Chapter 16 Summary

Chapter 16 covered markets that are oligopolies--that is, markets that fall between perfect competition and monopoly. In general, these types of markets are known as imperfectly competitive. Another example of imperfect competition is monopolistic competition, which is when many firms sell similar but different products, such as books, movies, or computer games. In an oligopoly, since there are only a few sellers, each seller greatly impacts the others' prices and profits. In these markets, firms must constantly decide between cooperation and competition. An oligopoly with 2 members is known as a duopoly, and is the simplest type of oligopoly. Firms in an oligopoly can decide to work together to set production and pricing, which is called collusion. Firms that collude in an oligopolistic market are known as a cartel and would lead to a monopoly outcome. However, cartel agreements are prohibited by anti-trust laws. If the oligopolists work independently, they will tend to produce a higher quantity and sell at a lower price, earning a lower total profit than a monopoly would. This equilibrium reached by oligopolists consider the others' actions is named a Nash equilibrium. Because oligopolists must consider the actions of all other sellers, as the number of sellers increases, the market approaches perfect competition. Game theory, especially the prisoner's dilemma, can help explain and predict the behavior of firms in an oligopoly market and the tradeoff between competition and cooperation these firms face.

Chapter 15 Summary

Chapter 15 talks about the behavior of firms that are monopolies, which refers to a situation in which 1 firm represents the entire market supply, and there are no close substitutes for that firm's product. Monopolies arise because of barriers to entry--that is, because there is something preventing other firms from entering the market. These can take the form of one firm controlling a key resource (as occurred with the DeBeers diamond monopoly), a monopoly created by the government (as occurs when the government issues patents), or a natural monopoly (when it is cheaper for 1 firm to supply the market than 2 or more) such as water distribution. While monopoly firms want to maximize profit, they face different production decisions because as they produce more they must lower the market price to sell the additional goods. Therefore, the monopolist's marginal revenue is always less than the price of the good. This leads to 2 effects on total revenue as quantity increases: the output effect (more quantity tends to mean more revenue) and the price effect (more quantity means less price). The monopoly will still set its production at the point where marginal revenue is equal to marginal cost, but here, marginal revenue is less than price, meaning that monopolists make a positive economic profit. Because of their profit-maximizing decisions, monopolies tend to increase the price of the good and reduce the quantity supplied.

Chapter 14 Summary

Chapter 14 expanded on the concepts relating to firms' costs introduced in Chapter 13 by applying them to the decisions firms face in perfectly competitive markets. An important feature of competitive markets is that firms in them are price takers (that is, their production decisions have no impact on the market price). Additionally, perfect competition implies free entry into and exit from the market. Because these firms are price takers, their marginal revenue (or the revenue they get from producing an additional unit of output) is equal to the market price. These firms maximize their profit when the marginal revenue is equal to the marginal cost. In essence, this works because the marginal cost curve is the firm's supply curve. If the firm's revenue in the short run is less than its variable costs, the firm will shut down (i.e. temporarily stop producing), treating its fixed costs as sunk costs (as they cannot be changed in the short run). In the long run, a firm will exit the market if its average total costs are greater than its revenue. When marginal cost is above average total cost when marginal cost is equal to marginal revenue, the firm makes an economic profit. However, this will incentivize other firms to enter the market, thereby increasing supply and reducing the price. Eventually, a competitive market equilibrium will arise with each firm operating at its efficient scale.

Chapter 13 Summary

Chapter 13 examined the various costs that firms face and how those costs relate to each other. The first concept introduced in the chapter was that of fixed costs vs. variable costs. Fixed costs are those costs such as office space that do not vary with the quantity of goods produced. Variable costs are those costs that depend on the quantity produced, such as labor and physical inputs. Costs can be explicit, which means they are strictly monetary, or implicit, which implies that they are not monetary and include things such as opportunity cost. Accounting profit is total revenue minus explicit costs; however, economic profit, which accounts for opportunity costs, is in general more important to firms' decisions. Fixed costs divided by the quantity produced is average fixed cost, and, since fixed costs don't depend on quantity produced, are always decreasing. Average variable costs tend to increase because of diminishing marginal product, which is the idea that as you produce more, you eventually become less efficient. Average total cost is the sum of average fixed cost plus average variable cost, and when it is equal to marginal cost (the cost of producing 1 more unit of the good), a firm is at the efficient scale.

