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.