Chapter 22/Course Reflection

Chapter twenty-two/Course reflection

I can truthfully say that I did find this course useful.  I greatly appreciate gaining knowledge about how our economy/country operates and the basic concepts that can be utilized to analyze how individuals make choices.

The thing that I found most useful is also the thing that I have changed my thinking about.  This was chapter three, particularly international trade.  I enjoyed being able to read about the benefits of trade and specialization and realize that there are benefits as well as drawbacks.  I love that that I have learned some substantial concepts, and it’s exciting to know that I don’t have to be uninformed or have set beliefs and make swift judgments.  It can be easy to get caught up with what other people are getting wound up about (like sending manufacturing jobs overseas) and be blinded by others’ comments and what “seems” to be happening.  That is why I love learning about alternate ways of thinking.  It prepares me to make informed decisions (which is amazing because I am passionate about voting) as well as have valuable conversations.

Thank you so much for a great semester and wonderful studies!

-Ashley

Chapter 21 Reflection

Chapter twenty-one: The Theory of Consumer Choice.

The section of this chapter that I found most confusing was how interest rates affect household savings, specifically the part about the income effect inducing Sam to save less.  I think I understand the theory, but I don’t see that happening in real life.  I have never known anyone to say “the interest rate on my savings account just went up, now I don’t have to save as much.”  It is likely that the person would continue to put the same amount in savings, or even more because of the incentive of a higher rate. 

One of the core concepts of the theory of consumer choice is that society faces trade-offs between work and leisure.  Also consumers are limited by budget constraints and what they can actually afford.  An indifference curve shows the consumption bundles that will satisfy a consumer.  The optimum point (where the highest indifference curve meets the budget constraint) is the best combination for the consumer.  Changes in income and in prices can affect the consumer’s choices by shifting their indifference curve.  With an increase in income, the consumer can buy more, so the curve adjusts (shifts to the right) for the increase in options.  On the other hand, if the price of one of the items that constitutes the curve increases, the curve would shift to the left, showing a decrease in options that the consumer can afford.



Chapter 20 Reflection

Chapter twenty: Income Equality and Poverty

Chapter 20 Summary 

 

           This chapter centers on equality, in particularly the redistribution of income.  The chapter discusses the numbers and data associated with the problem, various political views and philosophies, and potential solutions. 

There is great disproportion of income between the “poorest” and “richest” people in the United States, with the top fifth earning over ten times as much as the bottom fifth.  The rate of poverty was presented and statistics showed that female households with no spouse present had the highest rates, followed by Blacks and Hispanics.  However, this data is not always complete because it only takes into account money income.  It doesn’t consider things like in-kind transfers such as food stamps, housing vouchers, and medical services.  The economic life cycle (the regular pattern of income variation over a person’s life), transitory income versus permanent income, and economic mobility (the movement between poverty and wealth) also present difficulties for gauging actual poverty rate.

Numerous solutions to poverty have been presented.  Minimum wage laws have been passed.  Welfare presents various forms of financial assistance.  In-kind transfers (which are mentioned above) are nonmonetary aids.  The negative income tax is a system that collects revenue from high-income households and redistributes to low-income households in the form of subsidies.

There are different political viewpoints when it comes to solutions to poverty, in particular the redistribution of income.  Utilitarians favor the distribution of income and believe that government should enforce policies that maximize total utility of everyone in society.  Liberals believe that government should act as an impartial observer.  Libertarians believe that the government should promote individual rights and are against the redistribution of income.

Chapter 19 Reflection

Chapter nineteen: Earnings and Discrimination

Margin note 1. Page 398.
"Doesn't seem to take every nonmonetary aspect of a job into consideration."
The theory of compensating differential is the difference in wages that arises to offset the nonmonetary characteristics of different jobs.  Although I can think of think of some industries/jobs where this doesn't seem to come into play.  My family owns among other things a chain of convenience stores in Texas.  Four of these stores have QSRs (quick service restaurants).  I have spent time learning the ins and outs of those stores, as well as training managers for them.  So far in my experience the fast-food environment has been the most grueling to work in.  It can be hard work.  However, it requires no education background.  People who have never finished high school can learn how to drop a basket of french fries.  So in this industry, pay seems to be based on amount of education - not the amount/difficulty of labor. 
On the other end of the spectrum, there are people in the entertainment business - I'll focus on the movie industry.  Whereas shooting a movie may be physically taxing for a few months, actors get paid a ridiculous amount of money.  Their job is not particularly dangerous (the ones who don't do their own stunts) and some have gone to theater shcoool - some haven't.  The people in this industry aren't saving lives or producing an essential need for humans, it is simply entertainment.  Yet it can be one of the richest industries in the United States. 

Margin note 2. Page 399.
"Human capital view: People with a higher education make more money."
Human capital is the accumulation of investments in people, such as education and on-the-job training.  The text states that those with a college degree earn almost twice as much those without a college degree.  Depending on the type of job you are looking for, education and experience can make all the difference.  I know at the job I am at now, I was called for interview because I had previous experience at a business in the same industry.  When hiring, employers look for the right fit for the job, and education, previous training, and/or experience can signal that.