Article Review 4

The International Monetary Fund (IMF) is hosting its yearly meetings in the next week and they are likely to focus on issues of emerging economies, which reflects a movement away from focusing on the response of developed countries to the financial crisis. Emerging economies are now exhibiting a majority of the signs of impending financial crises, including a slowdown in economic growth and, more importantly, hidden debts. By their very nature these are difficult to detect and deal with until they pile up and lead to disaster, as was seen in the 1994-1995 peso crisis that resulted from Mexico's central bank's off-books borrowing. There are several other examples where the magnitudes of various countries' currency crises have been obscured by various monetary tricks of their central banks. It is difficult to expose the current hidden-debts before they balloon into crises, especially given the lack of transparency associated with China and its financial dealings. China has long financed infrastructure projects in other developing countries. Because Chinese development banks tend not to report their lending to the Bank for International Settlements, it is likely that many countries owe far more to China than has been reported. If the debts of developing countries are understated, the decline in capital inflows (and, in some cases, capital outflows) that have occurred recently become even more significant and may cause a real crisis.

Chapter 11 Summary

Chapter 11 deals with a completely new idea: that of goods that one does not pay for using--that is, public goods and common resources. It introduces 2 major ideas: excludability and rivalry in consumption. Excludability refers to whether or not someone can be prevented from using a good, and rivalry in consumption refers to whether or not one person's use of a good decreases another person's potential benefit from that good. This allows for goods to be divided into 4 categories: private (excludable and rival), such as ice cream cones; public (non-excludable and non-rival), such as national defense; common resources (non-excludable and rival), such as fish in the ocean; and goods characterized by natural monopolies (excludable and non-rival), such as fire protection in a small town. Public goods, such as fireworks displays, can be beneficial and efficient to do; however, because of free riders (people who see the fireworks but don't pay) it is impossible for a private firm to profit from providing the good. Free riders are essentially a positive externality, and the government can subsidize a show. Examples of public goods include national defense, basic research, anti-poverty programs, and others. However, it can be difficult to determine whether the cost or benefit of these goods is greater and therefore whether it is efficient to produce them, since there is no market to regulate prices. Therefore, the government has to do cost-benefit analyses. Common resources, because they are non-excludable but rival, suffer from the tragedy of the commons: without regulation, they will be overused. This is because of the negative externality created on other users by each user of the resource.

Chapter 10 Summary

Chapter 10 introduced the first type of market failure (that is, when a market doesn’t allocate resources efficiently) discussed in detail. This market failure is known as an externality and describes a situation in which the transaction that takes place in a market has some influence on a bystander (i.e. someone who is NOT the buyer or seller) that is not considered in the price of the transaction. If this harms the bystander, it is a negative externality; if it helps them, it is a positive externality. Examples of externalities include pollution—because it harms everyone, but the producers (or consumers) of goods or services that pollute don’t pay for this harm or consider it in their costs, too many polluting activities take place. The government, through methods such as emissions limits or a tax, can help to rectify this inefficiency. By adding the cost of pollution to the supply, we can see that the true cost of a polluting good is higher than the cost to the firm, and therefore the optimum quantity is lower and the optimum price is higher. Technological spillover is a positive externality and can be represented by shifting the supply curve down: the cost to the public is less than the cost to the firm. The government should tax goods that have a negative externality to reduce the size of the market and cover the public cost of the good, while the government should subsidize goods that have a positive externality.

Article Review 3

David Stockman goes on again about how the world is drifting towards economic collapse. This time he does that by ranting about the collapse of credit-based spending. He claims that the central banks of developed economies were responsible for pumping economies full of money and falsifying financial market data and prices which led to an increase in credit spending by households. This has led to a $185 trillion growth in worldwide debt which is 3.7 times as much as the corresponding growth in GDP (which he claims has also been overstated by the central banks and other stuff). He then goes back to complain about the Fed's decision not to raise rates (his favorite topic to rant about) and claim that that pumping of free money into the financial sectors of the economy is creating financial bubbles. He continues to go on about how financial firms such as Goldman  Sachs are happy with the "lunacy" of 100 straight months of interest rates at 0 because it gives them free funds for their "gambling." He then reminds the reader that the global system is so interconnected that issues in Brazil are related to issues in North Dakota, which is probably the most reasonable thing he's said yes.
It is relatively easily to understand what he's saying because he's said it over and over again: the world economy is destined to fail.

