Chapter 18: The Markets for the Factors of Production

Chapter 18 is all about the factors of production, or mainly, labor and capital. There are 6 key terms to know to understand the section, and those are factors of production, the production function, the marginal product of labor, the diminishing marginal product, the value of the marginal product, and capital.

Factors of production are inputs used to produce goods and services. Examples of factors of production are land, labor, and capital, which includes equipment and structures used to produce goods and services, such as factories. The production function refers to the relationship between the quantity of inputs and quantity of outputs (keeping in mind that labor and land also goes into the production function). The marginal product of labor is the change in output per one unit of labor. For example, the marginal product of labor would be 10 units if the output increased by 10 by adding a worker. The diminishing marginal product relates to the marginal product of labor. It states that marginal product declines as input increases. The value of the marginal product is the marginal product of an input multiplied by the price of the output. Another similar term to ones mentioned above is the marginal revenue product, which references that the firm gets increased revenue from hiring an addition unit of a factor of production. A theory developing around the factors of production is the neoclassical theory of distribution, which say that the amount paid to each factor of production depends on the supply and demand, which is based off of the firm’s marginal productivity.

Chapter 17: Oligopolies

Main terms to know concerning oligopolies are oligopoly, game theory, collusion,cartel, Nash equilibrium, prisoners’ dilemma, and dominant strategy. Oligopolies are markets where only a few sellers produce a majority of the goods in the market and they offer similar or identical products. Game theory is the study of how people behave in strategic situation, where each firms must act strategically on both how much they produce and how much other firms produce. Collusions are agreements between firms in a market about quantity or price, leading up to a cartel, which is a group of firms acting in unison. The Nash Equilibrium is a situation where economic actors interacting with one another each choose their best strategy given the other strategies the other people have chose. This occurs when none of the actors have any incentive to make a different decision. The prisoners’ dilemma explains the difficulty of maintaining cooperation even when it would be mutually beneficial. It is applicable in multiple situations, including arms races, common-resource competitions, and oligopolies. Dominant strategy is a strategy that is best for a player in a game regardless of other strategies.

Oligopolies maximize their total profits by either creating collusions and acting like a monopolist (leading to a downward sloping demand curve). But, if oligopolies make individual decisions about production, the quantity increases and price decreases. When more firms increase, the quantity and price would become closer to levels that would stay even when there is competition.

Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. These laws can be controversial, since behavior that seems to reduce competition can have underlying reasons for business.

Chapter 16: Monopolistic Competition

Chapter 16 talks about monopolistic competition. Graphically, there is a downward sloping demand curve, and produces quantity where MR=MC, using the demand curve to find price. In the short run, monopolistic competition is similar to a monopoly. However, unlike a monopoly, monopolistic competitive markets have three main characteristics: many firms, different products, and free entry or exit. Free entry occurs when firms are making profits, giving other firms an incentive to join the market. Conversely, free exit occurs when firms are producing at a loss, making firms have less of an incentive to producing the good.

Equilibriums in a monopolistically competitive market differs from that in perfectly competitive market in two ways: each firm in a monopolistically competitive market has excess turkey, and the other is that each firm charges a price above marginal cost. Each firm in a monopolistically competitive market operates on the downward sloping portion of the average total cost curve.

Monopolistic competition also does not have all of the qualities associated with a perfectly competitive market. Since there is a section between the price over marginal cost that is upped, there is a deadweight loss in monopolistically competitive markets. Also unlike perfectly competitive markets, the number of firms and producers can be too large or too small. Policymakers cannot always correct these differences, but they are able to correct some parts of it.

The differences in products also leads to the use of advertising and brand names. Critics of advertising say that firms manipulate consumers’’ tastes and reduce competition. This is also a psychological phenomenon, when people would decide what they want through advertising (especially through physical aesthetic features and the socially accepted norm of what the good should look like). However, on the other hand, people who defend advertising and brand names argue that the firm’s purpose of using them is to inform consumers and compete more vigorously on price and product quality.

Chapter 15: Monopolies

Chapter 15 focuses on monopolies. A monopoly occurs when there is a single firm that supplies a product without close substitutes. Monopolies occur because other firms are unable to join the market, either through monopoly resources (key resource to production owned by a single firm), government regulation (patents or copyrights), or the production process (cost). Monopoly resources are an example of something that can cause a monopoly, but due to the nature of the market (large number of goods with similar substitutes), monopoly resources appear less common.Government can create monopolies as well, either through patents or copyright laws. These two examples offer a way for firms to own a monopoly of a specific good. Even though monopolies are generally portrayed in a negative light, patents and copyright laws provide an incentive for firms and people to create new and better innovations. A natural monopoly arises when a single firm can provide a good to a market with a smaller cost than two or more firms. It rises when there are economies of scale over a period of time.

