and the unmeasured change in the quality of goods and services. Because of these issues, the CPI overstates inflation. The GDP deflator, which we learned about last chapter, is similar to the CPI in that it measure the overall level of prices in the economy, however it differs in that the CPI includes goods produced internationally, and the CPI uses a fixed basket of goods as well as a changing one. Additionally, dollar figures are not representative of a valid comparison of purchasing power because of changing interest rates and inflation. You can correct this by using a price index. Laws and contracts also use price indexes to correct for inflation, and tax laws are partially indexed for inflation. Correction for inflation is especially important when considering interest rates. The nominal interest rate is the one usually reported (rate at which the number of dollars increases over time). The real interest rate accounts for changes in the value of the dollar over time.  

Chapter 23 Blog

This chapter is our first introduction to macroeconomics, the study of economy-wide phenomena, including things like inflation, unemployment, and economic growth. The main concept we learn in this chapter is Gross domestic product. Gross domestic product (GDP) is the measure of an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. Basically, GDP shows the market value of all final goods and services produced within a country in a given period of time. There are four main components of GDP: consumption, government purchases, investment, and net exports.  Consumption is spending on goods and services by households. Government purchases are expenditures on goods and services by the government. Investment is spending on capital, like equipment and structures. Net exports equal the value of exports minus the value of imports. One way to compare and quantify the measure of GDP is through nominal and real GDP. Nominal GDP is the production of goods and services valued at current prices, whereas real GDP is the production of goods and services valued at constant prices, i.e. measured using one “base year”. The GDP deflator is the ratio of nominal GDP to real GDP measures the level of prices in the economy. The GDP is generally a good measure of economic well-being in the economy because the GDP per person shows the income and expenditure of the average person in the economy, however it excludes some things that add to well-being, so it is not perfect.

Chapter 18 Blog

In this chapter, Mankiw dives into explaining the economics of the factors of production, with a specific focus on labor markets. The economy’s income is distributed into the markets of the factors of production, those being labor, land, and capital (the equipment and structures used to produce goods and services). The demand for these factors is a derived demand, which means that it comes from firms that use these factors to produce other things like goods and services. Assuming that firms are competitive and profit-maximizing, a firm will utilize a factor up to the point where the value of the marginal product of the factor is equal to the price of what they are producing. The supply of the most important factor, is derived from individuals’ trade-off between work and leisure time, since leisure time has an opportunity cost of whatever wage you could’ve been earning. Additionally, the price paid to each factor is adjusted based on the supply and demand for that factor, and because the demand for the factor reflects the VMP of that factor, the equilibrium is where each factor is compensated based on the marginal amount that they contribute to the production of goods and services. The marginal product of any factor depends on the quantities of all factors that are available, meaning that a change in the supply of one factor changes the equilibrium of all factors.  

Chapter 17 Blog

In this chapter, we are introduced to the concept of oligopoly. Oligopoly is similar in many ways to monopolistically competitive markets, which we learned about in the last chapter, but differs in a few key ways. An oligopolistic market is characterized as a market in which a few sellers control the majority of the market. An oligopolistic firm aims to maximize their total profits by forming a cartel, or a group of firms acting in unison, and acting as a monopoly within the cartel. If oligopolists fail to act as a monopoly, the resulting quantity is too high and the resulting price is too low. The more firms that are involved in an oligopoly, the more the firms will act like firms in a competitive market, and the quantity and price will approach the socially efficient quantity. One of the ways you can understand oligopolists and their choices is by examining the prisoner's’ dilemma, in which you can see that while the choice to cooperate will always have a more beneficial outcome, self-interest will point people toward their “dominant strategy”, which might be beneficial for them but not as beneficial as if they had cooperated. This dilemma is an example of game theory and can easily be applied to oligopoly, as well as a variety of other situations. Policymakers do not like cooperation and collusion between oligopolists because it is not socially efficient, so they forbid these behaviors with antitrust laws.

Chapter 16 Blog

In this chapter, the concept of the monopolistically competitive market is introduced. A monopolistically competitive firm is similar to a perfectly competitive firm in that there are many firms in the market and free entry and exit, however it differs from a perfectly competitive market in that its firms sell differentiated products. While the equilibrium in a monopolistically competitive market is similar to that of a monopolistic market in that it has a profit maximizing position where marginal cost is equal to marginal revenue, it differs from both monopolies and perfectly competitive firms in many ways. It is different from a perfectly competitive market because it has excess capacity, meaning it operates on the downward sloping section of the average total cost curve. Additionally, there is a markup from price to marginal cost, meaning that price is greater than marginal cost. One way that monopolistic competition is less desirable than perfect competition is that in a monopolistically competitive firm, like in a monopoly, has a deadweight loss associated with the markup from marginal cost to price. Also, based on different positive and negative externalities associated with monopolistically competitive firms, there may be too many or too little. Because of this, policy makers cannot correct any inefficiencies in monopolistically competitive markets because every firm sells a slightly different product. Another thing to consider within monopolistically competitive markets is the prevalence of advertising, which is present because of the differentiation of products within monopolistically competitive markets. This can influence consumer decisions greatly.

Article Review #5

Essentially in this article, Scott Adams, the creator of the extremely popular cartoon “Dilbert”, explains his theory of how to be successful, which is mainly centered around his theory that experiencing failure is an integral part of learning how to be successful. In order to succeed in whatever venture you choose to pursue in your life, you must believe that failures are tools you can use to learn from and be better next time. Another point he hits in the article is that in order to succeed, you should adopt a habit of having a system, not a goal. A goal-based lifestyle will lead you to believe that you have succeeded once you have reached your goal, when in reality you should have a system in order to constantly be on the lookout for more ways to succeed. Adams also points out that in order to succeed, you should not necessarily pursue your passion. If you pursue your passion, you can become too wrapped up in the feelings surrounding the project, and you will be crushed if/when the project goes under. If you pursue something practical that you logically know is likely to do well, you are more likely to be successful in the end, and if the project does fail, you won’t be devastated. Furthermore, Adams acknowledges something that is not usually acknowledged by those advising on how to be successful: luck is a huge part of success. While this is true, Adams sugests a way to game the system in that you must position yourself in places where your luck is higher.

Chapter 15 Blog

In this chapter, Mankiw explains how a market works when a monopoly exists within a market. A monopoly is defined as a firm in a market where they are the sole seller of the good in the market (any competition is negligible). A monopoly can arise when the government grants a firm the exclusive right to produce a good, a firm owns a key resource for producing the good, or if a single firm is able to supply the entirety of the market of the good at a smaller cost than more than one firm would be able to. This last example is called a natural monopoly. Because a monopoly acts as the only producer for the entire market for a good, the demand curve for the firm functions as the demand curve for the entire market. This means that the demand curve for a monopoly is downward sloping, as most demand curves are, but different from the flat demand curve of a firm in a competitive market. However, a monopoly is similar to a firm in a competitive market in that it wants to maximize profit, and it does this by producing at the quantity where the marginal revenue and marginal cost curves intersect. The monopoly then is able to choose the price they want to sell the good for, and they choose a price above the marginal revenue and marginal cost in order to maximize profit. This level of production is often below the level that maximizes total surplus in a market because it raises the price and lowers the demand for the good, so some buyers don’t purchase the good and the market shrinks. This also causes a deadweight loss.