Chapter 8 Summary

Chapter 8 was relatively simple and easy to understand. It discussed in more detail the costs of taxation that were introduced in the previous chapter. Taxes are necessary to allow government to carry out its necessary functions; however, they have a cost on welfare--that is, the total economic well-being of a market. This is closely related to the idea of surplus. The cost of taxation ends up being higher than the revenue raised by the government. Tax revenue is equal to the area to the left of the tax wedge--that is, the area between what buyers pay and what sellers receive and the quantity sold. This benefit to government is eventually passed back along to consumers and producers who the government spends the revenue to benefit. When a tax is passed, the losses to buyers and sellers exceed the revenue raised by the government. This is the deadweight loss of the tax and is represented by the triangle between the tax wedge and the 2 curves. The deadweight loss is caused by the distortion of incentives the tax creates, which prevents some buyers and sellers from carrying out trades that otherwise would be mutually beneficial. The size of the deadweight loss is determined by the elasticities of supply and demand. The greater the elasticities of supply and demand, the greater the deadweight loss, which is logical because a change in price due to the tax will produce a larger change in quantity for more elastic markets. The Laffer curve shows that a larger tax can actually reduce revenue in addition to increasing deadweight loss.

Chapter 7 Summary

Chapter 7 began to discuss the idea of welfare economics--that is; the study of how the allocation of resources affects the well-being of people within the economy and therefore the economy as a whole. It began by introducing the idea of consumer surplus--that is; how much someone is willing to pay for an item minus how much they actually pay for it. In general, this is a reflection of economic well-being. Consumer surplus is a measure of how much extra value consumers receive for a good and can easily be measured by finding the area under the demand curve and above the market price. Obviously, the lower the price, the greater the consumer surplus. Producer surplus is defined similarly--the amount producers receive minus their cost (which is a measure of willingness to sell and should be considered to include opportunity cost as well as monetary costs). Like consumer surplus, it is a measure of the benefit paid to sellers and is measured by the area above the supply curve and below the market price. Obviously, a higher price raises producer surplus. The sum of consumer and producer surplus, called total surplus, is a good measure of society's total economic well-being. If an outcome maximizes total surplus, it is efficient. In addition to caring about efficiency, one might also care about equity--or how resources are divided up. At equilibrium, markets are most efficient, however, not necessarily the most equitable as that depends on values.

Article Review 2

This article was slightly easier to follow in a way than the first one. The author's primary claim is that a global collapse in commodity prices is beginning to cause problems in the financial sector and is also having an increasing effect on the US economy. The author notes that commodity prices have dropped 50% over the past 3 years, which is threatening to burst numerous bubbles in financial systems worldwide. He uses the examples of Shell's abandoning of Arctic drilling, Alcoa's split into 2 companies, and Glencore's stock collapse. The author then decides to go off on China, claiming that their economy is in collapse due to capital outflows and that the Communist party is trying to prop up a house of cards with more controls on the market and through devaluation of the yuan. He then connects this collapse in Chinese financial markets with an overproduction of commodities, including steel, that has led to overbuilding in Chinese cities that now threatens to become a "freight train of deflation" that will eventually make its way over to America. He then questions why people would overpay for stocks (19.6X earnings right now) when China, the driver of previous economic growth, is in such great trouble. He claims that markets would've long since corrected for the impending global economic slowdown if it weren't for the actions of the Fed. He finishes by claiming that the situation is much worse than what occurred in 2008, and Brazil's near-depression is evidence of that.

Chapter 6 Summary

Overall, chapter 6 was relatively easy to understand. It was primarily an application of the material from previous chapters to government policy and actual issues in the real world. The first examples are price ceilings and price floors. Price ceilings are a legal maximum price for a good and price floors are a legal minimum price for a good. Price ceilings and floors can either be non-binding or binding, depending on if they are above or below the market price. If they are binding, they change the market price and do not allow it to reach equilibrium. A binding price ceiling will create a shortage, meaning that some method will have to develop to ration the good (as more is demanded than is supplied). Therefore, while the ceiling was intended to help buyers, it actually makes some of them worse off. This idea can be applied to explain why government price controls were partly responsible for the gas lines of the 1970's. Combining this with elasticity can also show that rent control, while perhaps effective in the short run, in the long run leads to a significant shortage of housing. Price floors function similarly to price ceilings, except they create a surplus. Minimum wage is a price floor and the surplus it creates reflects in unemployment. The effect is especially pronounced on low-wage, low-skill workers (because higher-skill workers have higher equilibrium wages and therefore the floor is non-binding). The final policy discussed is taxes which are necessary for governments to raise revenue. Importantly, taxes on buyers and sellers both have the same result: a lower quantity and a higher price to buyers and a lower one to sellers. This tax will fall primarily on the less-elastic side of the market. I have no questions about the material.