Margin note 3. Page 402.
"Signaling theory of education: a degree is almost a facade of ability, and does not enhance productivity."
Under the signaling theory of education, workers are not more productive because they have higher learning, it just seems like they are.  Where I do think that there is a morsel of truth in that, I don't believe it to be entirely true.  I do think that real-life experience can do more than any college classroom, but there are things an individual can learn from obtaining a degree.  The most important of which is broadening your perspective.  Earning a degree can also show that you are committed to that field.

Chapter 18 Reflection

Chapter eighteen: The Markets for the Factors of Production

1. What is the concept of diminishing marginal product? Draw a basic graph showing a production function curve.  What happens to the curve as the quantity of input increases?

2. Name one reason that can cause the labor-demand curve to shift.  Describe what would happen to the curve in your example (which way it would shift).

3. Describe what would happen to equilibrium wage and labor supply in a country that has seen a recent influx of immigrants?  What would happen to the equilibrium wage and labor supply of the country the workers immigrated from?

Chapter 17 Reflection

Chapter seventeen: Oligopoly

One of the prominent concepts we've learned so far throughout this course is that competition is healthy for the economy.  The Sherman Antitrust Act of 1890 was passed to prevent price-fixing which can enable firms within an oligopoly market to form a cartel and act as a monopoly.
The market of wireless providers could definitely be considered an oligopoly.  An oligopoly is characterized by a few number of firms offering identical or similar products.  Right now there are four top wireless providers: Verizon, AT&T, Sprint Nextel, and T-Mobile who dominate a majority of the market.  Obviously these companies have not formed a cartel, primarily because it is against the law.  But another reason I think is just as significant is the fact that they are also competing with self-interest in mind.  Each have different offers and utilize various forms of bundling, while trying to offer the best deal while making the most profit.
If AT&T would have been allowed to merge with T-Mobile, the number of governing providers would have dropped down to three, pushing the industry ever closer to monopolostic status.  Personally, I like having options when choosing who to patronize when it comes to a wireless provider.  I hold in high regard the ability to have a choice; to weigh the pros and cons of a business especially when I'm going to sign a contract with them.
This being said I do support antitrust laws and goverment intervention in preventing monopolistic behavior in firms.  But I think it's a tough battle.  The driving force behind business is success, profit, and being number one in the industry in which you are competiting.  Big companies often do this by acquiring their competition, reassuring their leadership status in the market.  But "Big Business" does need to be kept in check to assure that consumers have choices and aren't forced to pay outrageous prices.
Nothing about chapter seventeen was very unclear, but I found the chapter interesting - in particular game theory and the prisoners' dilemma.  With the visual of the decision box, it is interesting to see how two competitors choices affect both them and their competition.  If one acts out of self-interest and the other does not, then the selfish firm comes out on top.  If they both act out of self-interest, they are both at a mediocre standpoint, but if they both cooperate the result is most profitable for both. 

That's all for now....
Ciao!

Chapter 16 Reflection

Chapter sixteen: Monopolistic Competition

Monopolistic competition is when there are many firms in the market that sell similar but not identical products.  Some attributes of monopolistic competition are: many sellers, product differentiation, and free entry and exit into and out of the market.
An oligopoly is a market structure where there are few firms selling similar or identical products.  Both firms are a form of imperfect competition.
Advertising can be vital to both monopolistic competition and oligopoly firms.  These firms often use advertising to develop brand names and create consumer loyalty.  In our text it states that there is a bit of a fiery disagreement between economists over the role advertising plays and the intentions behind these firms when they utilize it. 
The critics state that firms use advertising to influence customers' preferences and inhibit competition.  The defenders say that advertising is used to inform customers and compete on price and product quality.
I have to say I think I'm stuck in the middle.  While I do see some firms using advertising for informational purposes, I also do think it is to thwart compeition by creating such a saturation for a product in a consumer's mind that it is the only one they think of and perceive it to be superior.  There really is no informational reason for firms to pay for product placement in movies and on TV shows, and some label it as subliminal messaging.  How many subtle messages have you seen-maybe without even realizing it?
ET loves Reeses Pieces.
Little Nicky thinks Popeye's Chicken is [expletive] awesome!
Rene Russo shotguns a Pepsi like there's no tomorrow.
When you come back from the future, Western Union may have a package for you.
And I am beginning to think I could jot on down to the local GM dealer and buy a car that transforms into a cool robot.
Got a zit? Put some Windex on it.
I don't know that any of these advertisements are informational (maybe the one for Popeye's Chicken, haha) but they sure are ingeniously building brand loyalty.
When advertising is successful, firms will attract consumers.  The consumer may turn into a loyal customer, and keep returning to buy the firm's products.  Therefore I would think that successful use of advertising can definitely give a firm an edge, and maybe even allow the firm to act as a monopoly in the short-run.

