Chapter 18

Chapter 18 talks about the factors of production, which include land, capital, and labor. To make a hiring decision, a firm must consider how the size of its work force affects the amount of output produced. The diminishing marginal product is that as the numbers of workers increases, the marginal product of labor declines. The theory of neoclassical production is that the amount paid to each factor of production depends on the supply and demand for that factor. The marginal revenue product is the extra revenue the firm gets from hiring an additional unit of a factor of production. The value of the marginal product curve is the labor-demand curve for a competitive profit maximizing firm. A competitive profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage. Changes in taste, changes in alternative opportunities, and immigration causes the shifts to the labor supply curve. Any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount. This is because these must always be equal. Capital is used to refer to the stock of equipment and structures used for production. The economy's capital represents the building up of goods produced in the past that are being used now to produce new goods and services. Labor, land, and capital each earn the value of their marginal contribution to the production process. Since the factors of production are used together, the marginal product of any factor depends on the total quantities available. I thought that the case study of the Black Death was helping in understanding the topics covered in this chapter.  

Chapter 17

Chapter 17 is about oligopolies and their behavior in the market. Oligopolistic firms are interdependent on each other, unlike competitive firms. An oligopolistic market has few sellers that impact each other's profits with their behaviors. It is part of imperfect competition in which firms have competitors but do not face as much competition because they are price takers not price makers. An oligopoly with only two members is called a duopoly, which is the simplest type of oligopoly. When firms in an oligopoly individually choose to produce at maximum profit, they produce at a quantity greater than the level of a monopoly and less than the level produced by competitive. An oligopoly's price is less than the monopoly price but more than the competitive price. The output effect is that selling one more quantity at the price (as above marginal cost) would raise profit. The price effect is that raising production would increase the total quantity sold, which would lower the price of water and its profit on the other products sold. As the number of sellers in an oligopoly increases, it begins to look more like a competitive market. In return, the price begins to reach marginal cost and the quantity would start to reach the socially efficient level. Policymakers use antitrust laws to prevent oligopolies from reducing competition with their behavior. Controversies have arisen over the types of behavior antitrust laws should prohibit. Three examples of controversial business practices are resale price maintenance, predatory pricing, and tying. I thought this chapter was informative in its comparison of oligopolies, competitive, and monopolistic markets. It helped clarify the differences between the different markets.

Chapter 16

Chapter 16 is about monopolistic competitive markets. They are markets that contain elements of competitive markets and some elements of monopolies. A monopolistic competitive market is defined by having many sellers, product differentiation, and free entry. Similar to monopolies, monopolistic competitive markets produce at the quantity where marginal revenue equals marginal costs. It then uses the demand curve to set the price at that quantity. In the long run equilibrium of a monopolistic competitive market, price equals average total cost, like a competitive market. Also, price exceeds marginal cost, as in a monopoly. There are positive and negative externalities from the entry of new firms. The product-variety externality is where an entry of a new firm creates a positive externality on consumers because consumers get some consumer surplus. The business-stealing externality is where the entry of a new firm creates a negative externality on existing firms because a new competitor causes other firms to lose customers and profits. The product differentiation apparent in monopolistic competitive markets leads to the use of brand names and advertising. This leads to critics and defenders of advertising. Like monopolies, monopolistic competitive markets don't produce at the welfare-maximizing level of output. Similar to monopolies, monopolistic competitive markets have price exceeds marginal costs and are not price takers. Like competitive markets, monopolistic competitive markets contain many firms in the market and can have entry in the long run. Monopolistic competitive, monopolies, and perfectly competitive markets all have the goal to maximize profits. I thought this chapter was interesting in its comparison of the different types of markets and how monopolistic competitive markets are hybrids of monopolies and perfectly competitive markets.

