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.  

Chapter 14 Blog

In this chapter, Mankiw begins to discuss how competitive markets work. One of the main details to keep in mind when analyzing a competitive market is that a firm in a competitive market is a price taker, which means that they must accept the price that the market determines for their good. Because of this, their revenue is directly proportional to the amount of output of the good it produces. The price that the good is sold for (determined by the market) is equal to the firm’s average revenue (total revenue divided by quantity sold) and its marginal revenue (the change in total revenue from one additional unit sold). In order to maximize profit, the main goal of any firm, a firm must choose a quantity of output where the marginal revenue equals the marginal cost. Because of the fact that marginal revenue is equal to the market price, the marginal cost curve is the supply curve for a competitive firm. One choice that a firm is able to make is to either shut down temporarily or exit the market. If a firm is unable to recover its fixed costs because the price of the good is less than the variable cost, it may choose to shut down temporarily (short run). In the long run, if the market price is less than the average total cost, a firm may choose to exit the market. Also in the long run, in a market where firms are free to exit and enter the market at will, profits will be driven to zero eventually.

Chapter 13 Journal

In this chapter, Mankiw goes more in depth in explaining the costs of production to a firm besides the basic introduction to opportunity cost, etc. that we read in earlier chapters. Mankiw explains that the ultimate goal of a firm large or small is to maximize profit. Profit is equal to total revenue minus total cost. There are two different ways to analyze profit, however. An economist analyzes not only a firm’s explicit costs, or costs that require an outlay of money from the firm, but also a firm’s implicit costs which do not require a direct outlay of money by the firm. An accountant only takes into account explicit costs. A firm’s costs directly reflect its production process, which is reflected in a graph called a production function. This function gets flatter as the quantity of an input increases. In this graph, you are able to see the diminishing marginal product, which means that the increase in an output from an additional unit of input diminishes with each additional unit. Because of this, a firm’s total-cost curve becomes steeper as they increase their quantity produced. The total cost of a firm can be divided into two categories: fixed and variable costs, Fixed costs do not change when the firm changes their quantity produced, like the cost of rent. Variable costs change when the firm alters the quantity of output produced, like the cost of supplies. Based on the total cost, you can determine the average total and marginal cost of the firm.

Article Review #4

Recently, the International Monetary Fund (IMF), the international organization that is composed of 188 countries working to ensure financial cooperation and stability and facilitate international trade and economic growth, held their annual meeting to discuss recent trends in the world economy and international financial concerns. Something that Carmen Reinhart, a professor at Harvard Kennedy School, noticed about the meetings is that the primary concerns are no longer over countries with already established economies bouncing back from the huge international financial crisis of 2008, but rather concerns over countries with emerging economies who are facing financial crises of their own. Lately, emerging economies who were growing fast previously are now showing some of the main symptoms of a financial crisis: slowdown in economic growth/exports, reduction in capital inflows, etc. This relates back to the trend we have seen in previous article reviews pertaining to falling commodity prices. The global trend of falling commodity prices along with rising income rates means that the capital inflow that was supporting the growth of emerging economies has ended. The primary concern surrounding this is that China, a prominent emerging economy, has slowed down economically, and that has lead to an economic downturn in all emerging economies worldwide. Another huge concern that emerging economies are facing and that could lead to a financial crisis are hidden debts, which are debts that aren’t always as obvious on the surface but morph from one crisis to another, meaning that is hard to detect them until it's already too late.

Chapter 11 Blog

In chapter 11, Mankiw explains two ways goods can be categorized: by excludability, or if a person can be prevented from using it, and rivalry in consumption, whether one person’s use of a good diminishes other people’s use. Goods are defined into four categories: private goods, public goods, common resources, and goods produced by natural monopolies. Private goods are the types of goods like food, clothing, and cars that we see traded in markets, because these goods are excludable and rival in consumption. Markets do not work well for other goods because oftentimes their prices or costs cannot be quantified by a buyer’s willingness to pay, they are more abstractly quantified by other factors. Public goods, such as national defense or basic research, are not rival in consumption or excludable. Because these goods are free, people have an incentive to free-ride, or enjoy the benefit without paying for the good. Economists attempt to decide whether the government should provide certain public goods based on cost-benefit analysis, where they try to quantify the cost or benefit to society of the public good compared to the cost of providing it.  Common resources are also not excludable, but they are rival in consumption. Some examples of these are clean air, clean water, and fish in the ocean. People generally overuse common resources because they do not have to be paid for, so governments must try to limit use of common resources through taxation or regulation, or turning it into a private good.