The most interesting thing to me in this chapter was the relation of the supply and demand curves of monopolistic competition.  I thought it was interesting how in the short-run, a monopolistically competitive firm will choose its quantity and price the same way a monopoly does - by producing at a point where MR=MC.  That being said, when a company is doing well, it is an incentive for others to enter the market.  When another firm enters the market it would decrease demand for present firms, shiftint the curve to the left.  In the long-run this could cause a firm's equilibrium to be at a point where P=ATC, and they would not have any profit.

That's all for now...
Ciao!

Chapter 15 Reflection

Chapter fifteen: Monopoly

The thing that I found most interesting and learned from this chapter is that when graphing curves for monopolies, there is no supply curve.  After reading this though, it makes perfect sense.  Because a monopoly is the sole provider of a good, it is a price-maker.  And there is no supply relation between price and the quanity of output produced.  A monopoly will maximize profit by producing the quanitity at which MR=MC, but then it will choose the price at which that quantity is demanded.  And whereas a competitive firm will choose a point at where P=MR, a monopolistic firm's price will exceed its marginal revenue.

In the text it states that goverment-created monopolies usually arise due to 1) political clout or 2) because the goverment believes it would be in the best interest of the public.  I am not sure that either of these would be a good reason to create a monopoly on trash removal.  I think the reason for goverment to create this monopoly would be to generate income.
We were able to choose between two private companies, and chose who we thought had the best prices, offerings (such as recycling pickup) and schedule.  I personally favor being able to choose.  I guess I'm just conservative like that. :)

That's all for now...
Ciao!

Chapter 14 Reflection

Chapter fourteen: Firms in Competitive Markets

The goal of a firm in a perfectly competitive market is to maximize profit.  If a firm is profit-maximizing, it will operate at a point where price equals marginal cost (P=MC).  This is because in a perfectly competitive market, firms are price-takers.  Therefore they really can't set their prices higher than the point where P=MC or they are likely to have no business.
At the point of profit-maximization, price also equals marginal revenue (P=MR). And marginal revenue equals marginal cost (MR=MC), hence the two are interchangeable in relation to price under these circumstances.  Because a firm in a perfectly competitive market tries to operate at the point where MR=MC, it is understandable that if MR is greater than MC, the firm can increase production and it will result in an increase in profit.
From what I have read, there seems to be no actual perfectly competitive firm.  I suppose what I think would come close is something like the corn industry.  This is because there are a large number of buyers and sellers, the goods being offered are identical, and I don't think there are any barriers to entry or exit of the market.
I guess it doesn't suprise me that there are no firms considered to be perfectly competitive.  It seems like it would be near impossible to operate under these conditions 100% of the time!

That's all for now...
Ciao!

Chaper 13 Reflections

Chapter thirteen: The Costs of Production

Marginal costs curves first start to fall before they rise. This is due to the fact that while at first an increase in marginal product may see a decrease in marginal cost, eventually a firm will experience diminishing marginal product which happens when marginal cost rises with each marginal product.
Simply put: when there's too many cooks in the kitchen it starts to be more expensive to bake an additional cake.
Depending on the size of the company, with the first few hires it may reduce marginal cost while increasing marginal product because a team may be more efficient than just one worker. Eventually the company will see diminishing marginal product for reasons such as the workspace getting increasingly crowded, having to hire more management to oversee the increasing amount of employees, etc.

Marginal cost is important when deciding to increase of decrease production because profit-maximizing firms strive to operate at a point where marginal revenue equals marginal cost. If marginal revenue is less than marginal cost, a firm can boost profit by increasing production - and vice versa.
There are many ways I could apply these cost concepts to my life. The first that comes to mind would be finding the point of benefit maximization between work and school. There are x amount of hours I need to work to be able to eat, pay bills, support my kids (dogs), etc. Over the past couple of semesters I have had to find the balance of classes to be able to utilitze my time as efficiently as possible while not overwhelming myself and being able to achieve the high standards I've set for myself in terms of grades and GPA. The first semester I only took two classes. I can now relate that to having marginal revenue greater than marginal cost. I realized that if I was diligent, I could squeeze another class in. Now if I were to take four classes, I think that would equate to marginal cost being higher than marginal revenue. My grades would likely suffer at the hand of just not having enough time to fulfill all of the homework assignments and study like I should. It seems that for now, I have found the point - at three classes - where my marginal "revenue" equals my marginal cost. I have found the current point where I can make enough to provide a living, earn the grades I want, and get done with my degree as quickly and efficiently as possible.

And that's all for now...
Ciao!

Firm Type

Firm Type: Natural Grocers

For this assignment I am choosing to analyze Natural Grocers by Vitamin Cottage which is (pretty self-explanatory) a natural grocery store. The market type that I perceive Natural Grocers as being in is the oligopoly market structure, but slowly progressing towards monopolistic competition. Average grocery stores would fall under monopolistic competition because there are many firms selling similar products – most even offering a small assortment of organic foods. As of mid-2012, organic food only accounted for about 4% of all foods sold. For this reason I believe that natural grocery stores (stores that sell as majority only natural or organic foods as opposed to large grocery chains that carry some natural/organic foods) still fall under the oligopoly market type because there are still 1) few sellers: in the Colorado area there are a) Whole Foods b) Sprouts and c) Natural Grocers - 2) and they are offering similar or identical products.