Chapter 15

Chapter 15 is about monopolies and their role in the market. They are the sole producers of a product, and are given exclusive rights by the government to produce their good through patents and copyright laws. A natural monopoly is a firm that is the sole producer of a product and supplies the market at a lower cost than multiple firms could. Since a competitive firm is a price taker, their demand curve is a horizontal line. However, since monopolies are sole producers of a product, its demand curve is downward-sloping This is because as the monopoly reduces its quantity of output it sells, the price of its output increases. A monopoly's MR<P. For a competitive firm: P=MR=MC. However, for a monopoly: P>MR=MC. The socially efficient quantity is where the demand curve and marginal-cost curve intersect. However, monopolies produce less than the socially efficient quantity and produce a deadweight loss. A monopoly causes deadweight losses similar to the deadweight losses produced by taxes. The deadweight losses of a monopoly are eliminated only in extreme cases of perfect price discrimination. Monopolists try to raise their profits by charging different prices for the same item based on a buyer's willingness to pay. Policymakers respond to the problems of monopolies by: trying to make the monopolized industries more competitive, regulating the behaviors of monopolies, turning some private monopolies into public enterprises, or by doing nothing at all. Overall, I thought this chapter was dense in information. I thought that Table 2 on page 338 was very helpful in summarizing the similarities and differences between monopolies and competitive firms.

Chapter 14

Chapter 14 is about how firms want to maximize profits with production decisions in competitive markets. Buyers and sellers need to accept the prices in the market and are seen as price takers. Three characteristics make up perfectly competitive markets: 1. There are many buyers and sellers in the market. 2. The items offered by the numerous sellers are largely the same. 3. Firms can freely enter or exit the market. Average revenue is the total revenue divided by the quantity sold. For all firms, the average revenue equals the price of the good. The marginal-cost curve, on a graph, is also the competitive firm's supply curve because it determines the quantity of the good the firm is willing to supply at any price. The competitive firm's short-run supply curve is the portion of the marginal-cost curve that is above AVC. The competitive firm's long-run supply curve is the portion of its marginal-cost curve that is above ATC. A firm's profit is (P-ATC) X Q. The process of exit and entry ends only when price and average total cost are driven to equality. Since firms can enter and exit more easily in the long-run than in the short-run, the long-run supply curve is more elastic than the short-run supply curve. I thought this chapter had helpful graphs for visualization. For example: Figure 8 had numerous graphs depicting the increases in demand in the short-run and long-run, which was helpful in understanding this concept.  

Chapter 13

Chapter 13 talks about expanding our knowledge in firm behavior, by analyzing them more closely. Industrial organization is the study of how firms' decisions about the prices and quantities are relied on the market condition. Profit is total revenue minus total cost. Explicit costs are costs that make it mandatory for the firm to pay out some money. Implicit costs are costs that do not require a cash outlay from a firm. Economists study both implicit and explicit costs when studying how firms make production and pricing decisions. However, accountants only measure explicit costs and ignore implicit costs. Production function is the relationship between quantity of inputs to outputs of a good. The diminishing marginal product is the property where the marginal product of an input decreases as the quantity of input increases. Total cost can be divided into two types: fixed costs and variable costs. Variable costs vary with the quantity of output produced, unlike fixed costs. A firm's total cost is the sum of fixed costs and variable costs. Average total cost is the total cost divided by quantity. Marginal cost is the change in total cost divided by change in quantity. These show how the average total cost and marginal cost are obtained from total cost. Whenever the marginal cost is less than average total cost, average total cost is falling. However, whenever marginal cost is greater than average total cost, average total cost is rising. Costs vary with the quantity of output a firm produces. I thought this chapter was extremely informative and full of terminology that are well summarized in Table 3. 

Chapter 11

Chapter 11 observes the problems that appear with goods that don't have a market price and shows their effects on the market. Two characteristics of goods are excludability and rival in consumption. Excludability refers to whether one can be prevented from using a good. Rival in consumption refers to whether someone's use of good diminishes another person's ability to use it. Goods with these characteristics are split into four categories: private goods, public goods, common resources, and natural monopolies. Private goods are both excludable and rival in consumption. Most goods tend to be private goods. Public goods are neither excludable nor rival in consumption. Common resources are rival in consumption but not excludable. Natural monopolies are excludable but not rival in consumption. A free rider is someone who benefits from a good without paying for it. Since public goods are not excludable, the free-rider problem stops the private market from producing them. Cost-benefit analysts have the tough job of finding the cost and benefits of a good to society and their conclusions tend to just be approximates. Common resources arise the problem of Tragedy of Commons, which is a story explaining why common resources get used more than is desirable. The lesson of the Tragedy of Commons is that when one person uses a common resource, it reduces other people's pleasure of it. This illustrates a negative externality that the government can solve through taxes/regulation or by converting the common resource to a private good. I thought this chapter was well-explained through the multiple examples of common resources and public goods.

