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