Chapter 5 Summary

Chapter 5 covered the idea of elasticity and how elasticity works. Elasticity is defined as how much buyers and sellers respond to changes in the market. Specifically, demand for (or supply of) a good is elastic if the quantity demanded changes substantially with a change in price, and inelastic if it isn't. The price elasticity of demand is the percent change in the quantity demanded divided by the percent change in price. Elasticity of supply is defined analogously. The midpoint method provides a more accurate definition of the elasticity of any good. If elasticity is greater than 1, the good is elastic, if it is less than 1, it is inelastic, and if it is 1, the good is unit elastic. The extreme case of an elasticity of 0 is known as perfect inelasticity. The other extreme, of an undefined elasticity, is known as perfect elasticity. Price elasticity of demand is influenced by the availability of substitutes, the necessity of the good, the definition of the market, and the time horizon under consideration. Price elasticity of demand allows for the calculation of total revenue, or price times quantity. If demand is inelastic, price and total revenue are directly related. If demand is inelastic, they are inversely related, and if demand is unit elastic, total revenue is constant. In addition to price elasticity of demand, there is also income elasticity of demand and cross-price elasticity of demand.
There are many applications of price elasticity of supply and demand. It can show that even though farmers' total revenue decreases from adopting more efficient wheat production methods, they must adopt it because of the forces of a competitive market. The changes in elasticity with respect to time horizon explain why OPEC failed to keep prices high for long periods of time.
I have no questions about this material. Difficulty: 1/3.

Article Review 1

This article was rather difficult to understand; however, I think I was able to grasp the main points. The article railed against the so-called "Keynesian Chorus" and their opposition to a Fed rate hike, which would lead to "tightening" (that is, making it more difficult to get a loan), on account of the Fed already having tightened too much. This is of course ridiculous because interest rates are so low that it is very easy to get them. His attack on the statistics used to enable this belief is rather difficult to understand but the general point is clear: the market is not tightened as the Keynesians claim.
He then moves on to attack the foundation of the Keynesians' argument on why interest rates should remain low; that is, the idea that low rates will encourage borrowing which will encourage spending which will stimulate aggregate demand. His claim that the actual impact of low rates has inflated the market for financial assets (such as stocks) rather than having any real impact on actual consumer spending and economic growth is logical and seems supported by the evidence. This leads to the logical conclusion that since lower rates haven't helped stimulate aggregate demand, higher rates won't hurt aggregate demand. A more interesting claim is the one that this has created a financial bubble, which the author claims is the largest of the century. My questions are as follows:
1. What would the response of a Keynesian to this defense be?
2. What other reasons might there have been for the Fed to not raise rates?

Chapter 4 Summary

Chapter 4 began introducing in more detail the idea of markets, which the textbook defined as the group of buyers and sellers of a particular good or service. The textbook noted that markets can either be organized (like markets for agricultural products) or less organized but still function similarly. The chapter then introduced the idea of a competitive market; that is, a market where no one has an influence on the price. Assuming this (or considering the common cases where it is true) allows for simpler models.
The behavior of buyers together constitutes demand. The quantity demanded (that is, how much buyers are willing and able to buy) is negatively related to price by the law of demand--that is, as price increases, quantity demanded decreases.  The market demand curve changes only when something causes the quantity demanded to change at EVERY price. These factors include income, the price of substitutes or complements, and expectations.
The behavior of sellers constitutes supply. The quantity supplied (that is, how much sellers are willing and able to sell) is positively related to price by the law of supply--that is, as price increases, quantity supplied increases. The market supply curve changes only when something causes the quantity supplied to change at EVERY price. These factors include technology, input prices, and expectations.
As a whole, markets will tend towards equilibrium--the point where the supply and demand curves intersect. At this point, every good produced is bought. If there is either a surplus (supply>demand) or a shortage, (supply<demand), market forces will drive the market towards equilibrium.
I have no questions regarding this chapter.
Difficulty: 1/3

Chapter 3 Summary

Chapter 3 was both interesting and at the same time very accessible and simple to read and understand. The concept of the production possibilities frontier logically builds off of the idea of trade-offs discussed earlier. The example of the farmer and rancher clearly illustrates both the practical use of this tool as well as the real-world phenomenon of gains from specialization and trade. It is logical that everyone should focus on what they are best at to increase efficiency, and it is also logical that an increase in efficiency will lead to an increase in production that is beneficial for everyone. However, what was somewhat surprising is the number of possible ways that these additional resources can be distributed through trade--that is; that trade can occur at any ratio between that of the producers' opportunity costs. It is also logical that it is relatively irrelevant that some people (or countries) are better than others at everything. In other words, it was very reasonable to see that an absolute advantage does not preclude gains from trade. The concept of comparative advantage was also well-explained and followed logically from earlier discussions of opportunity cost. These concepts were combined and explained clearly with the examples of Tiger Woods' lawn and US-Japanese trade. While this is a simple analysis of what is in fact a more complicated issue, it is interesting to see that trade is often in general beneficial to everyone.
I have no pressing questions regarding this material.
Difficulty: 1/3