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