                Because the number of companies and their take of the natural foods market share are increasing, prices are gradually growing closer to marginal cost and behaving slightly like a competitive market.  That being said it has not quite grown to a competitive market just yet. I still believe Natural Grocers utilizes a dominant strategy. Natural Grocers is a smaller, not-so-flashy chain as compared to Whole Foods and therefore carry fewer brands at lower prices. Whole Foods is a larger corporation with more variety to whom customers usually come for the “experience” therefore they can afford to have higher prices. Even though Natural Grocers and Whole Foods are offering similar products, their pricing strategies are different, illustrating the dominant strategy employed by these companies. They also branch into non-pricing strategies in the form of value-added pricing. Natural Grocers and others in this market strive to provide excellent customer service and build customer loyalty. This strategy doesn't focus on price, rather on creating an allegience with the cosumer that keeps them coming back.

                This industry is definitely evolving. There seems to be a new wave of consumers who are health and eco-conscious.

 

I believe that modernized food will probably always be the leader in sales and market share because it’s more economically efficient to produce. But awareness will continue to rise about wholesome food and I believe it will give modernized food a run for its money. It’s already happing with big box retailers expanding their offerings to include organic foods and satisfy their customers. However there are a couple possible results. 1) Brand giants will buy out all organic food brands (this is already occurring) and there will be no more purely natural/organic grocers; organic food will solely be an option in Wal-Mart, City Market, etc. and it will phase in with the companies’ existing pricing strategy. 2) There will be significant demand for nourishing food, the industry will continue to grow and develop its own competitive market, shifting prices toward marginal cost.

Works Cited            

 Ferner, Brandy. "Is Whole Foods Really More Expensive? And Other Grocery Store Findings..." Mother Nurture. N.p., n.d. Web. 31 Mar. 2013. http://www.mothernurturedenver.com/2011/06/is-whole-foods-really-more-expensive-and-other-grocery-store-findings…/.

Runtung, Clairine B. "Value-Added Pricing." Marketing Examples. Marketing 301 Blog, 12 Feb. 2010. Web. 31 Mar. 2013. http://uwmktg301.blogspot.com/2010/02/value-added-pricing.html.

Strom, Stephanie. "Has 'Organic' Been Oversized?" The New York Times. The New York Times, 08 July 2012. Web. 31 Mar. 2013. http://www.nytimes.com/2012/07/08/business/organic-food-purists-worry-about-big-companies-influence.html?pagewanted=all.

"U.S. Grocery Shopper Trends 2012 Executive Summary." ICN Intelligence Clearing Network. Food Marketing Institute, n.d. Web. 31 Mar. 2013. http://www.icn-net.com/docs/12086_FMIN_Trends2012_v5.pdf.

 

 

Chapter 12 Reflections

Chapter twelve: The Design of the Tax System.

Which tax system do I prefer?
(Disclaimer to all who read: you will probably disagree!)
I fancy the proportional tax, or at the very most, a progressive tax with very slight increases in brackets (much smaller than they are now).
My reasoning: I believe that it's equitable. Okay, and maybe there's just a touch of rebellion in there - I don't think the government should be allowed to make anyone pay more than anyone else based on any circumstances!
I have a few reasons I think this is the appropriate system relating to the deficit and small businesses, but for this post I'm going to focus on equity.
Now when it comes to equity, the norm in economic conversation is usually the opposite with arguments that progressive tax is the essence of equity. And while I get where that argument comes from (everyone should be giving up an equal "slice of their pie"), I disagree. The same share should be taken from the rich and the poor. Why should our government take more in taxes from someone just because they make more money? They shouldn't. Just like they shouldn't take more in taxes from people who make less money, or have blonde hair, or own a hot tub. But seriously, where is the equity in that?
I think many of us Americans are too quick to throw around phrases like "They've got a ton of money, they can afford it" and "Increase taxes for the rich, they probably won't even notice while they're drinking that $80,000 bottle of wine" or "We're in a recession and our government has a budget deficit, the rich can afford to help."
And to that I say, where do any of us get off thinking we are owed anything by anyone else just because they are "rich"? But I've got a whole rant for that topic so I'll spare you...
So yes, I believe that equity is not discriminating, and not having a higher tax bracket for anyone - rich or poor.
J.R. McCullough, a Scottish economist stated: "The moment you abandon...the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit."

That's all for now...
Ciao!

Chapter 11 Reflections

Chapter eleven: Public Goods and Common Resources.

Federal prisons are an example of a public good/service. There are many costs associated with prisons; food, staff wages, electricity, water, etc. paid by taxpayers. According to a survey done by Vera Institute of Justice, in fiscal year 2010 the total cost of prisons to taxpayers was $39 billion. In Colorado alone, the total cost to taxpayers for 2010 was $606,208,000.
The benefits of prisons are most importantly safety, and justice. The justice component says if you break the law, you suffer the consequences. If you can't abide by the rules of society then you are not fit to be free in society. And there are several ways that prisons increase safety. People who have done wrong serve their time. In some cases that provides an incentive to not break the law a second time. If that's not the case, then usually they are right back behind bars.
There are other ways to provide corrections, and that is to have it privatized. Currently private prisons account for about 10%. If corrections were to be completely privatized the outcome would likely not be good. Businesses cut costs to maximize profit, and whereas normally that's good business sense, it wouldn't be in this case. Conditions and security would definitely suffer.

