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.