Chapter 10

Chapter 10 talks about externalities and how they create inefficiencies in the market. When there's a negative externality, the socially optimal quantity in a market is less than the equilibrium quantity. When there's a positive externality, the socially optimal quantity in a market is greater than the equilibrium quantity. The Coase theorem states that people can solve the problems of externalities on their own. People can bargain until they reach an efficient solution that benefits everyone. When this private bargaining doesn't work, the government intervenes. The government can respond to externalities by command-and-control policies or market-based policies. Command-and-control policies usually mean the government makes laws banning or requiring certain actions to remedy an externality. Market-based policies the government can internalize the externality by applying taxes to goods that cause negative externalities or by subsidizing goods that have positive externalities. The corrective taxes on negative externalities raise revenue for the government and also enhance economic activity. Another market-based policy is tradable pollution permits. The markets that trade these permits are guided by the invisible hand to ensure efficiency. From this, the pollution permits will be given to firms that value it most highly, according to their willingness to pay. A firm's willingness to pay is based on its cost of reducing pollution. The more it costs for a firm to cut back on pollution, the more it would be willing to pay for a permit. I thought this chapter was interesting because it expanded my knowledge of externalities and their effects on the market.

Chapter 8

Chapter 8 talks of how our study of taxes in Chapter 6 can affect the economic well being of the people in the market. When a tax is put in place, the price paid by buyers rises and the price received by sellers falls. The burden is shared by both the buyers and sellers, no matter how a tax is levied. Total tax revenue is measured by multiplying the size of the tax (T) by the quantity of the good sold (Q). A fall in total surplus is a consequence of when a tax distorts a market outcome and shrinks the market, which is called deadweight loss. The losses of sellers and buyers from a tax exceeds the revenue raised by the government. Taxes distort people's incentives, so markets use their resources inefficiently. Taxes cause deadweight losses because they block buyers and sellers from realizing some benefits and gains from trade. The greater the elasticities of supply and demand, the greater deadweight loss of a tax. As the size of a tax increases, its deadweight loss gets larger fast. Oppositely, tax revenue initially rises with the size of the tax; but as the tax gets larger, the market shrinks so the tax revenue starts to fall. To determine how much revenue the government receives of losses from implementing a new tax, one needs to observe the tax rates and how it affects people's behavior. I thought the chapter was intriguing because it took concepts from chapter 6 to explain the new topics in this chapter. I thought the graphs examining tax distortions and elasticities was extremely helpful in visualizing these topics.

Chapter 7

Chapter 7 talks about welfare economics, which is the study of how the allocation of resources affects economic well being. Consumer surplus is the amount a buyer is willing to pay for an item minus the amount they actually paid for that item. This relates to the demand curve. It can be measured on a graph by the area under the demand curve and above the price. As the price of an item falls, the consumer surplus increases because buyers are paying less for the product than before and because new buyers enter the market. Producer surplus relates to the supply curve. It is the amount a seller is paid for an item minus the seller's cost of providing that item. It can be measured on the graph as the area above the supply curve and below the price. As price rises, producer surplus increases because sellers already on the market will sell more of the product and because new sellers will enter the market. Producer surplus measures the economic well being of producers. Consumer surplus measures the economic well being of consumers. Total surplus is the value to buyers minus the cost to sellers. It is maximized at the market equilibrium. By saying markets are efficient, it is assumed that they are perfectly competitive markets and that there are no externalities. I thought this chapter was pretty interesting. I thought the case study on the potential market in organs was intriguing because it was a unique scenario that made the concepts in this chapter easy to understand in a relatable context.