I don't know that I would say this chapter made me look at public goods differently, rather it made me realize how much I take for granted. Yes I pay taxes, but I feel that the plethora of benefits I get in return far outweighs the actual cost of taxes.
I am blessed!

That's all for now...
Ciao!

Works Cited:http://www.capps-mi.org/pdfdocs/the-price-of-prisons-updated.pdf

Chapter 10 Reflections

Chapter ten: Externalities.

One of my favorite (weird way of putting it) examples of a negative externality is unhealthy food. The production of unhealthy food yields numerous social costs; costs to health care, decreased productivity, and a vast array of health problems such as obesity, heart disease, high blood pressure, etc.
There are many ways that food is produced unsuitably. For example: beef. The average American beef farmer "produces" beef by feeding them a diet of corn and raising them in compact feedlots. Because of the cramped, unisanitary conditions they are kept in, if one cow has a disease - all the cows have a disease. Also if farmers would take their cows off the corn diet and grass-feed them for just 5 days before slaughter, they would shed 80% of the E. coli in their gut. But this would not be profitable for the farmer. And as a result of decreased production, beef prices would likely rise 5-10% which would cause dismay to the average consumer.
In today's society, what most consumers look for is inexpensive food. Food production has adapted by creating ways to produce more of fewer foods to reduce the apparent cost to consumers and increase availability of those foods.
I could dive into a rant about how almost everything in the average supermarket is unhealthy but I'll spare you. :)
I don't believe the problem can be fixed by applying the Coase theorem. The reasoning behind that belief?
It hasn't worked yet!
Farmers and food creators don't have any incentive not to produce foods in these ways (in fact they have incentive to do it - money!) and most of the general public is either uneducated about the food they are eating or driven by the lower prices offered. If applying the Coase theorem to this negative externality I would say it would - and has so far - failed.

 

That's all for now...

Ciao!

 

 

And an intersting paper on externalities in industrial food production from the Dartmouth Law Journal:http://www.dartmouthlawjournal.org/archives/9.3.6.pdf



Chapter 9 Reflections

Chapter nine: Application: International Trade.

I had a few opinions about international trade before I read this chapter. Most of them were confirmed, but there is one that I have possibly changed my mind on - or at least it got me thinking in ways other than just being flat-out set in my opinion. This was the "unfair-competition" argument.
Before, I was "that girl" using this argument to support things like tariffs on imports from other countries who - as the textbook put it - don't play by the same rules. In my "before" opinion, I thought that if for example, a country like China didn't have any type of labor requirement then the goods produced using those unfettered methods should be taxed with tariffs to keep the playing field "fair" (good gosh, I really dislike that term).

Now I'm not so sure I'm keen on that idea.

This may be silly, but I never thought about it in terms of comparitive advantage. Adam Smith said it best when he stated "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.. . . If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."
If China can make a digital clock cheaper, why wouldn't we want to import digital clocks and focus on specializing in something in which we have comparative advantage? This is starting to make sense. ;)

The most interesting part about this chapter to me was how it stated that the gains of the winners would exceed the losses in both exporting and importing. Also that when countries trade and are able to specialize, it opens up a whole new realm of possibilities. This enhanced flow of ideas like stated in the textbook which can spur growth and push our PPF outward.

That is all for now...
Ciao!

Chapter 8 Reflections

Chapter eight: Application: The Costs of Taxation.

"Arduous."
Let's face it, when it comes to taxes I bet you've never heard someone say "I love paying taxes!" or "I wish taxes were higher!" There is a need for taxes for taxes because otherwise people would probably not pay enough (or think that they needto pay at all) for goods and services that are in reality very much needed.
When it comes to deadweight loss, I think it can be a challenging job for politicians. Deadweight loss occurs when a market distortion (such as a tax) causes a fall in total surplus. When deciding tax policy, the optimal outcome would be minimal reduction in total surplus for the greatest increase in revenue from taxes possible.
Pardon the expression, but this can be a taxing task. With so many different taxes to take into consideration, on different goods/services, in different places, at different times, there seems to be a  plethora of outlets by which to increase or decrease taxes and try to find the "magical mix."
This is why I say that considering deadweight loss when it comes to tax policy can surely be arduous. If it wasn't, we wouldn't have politicians arguing about it all......the live-long......day.

That's all for now...
Ciao!

Chapter 7 Reflections

Chapter seven: Consumers, Producers, and the Efficiency of Markets.

Efficiency from the perspective of an economist would be described as: an allocation of resources that maximizes the sum of consumer and producer surplus; because when total surplus is maximized, market allocations are most efficient.