Chapter 10 Journal

In this chapter, Mankiw begins to explain the concept of externalities, which is the effect of a transaction between a buyer and a seller on a third party. Externalities can be negative, meaning they are detrimental to the third party, or positive, meaning they are beneficial to the third party. These externalities create their own curves, called social-cost curves, that cause the socially optimal quantity to be greater than the equilibrium quantity. Ideally, the government wants to shift the supply or demand curves so that the equilibrium quantity is the same as the socially optimal quantity, and they do that by imposing either taxes, in the case of negative externalities, or subsidies, in the case of positive externalities. In some cases, those that are affected by externalities are able to solve the problem of the externality privately, i.e. without government intervention. For example, if a firm creates an externality for another firm, they could either merge or create a contract with each other in order to “internalize”, or alter the incentives, of that externality. This relates to the Coase theorem, which states that private parties can solve externalities on their own if they are able to bargain without cost. However, this theorem does not always prove to work out because bargaining can be costly and difficult for the parties involved, especially if there is a larger number of parties involved. If private parties are not able to deal with externalities by themselves, the government can internalize an externality using regulation or Pigovian taxes, which are taxes that are enacted to correct the effects of a negative externality.

Article Review #3

In this article, David Stockman returns to the idea that the economy is spinning out of control, even going as far as to claim that the global economy is drifting into the next recession. He claims that because of the deflation in commodities prices, an idea that we have seen discussed in past article reviews, along with capital spending (a business spending money on fixed assets, or assets that are not likely to be quickly converted into cash), the economy has gone into a tailspin. He also mentions that world trading has led to this economic disarray, something I found confusing as world trade is generally seen as a good thing. As discussed in the Mankiw book, trade can make all parties involved better off, and more specifically speaking, trade can help countries attain goods they are unable to produce in exchange for goods they are able to produce, making all countries involved better off. If this is true, then my question is why does Stockman argue that world trade is leading into a global recession? Next, Stockman argues that it is the “credit binge” that has led us into this looming recession. This argument makes more sense, in that the credit binge entails individual households essentially borrowing money they may not have from banks in the form of credit on credit cards. This credit frenzy has led to a huge amount of debt in recent years.

Chapter 8 Journal

Mankiw in this chapter reiterates how important the concept of taxation is in economics. While he was discussed the applications of taxation in past chapter, he has not fully explained how taxation can affect the welfare, or economic well-being, or participants in a market. Generally, we learn that a tax on a good reduces economic well-being of all participants in a market, whether they are buyers or sellers. This is because when a tax is imposed, the buyer will always pay more and the seller will always receive less. Furthermore, the reduction in total surplus caused by the tax generally exceeds the revenue raised by the government. The fall in total surplus (consumer surplus, producer surplus, and tax revenue) caused by a tax is called the deadweight loss. Taxes have these because they reduce market activity by raising prices and reducing how much sellers make, meaning they cause the market to shrink. More specifically, taxes cause the market to shrink even farther than the level that maximizes total surplus, i.e. when the market is running the most efficiently. A larger elasticity means a larger deadweight loss. A larger tax also means a larger deadweight loss. When a tax increases, it initially raises tax revenue, but if it gets large enough, it causes tax revenue to shrink.

