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.