I can't say that any concepts in this chapter were necessarily difficult, thanks to our textbook it made the theories understandable. But I did learn something new, and that is about consumer, producer and total surplus.
Consumer surplus gauges the benefit buyers receive from participating in the market. In mathematical terms, it is the value to buyers less the amount paid by buyers. For example: it's a hot summer day and my husband and I are both craving ice cream. He is willing to pay $4 for a cup, and I am willing to pay $3/cup. The ice cream comes out to $2.50/cup. Our total consumer surplus is $2 - the value of the ice cream to us less what we actually paid.
Producer surplus evaluates the benefit sellers receive. Producer surplus in mathematical terms is the amount received by sellers less the cost to sellers. Using the same scenario as above, if the cost of to the seller of selling each cup of ice cream is only $1, the seller's surplus is $1.50.
By adding both the consumer and producer surpluses, we arrive at total surplus.
If the price of a product is lower than market price the consumer surplus increases, but at the expense of producer surplus (if all product were purchased). But surpluses or shortages in the marketplace will result in a reduction of the total surplus to consumers and producers. Thus, it is safe to say that total surplus is maximized when the market price is in equilibrium (achieving efficiency!).

And with the exceptions of market failures, I agree with most economists in the theory that a free market is most efficient and will produce the price and quantity of goods that maximizes the sum of total surplus.

This chapter has definitely got me thinking about what value I place on the things I buy. It would be interesting to take a month and track all purchases, recording the amount of surplus (or by which amount things were forgone because the price was too high) and see the total personal amount of surplus at the end of the month!

That's all for now...
Ciao!

Chapter 6 Reflections

Chapter six: Supply, Demand, and Government Policies.

The article about Venezuela facing food shortages relates to this chapter well. It verifies the economic theory that price ceilings can create shortages. When a price ceiling is set, prices aren't allowed to rise like they would in a free market. The demand is present, but prices are kept artificially low and it creates a shortage of goods.
Consumers also end up paying with their time. A restaurant worker, Nery Reyes, is quoted in the article saying "I'm wasting my day here standing in line to buy one chicken and some rice." With the time she stood in line, she probably could have made more than enough money working at the restaurant to pay the free-market price for those items.

We were also instructed to consider Hurrican Katrina and high prices speculators set for bottled water. If price controls would have been imposed, there would have been a shortage. The lucky few who would have been first in line would have been able to purchase water, but what about the rest? Dr. Edward Glaeser said, "In a free market system, goods go to the people who value them most; in a price-controlled system, goods go to whoever is lucky enough to get them." Suppliers raising prices when they think the consumers are willing to pay more isn't necessarily greedy. It curbs overconsumption by creating incentives and forcing people to determine what they really need.
 
"Price 'gougers' save lives" - Milton Friedman

Sources:
http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?_r=1

http://www.slate.com/articles/business/moneybox/2012/10/sandy_price_gouging_anti_gouging_laws_make_natural_disasters_worse.html

Chapter 5 Reflections

Chapter five: Elasticity and It's Application.

In this chapter I learned about elasticities. Something is said to be elastic if the quantity demanded responds significantly to a change in price. Adversely, it is said to be inelastic if the quantity demanded does not change substantially due to a change in price. 
Years ago I used to frequent a local grocery store in my hometown in Texas. One day while shopping for groceries for a girls' weekend at the river, a certain sale caught my eye. It was a combo sale. It was something like 2 lb. pre-marinated fajitas, 1 pkg tortillas, a jar of salsa, 1 pkg shredded cheese, a bag of tortilla chips, a can of refried beans and a liter of Pepsi - for $10! Now usually I like to marinate my own meat, but this was a package deal I couldn't pass up, especially since the fajita meat I usually bought was around $7-8/lb.
This is an example of using cross-price elasticities and it got me to purchase something I normally wouldn't have. While the salsa, cheese, soda and tortillas were name-brand, the fajitas, beans and chips were store-brand. I am assuming they strategically paired the name-brand products with their store-brand products to try and boost sales of their own products. And guess what, IT WORKED! The store-brand's fajitas were tender and had great seasonings and let's face it, I didn't have to work as hard preparing it. From that point on I bought those fajitas many times - even without the sale. So it is safe to say that the demand for the store-brand fajitas increased, at least by four women, and possibly many more.
All of the topics in this chapter seemed to make sense to me. It might take me a while to be able to efficiently use the graphs or equations, but it all made sense. Something I did find particularly interesting was how total revenue was impacted by price elasticity of demand. I never really thought about it before, but it makes complete sense that when then demand curve is inelastic the extra revenue from selling at a higher price is greater than the lost revenue from selling fewer units. As opposed to if the demand curve were elastic, the extra revenue from selling at a higher price would be less than the lost revenue from selling fewer units.

That's all for now...
Ciao!

Chapter 4 Reflections

Chapter four: The Market Forces of Supply and Demand.

For this reflection, we were asked "what role do speculators play in the market?" And "are they responsible for large price hikes?" (For example oil speculators driving up the price, and the price of gas increasing to almost $4/gallon.)