Chapter 7 Journal

In this chapter, Mankiw explains the concepts of consumer and producer surplus and how they affect the market. Mankiw also begins to dive into the idea that the allocation of resources is not about just a simple relationship between supply and demand, but something that can affect the economic well-being of the buyers and sellers in a market. First, Mankiw explains that the idea of consumer surplus, which is buyers’ willingness to pay (the maximum amount buyers will pay for a good) minus the amount they actually pay for it. The bigger the difference, the more they buyers benefit. Producer surplus is a similar concept, but pertains to sellers, not buyers. Producer surplus is the amount sellers receive for their goods minus the costs of production (opportunity cost). This measures the benefit that buyers receive from participating in a market. The sum of consumer and producer surplus is called total surplus and if there is an allocation of resources that maximizes the total surplus, it is efficient. This means that all of the resources in the market are being used efficiently. Governments and policy makers are concerned with not only efficiency, but also equity, which is where the concept of welfare economics, or the study of how the allocation of resources affects economic well-being, becomes important. It has been found that centrally planned economies are not effective at allocating resources efficiently or equitably, so it is better to allow the invisible hand to allocate the market.

Article Review #2

In this article, David Stockman, the former businessman and director of the Office of Management and Budget under Ronald Reagan, discusses the current state of the commodities market in the United States. Commodities are basic goods that are traded that are considered interchangeable with other commodities of the same type. Quality may differ between commodities, but is found to be essentially uniform throughout the market. Examples of commodities are grains, gold, beef, oil, and natural gas. This reminded me about when we were first learning about elasticity and inelasticity and we learned that goods that are essentially the same no matter who the seller is, i.e. commodities, are the closest thing to perfectly elastic that exists. Stockman explains that there is a huge decline in the commodities market currently, mainly influenced by the decline of demand from China, a place that was hailed by Wall Street as a huge potentially growing market for commodities. Stockman believes that due to their highly profitable and quickly deflating steel market, they have the capacity to change prices of steel, cars, and other steel products, leading to the potential collapse of the steel market and already causing a crisis in the commodities market as a whole. Stockman then references an article from about a month ago that explains that the entire globe is potentially headed toward a global monetary deflation, with China at the center. The financial bubble that is developing now is even more combustible than the one that developed before the 2008 recession, a terrifying possibility for the global economy.

Chapter 6 Journal

In this chapter, Mankiw begins to explain how government intervention can affect markets. In previous chapters, he explained how the market, made up of numerous buyers and sellers, cause prices to be naturally regulated. However, in this chapter he introduces the concept that the government can affect prices in the market based on two actions: the introduction of price ceilings and floors and taxation. Price ceilings and floors are boundaries that the government is able to put in place that can put a maximum or minimum on the price that a seller can sell a good for. These boundaries generally have a negative effect on markets because they skew the price away from the equilibrium price and then cause a shortage or surplus. Taxes are money that buyers and/or sellers are required to give to the government to increase government revenue. Taxes also generally discourage market activity because they reduce the size of the market and give buyers less incentive to buy. Ideally, the buyer and the seller share the burden of the tax regardless of whether the tax is on the good before or after it is sold. However, based on the elasticity of the good’s supply and demand, the tax burden is prone to shift more to the buyer or seller depending on the circumstances. If there is an elastic supply and relatively inelastic demand, the addition of the tax causes buyers to bear the burden. However, if the elasticities are switched, the burden goes to the sellers.

Chapter 5 Journaling (#3)

In Chapter Five, Mankiw began to discuss the idea of elasticity and its applications on supply and demand. Essentially elasticity is the way in which the responsiveness of quantity demanded or quantity supplied to one of its determinants, namely price, is measured. That specifically is called price elasticity, and is the one Mankiw talks about most in the chapter. Thankfully, I found that this topic was fairly easy to understand if you have a good foundation of understanding on supply and demand curves, as well as normal and inferior goods. For example, it was easy for me to understand the concepts of positive and negative relationships between price and total revenue (price times quantity sold) because I was already able to see similar positive and negative relationships between income and normal and inferior goods in the chapter before. In this case, we see that when the price and total revenue move in the same direction (positive) the demand is inelastic, meaning the demand stays fairly constant no matter the price. It is the opposite for elastic demand, when the price and total revenue have a negative relationship.The one thing that I was confused about in this chapter was the graphing component. I understood that some of the graphs used in this chapter were similar to the supply and demand curve graphs I became familiar with in the last chapter, however I did not quite understand how they translated to elasticity. When there is zero elasticity, there is a vertical supply curve because even a dramatic change in price cannot affect a change in demand, but if there is perfect elasticity, the curve is horizontal because even a small change in price can mean a huge change in demand.  