Chapter 6

Chapter 6 talks about how the government controls price and taxes through their policies. These can sometimes have unintended outcomes. A price ceiling is the maximum, by law, on the price of a good. A price floor is the minimum, by law, on the price of a good. A binding price ceiling causes a shortage and the sellers must disperse small amounts of the good to a large number of buyers. A binding price floor causes a surplus. Taxes discourage market activity in that when a good is taxed, the quantity sold is smaller in the new equilibrium. Buyers and sellers both bear the burden of taxes. However, the tax burden is heavier on the side that is less elastic. When a good is taxed, the side with fewer alternative choices has to bear the burden of the tax. An unintended outcome is that the distribution of tax burden is not equal, fifty-fifty, like the policy makers initially wanted. This chapter showed how the laws of supply and demand along with the government laws interacted with each other. Their effects are still greatly debated among policymakers today. I thought this chapter was pretty understandable but I still have a few questions. I would like more of an explanation of the difference between how taxes on sellers affect market outcomes versus how taxes on buyers affect market outcomes. Other than that, I feel this chapter had useful graphs and examples to explain the topics, like how the minimum wage affects teenage labor.

Article Review 9/26

Ben Hunt's article describes how crisis actors are people hired from the government to go on TV and pretend to be victims in a staged event, such as a fake terrorist attack, to influence other people to support government action. Hunt warns readers that such lies inevitably influence our opinions. Since humans have self-awareness, we can resist these lies using our own knowledge. We do not have to immediately believe in the propaganda delivered by governments. My favorite quote/passage that describes Hunt's theory best is the Hermann Goring interview by Gustave Gilbert (1947) describing "poor slobs in the farm". This passage states that people are so willing to go fight for their country because the country makes the people feel endangered by the enemy and sparks a sense of patriotism in them. This clearly showed me how propaganda by the government controlled its people and influenced their opinions. Without using self-awareness, people could be controlled by the government and its lies. The crisis actors are the people that don't use their self-awareness and let the government control them and their decisions. They act AS their leader's words are the absolute truth, meanwhile people usually act AS IF their leader's words are true. We must prevent ourselves from going from AS IF to AS, from not using our self-awareness. I thought this article was interesting to read. I thought it was cleaver to use quoted evidence, from places like movies, to support the views stated in this article. That made the article easier to understand. 

Chapter 5

Chapter 5 discusses how buyers and sellers react to changes in economic variables, which is the concept of elasticity. The price elasticity of demand is calculated by the percent change in quantity demanded divided by the percent change in price. If the elasticity is less than one, the demand is known as inelastic. If the elasticity is greater than one, the demand is known as elastic. The determinants of price elasticity of demand include the availability of close substitutes, necessities vs. luxuries, time horizon, and markets (narrowly vs. broadly defined).  The cross-price elasticity of demand measures how the quantity demanded of one item reacts to the price of another item. Total revenue is the amount paid for a good and equals the quantity sold multiplied by the price. In inelastic demand curves, total revenue rises as the price rises, which shows a positive relationship. In elastic demand curves, total revenues falls as the price rises, which shows a negative relationship. The price elasticity of supply is calculated by the percent change in quantity supplied divided by the percent change in price. The equations for price elasticity of demand and price elasticity of supply are extremely similar. The determinants of the price elasticity of supply include the flexibility of sellers and the time horizon. When the elasticity is equal to zero, the supply is perfectly inelastic and is shown on the graph as a vertical line. When the elasticity is infinite, the supply is perfectly elastic and is a horizontal line. 

Chapter 4

The relationship between supply and demand is the basis of Chapter 4. In a competitive market, there are so many buyers and sellers that each of them has no impact on the market price. The law of demand shows that as prices of a good falls, the quantity of a good rises. Basically, if the prices for apples falls, people will buy and demand more apples. This is seen as a negative relation, and the demand curve is shown in a downward curve. In contrast, the law of supply states that as the prices of a good rises, the quantity of a good rises. Therefore, when the price of apples rise, then the amount of apples produced rises. This is seen as a positive relation, and the supply curve shifts upward. The intersection of the supply and demand curves is known as equilibrium, which means that there is a balance in the price and quantity of a product. The area above equilibrium on the graph means there is a surplus in items made than are demanded. The area below equilibrium on the graph means there is a shortage, which means that items desired are greater than the number available. I felt this chapter was understandable due to relatable examples that helped explain these concepts. I also felt the labeled graphs were helpful explaining the supply and demand curve relationships. I think the hardest part was learning about the shifts in the supply/demand curves and how the graphs then changed.