To be honest, I am not too knowledgable when it comes to oil, and probably less knowledgable when it comes to futures. But after doing a little research and reading various articles, I feel like I've gained at least a glimpse of understanding on the subject! I also see how it can relate to the principles in chapter four.
Basic econ tells us that equilibrium is where the market price is at a level that allows quantity supplied to equal quantity demanded. It also tells us that variables such as expectations (aha!) can shift the supply or demand curve. For example, if I expect that gas prices are rising tomorrow I am going to fill up my car today. This would cause an increase in demand, shifting the demand curve to the right and encouraging prices to rise.

When it comes to speculation in oil futures, while fundamental economics tells us that speculation does increase prices, I am not too sure they are entirely to blame. In an article presented to us by our professor, James Hamilton wrote: "But remember that for every buyer of a futures contract, there is a seller. The person who sold the initial contract to me also likely wants to buy out of the contract at some later date. I buy and he sells at the initial contract date, he buys and I sell at a later date. One of us leaves the market with a cash profit, the other with a cash loss, and neither of us ever obtains any physical oil." But amidst all the exchange of speculation, speculators do have some affect on prices. If they think that prices will be higher in the future, then more of them want to buy than sell, so the futures will rise until there are equal buyers and sellers. When this happens, those in physical possession of oil may hold it off the market. "By paying higher prices now, they assure that prices will be lower in the future. In effect, they hold supplies off the market today so that they will be available next week or next year when things become even more scarce." (Tucker, Wall Street Journal)

I'd like to close my thoughts on oil speculation with an excerpt from Mark Thoma's post in Economist's View: "It is immediately clear that speculation defined in this manner need not be morally reprehensible. In fact, speculation may make perfect economic sense and indeed is an important aspect of a functioning oil market. For example, it seems entirely reasonable for oil companies to stock up on crude oil in anticipation of a disruption of oil supplies because these stocks help oil companies smooth the production of refined products such as gasoline. The resulting oil price response provides incentives for additional exploration, curbs current consumption, and helps alleviate future shortages. Hence, it would be ill-advised for policymakers to prevent such oil price increases."

That's all for now...
Ciao!

Sources:
http://economistsview.typepad.com/economistsview/2012/04/speculation-in-oil-markets-what-have-we-learned.html

http://online.wsj.com/article/SB10001424052702303513404577356344113351000.html

Policy Assignment

Question: Should the federal government impose a price ceiling on essential items such as bottled water during an emergency such as Hurricane Sandy?

The attractiveness of price controls is understandable, especially to the general public. And when it comes to necessities during a national emergency/natural disaster/catastrophe, it invokes something within us that’s on a whole other level. What should be done? Should price control policies be put into place? After all, it would be unethical for suppliers’ prices to rise on goods that people need to survive!

            First of all let’s address the pros on setting a price ceiling on essential items during a disaster: potential lower prices (in actual dollars) …for the people that receive the goods and services before they are gone.

            Now that we’ve addressed the possible pro of a price ceiling, I’ll give you multiple reasons why it’s not successful. Initially, as any economist will tell you, price ceilings create shortages. Plain and simple. When prices are kept artificially low, demand will exceed supply causing a shortage. Historically, this has also created a rise of scarce items being sold on the black market. “Black markets are typically common when price ceilings are imposed, but the prices here are generally higher than what the price of the good would have been in a free market.” (Smith) Also, a price ceiling would hamper any incentives for the people providing the goods and services because let’s face it – they’ve probably got disaster-related problems of their own.  Third, what is the actual cost of, for example, a gallon of gas? Let’s assume the free-market price of gas after a disaster would be $12/gallon, but is controlled at $4/gallon. Let’s also assume that Sally’s time is worth $10/hour. If she waits in line one hour for a gallon of gas, she has “paid” more with the price ceiling in effect than if the market was dictating the prices. “The cruel irony is that any “benefit” for those we are trying to help is frittered away because people who aren’t allowed to pay for something with their money will pay for it with their time. Passing a law doesn’t change what someone is willing to pay, but it changes how they pay.” (Carden)

Finally, “price controls [also] create shortages because they eliminate the market’s way of telling people to conserve scarce resources.” (Carden) A natural price increase would push consumers to economize on their purchases. “Freely moving prices make sure resources are allocated to their highest-valued uses, and rising prices send people a very important signal: resources have gotten scarcer and need to be conserved. If houses are destroyed by a tornado, rising lumber prices will tell someone in an unaffected area to think twice about building a new deck because the lumber is probably more valuable rebuilding houses. Rising gas prices tell people to think twice about burning scarce gas for a Sunday drive in the country.” (Carden)

In my opinion, the costs of price controls exceed the benefits. When thinking about the surface issues of the question “should the government impose a price ceiling on necessities during emergencies” my heart wants to immediately say “yes.” But when taking into account the short and long-term consequences it would do more harm than good. In events of disasters, I feel that by inhibiting the price mechanism from functioning, we only make disasters worse than they already are.