Article Review #1

Overall, while reading the "Why The Keynesian Chorus Is Cackling Like Chicken Little" article, I was extremely confused. I was unfamiliar with many of the concepts and ideas that David Stockman discussed in the  article, and this led to a lot of confusion for me the first time I read through it. However, upon reading it another time through I looked definitions and info about many of the concepts that Stockman addressed and it made my understanding of the article a lot more clear. First, I looked up who David Stockman was for context on what some of his positions and views might be. I learned that he is a former business man/politician, was the Republican U.S. Representative for Michigan (1977-1981), as well as the Director of Office of Management and Budget under Reagan. Knowing that he was a Republican politician gave me an idea on what his stance might be on many economic issues in the U.S., as most politicians within a certain political party have similar views on key issues. I was surprised to find while reading the article that his tone while writing was extremely aggressive. The article was very opinionated and was filled with his own personal views. I was surprised to find this only because I went into reading it expecting a strictly informative article about economics. A few of the things I was very confused about in the article, even after looking them up, were the terms “free money is actually tight money” (an opinion Stockman does not agree with) and the term “auto loop” from the sentence “the Goldman index consists of financial variables that are so powerfully influenced by Fed policy that they comprise the next closest thing to an auto loop.” Even after looking these ideas up I was not able to understand them or find any explanation of them.  

Chapter 4 Journaling (#2)

During this chapter, Mankiw dives into explaining one of the most important economic principles, supply and demand. While I thought I had a fairly solid basic understanding of what supply and demand really was, there were a lot of subtleties within the concept that I found a lot harder to grasp. I already knew before reading this chapter, or even taking Econ, that supply and demand were inversely related, meaning as one goes up, the other goes down. Some of the ideas from the chapter that were a little harder to understand were the supply and demand curves. I found the graphs slightly difficult to understand. I could understand how the graphs represented the positive or negative relationship of supply and demand, but what I did not understand was how and why you combine the individual demands to represent a market demand. I understand that you change the horizontal factors to add them together, but why don’t the other factors involved in a market change as well? Another thing I was very confused about while reading was normal good versus inferior good. The book defines these things as goods for which an increase in income leads to an increase or decrease, respectively, in demand. My question was what does the book mean by income and how does it affect demand? Is it talking about income as in income that firms pay to households? Fortunately, I understood the related topics of substitutes and complements much better than normal and inferior good.

Chapter 3 Journal

C hapter Three aimed to emphasize one of the 10 Principles of Economics that were introduced in Chapter One: Trade Can Make Everyone Better Off. Mankiw explains the concepts of absolute and comparative advantage, and gives the reader a more in depth look at what opportunity is. While I thought that the analogy used throughout the chapter about the farmer and the rancher was a little hard to understand, the example that really helped to make these concepts click for me was the example about Tiger Woods. Basically, it explained that Tiger Woods could mow his lawn in 2 hours, while the boy next door could mow it in 4, meaning Woods has an absolute advantage. However, in those same 2 hours, Tiger Woods could make a commercial and make $10,000, and the boy could work at McDonald's and make $20. This means the boy has the comparative advantage because he has less to lose. This is where a began to understand opportunity cost: Tiger Woods should do the commercial, even though he could mow the lawn more efficiently than the boy, because he has more to lose, and as long as he pays the boy somewhere between 20 and 10,000 dollars, both of them end up better than they started. Something that I really started to understand with this analogy is that opportunity cost isn't just about money, but other factors, for example labor is factored into opportunity cost, as is time. Tiger Wood's time is much more valuable than the boy's, so he has more to lose.