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.