Works Cited

Smith, John. “The Maximum Price: A Price Ceiling.” Objectivist Blogger. 8 April, 2011. Web. 31 Jan. 2013. http://objectivistblogger.com/2011/04/08/the-maximum-price-a-price-ceiling/

Carden, Art. “Price Gouging Laws Hurt Storm Victims.” Forbes.17 Jun. 2011.Web. 31 Jan. 2013. http://www.forbes.com/sites/artcarden/2011/06/17/price-gouging-laws-hurt-storm-victims

Carden, Art. “Price Controls Create Man-Made Disasters.” Mises Daily Index. Ludwig von Mises Institute. 25 Jun. 2008. Web. 31 Jan. 2013. http://mises.org/daily/3025

Chapter 3 Reflections

Chapter 3: Interdependence and the Gains from Trade

What surprised me most about the concepts in this chapter had to do with comparative advantage and trade. First off, a few brief definitions:
Absolute advantage: the ability to produce a good or service at a lower cost per unit than a competitor.
Comparative advantage: the ability to produce a good or service at a lower opportunity cost than a competitor.
 When I came to this sentence in our textbook: "The gains from specialization and trade are based not on absolute advantage but on comparative advantage" I have to say I was taken aback. In my mind I would automatically assume it would be based on some calculation of both, and I was confused as to how and why it would only be based on the one. Alas, after further reading... *ding* - light bulb!
Our textbook poses the question "Should Tom Brady mow his own lawn?" in which lies the resolution of my confusion. The example goes something like this:
Mr. Brady is capable of mowing his lawn in two hours, while the neighbor boy would do it in four. Mr. Brady has the absolute advantage because it takes him less time to mow the lawn. BUT, in that same two hours, Mr. Brady could instead film a commercial and earn $20,000; and the neighbor boy - in his four hours - could earn $40 working at Mickey D's. Tom Brady's opportunity cost of mowing the lawn: $20,000; neighbor boy's: $40. Accordingly, it's the neighbor kid that has the comparative advantage.
*DING!* Now it all makes sense. Of course Mr. Brady should hire the boy to mow the lawn.

Shifting gears...
International trade - it's a good thing!
Without international trade, a country would be restricted to goods/services produced within its borders, and miss out on the valuable revenue and growth that comes from global trade. International trade also stabilizes seasonal market fluctuations; and it allows for greater efficiency.

And that is all for now...
Ciao!
 

Chapter 2 Reflections

Chapter two: Thinking Like an Economist.

"Economic models are used to explain the way the world had worked in the past and predict how it will work in the future. A good model does both accurately." -Author Unknown

Economic models use a simplified version of reality to illustrate complex processes. Too much information while testing theories can be overwhelming - at least for me - so by cutting down the information to a few key components, it's easier to reach a conclusion. And by putting information into a model, it makes it possible to obtain consistent results.
For instance with the production possibilities frontier it's much easier to grasp the scope of possibilities when loking at two specific goods as opposed to trying to factor in several goods. The PPF model is a graph that shows a variety of combinations of output that the economy can possibly produce with the resources available at that time. This model makes it seem effortless to understand the concepts of efficiency, growth, opportunity costs and scarcity. It helps me to understand the economy by having an organized visual that lays out the different possibilities. By moving to a different point along the line, it illustrates opportunity cost - what was given up to produce x more units of something else. A point outside of the curve shows where production could be with growth, and inside the curve demonstrates inefficiency.
So with that I can boldly say, grasping economic concepts by use of the PPF = SUCCESS!  :)

This chapter also talked about positive and normative analysis in the world of economics.
A ban on smoking in public places will reduce the tobacco industry's annual revenue. - Positive statement.
The government should ban smoking in public places. - Normative statement.
Positive analysis refer to descriptive, factual statements whereas normative analysis refers to prescriptive, value-based statements.
There's a big difference. ;)

That's all for now...
Ciao!

Chapter 1 Reflections

Chapter one: The Ten Principles of Economics. This chapter was a brief introduction of the ten principles, so I can only imagine what is to come as we delve deeper into the world of micro.

Something in this chapter that made me think about an economic concept differently than my previous beliefs was the concept of a short-run trade-off between inflation and unemployment. Now, I admit I am no genius in economics. In fact before studying Principles of Macro I had very limited knowledge on the subject. But before even knowing the theories or terms, I have been a believer in "the invisible hand," so trying to see the positive side of government control has always been a bit challenging for me. However I do find it interesting to open up my perspective and entertain new ideas.
According to short-run trade-off between inflation and unemployement when inflation is high, unemployement is low and vice versa. The government/Federal reserve manipulates the money supply: if a lot of money is printed, government spending is increased, taxes lowered, etc. it stimulates the economy and reduces unemployement but leads to inflation in the long run. On the contrary, if the money supply is retracted, government spending cut, taxes raised, it would raise unemployement but reduce inflation in the long run.
Mathematically, this seems logical.
I guess when it comes to "controlling" our economy I just need a little more convincing. I suppose I'm still a believer of letting the marketplace self-regulate. Old fashioned idea to some, I know.

New questions I have after reading this chapter would all have to do with monetary policy, mostly because I don't know too much about it. I wonder just how often these policies are put into effect; monthly, daily, hourly? And also, are they really working?

"...but if daddy raised your allowance he'd be hurting the economy by stimulating inflation. You wouldn't want him to do that, would you?"

That is all for now...
Ciao!