Profit maximization is determined by the intersection of marginal revenue and cost. Marginal revenue is always less than the demand curve (average revenue). The demand curve determines what the price is. From the intersection, draw a line up to the price curve, and then take the area of the spot on the price curve to the ATC.

The socially efficient quantity of production in the case of a monopoly occurs where the demand curve and marginal-cost intersect. Below the quantity causes the value to consumers to rise over the cost of production, so increasing outputs causes total surplus to increase. On the other hand, a unit above the quantity would raise total surplus through decreasing output. However, monopolistic firms produce less than the socially efficient quantity of output.

Price discrimination is when businesses sell the same good at different prices to different customers. When this is considered perfect, the monopolist knows exactly the willingness to pay of each customer, charging them for that price.

Chapter 14: Firms in Competitive Markets

Chapter 14 starts off with the definition of competitive markets, where there are so many buyers and sellers trading an identical product that everyone is a price taker. We are introduced to average revenue and marginal revenue, which end up being the price of the good in a competitive market. A relationship between marginal revenue and marginal cost come into play here, where is revenue is greater than cost, production should be increased. At the profit maximizing level of output, revenue and cost are exactly equal. Since the firm’s marginal cost curve determines the quantity supplied, it ends up looking like the supply curve.

There are two ways that a firm could leave the market: a short-run shutdown (decision to abstain from activity due to current economic conditions) and exit (a long term decision to leave the market). Since fixed costs cannot be avoided in the short run, firms that shut down would have to pay off the fixed costs. Although, since fixed costs can be changed in the long run, firms can decide to not pay both variable and fixed costs. The fixed costs that cannot be avoided are referred to as sunk costs (in the short run) and this happens when the revenue from a firm’s outputs is less than the cost.The short-run supply curve is the part of the marginal cost curve that lies above average variable cost.

In the long run, firms would decide to leave the market depending on whether or not the revenue from its outputs overweigh the costs. The firm’s long-run supply curve is the portion of the marginal cost curve that lies above ATC. Firms would attempt to maximize profit and minimize losses, which occurs by producing the quantity where price is equal to marginal cost.

In the short run, firms have a nearly identical curve to the supply curve. However, this case is different in the long run. In the long run, firms end up making zero economic profit due to entry and exit. Entry would drive up production and lower price, whereas exit does the opposite. Although they make zero economic profit, that takes into account implicit costs too, so producers actually end up getting a profit. Marginal firms come into play here, where they are the firms that would leave the market if costs increased or prices decreases. Also, since firms can leave and join the market more easily in the long run, the long run supply curve is more elastic than the short run supply curve.

Chapter 13: The Costs of Production

Chapter 11 talks about the costs of production and the profit gained from it. Total revenue is decided from the total money a firm takes in, and when the total cost (cost of inputs of production) is subtracted from it, you get the profit. There are two kinds of profit however, depending on who is doing the analyzing. An economic profit is the total revenue minus total cost (implicit and explicit) while the accounting profit only takes into account the explicit costs.

Production costs can be determined through production function (the main idea surrounding it) which is the relationship between quantity of inputs used to make a good and the output from the inputs. There are two kinds of marginal products; regular and diminishing. A marginal product is the increase in output that comes from added input, and diminishing marginal products are the opposite.

Cost are measured in different ways as well. There are fixed costs which do not change with the amount of quantity produced (rent). On the other hand, there are variable costs that change with output (inputs such as sugar or bananas). There are three equations in relation with the two ideas mentioned above. The average total cost is the total cost divided by output, average fixed cost is fixed cost divided by output, and average variable cost is the variable cost divided by the output. These help firms determine how much of each good to buy to manufacture the goods they are producing. Whenever average total cost is greater than the marginal cost, the average total cost is falling, and the marginal cost curve crosses the average total cost curve at its minimum. Costs end up being fixed in the short run but become more variable in the long run, causing the firm to change its production. Therefore, since the cost may increase in the long run, the average total cost could decrease in the long run.

Chapter 11: Public Goods and Common Resources

Chapter 11 focuses on public goods, private goods, common goods, and natural monopolies. What kind of good something is classified as is determined by the excludability and rivalry of consumption. Excludability depends on whether or not a person can be prevented from using a good, and the rivalry of consumption depends on whether or not a person’s use of one good decreases another person’s use of the same good. Private goods are both excludable and have a rival in consumption, common goods have only a rival in consumption, natural monopolies only have excludability, and public goods have neither.

A primary concern with public goods is the idea of free-riders, people who take advantage of a good but don’t pay for it. Therefore, in an effort to prevent the free-rider problem, governments subsidize private provider (changing a private good into a public good). Governments usually end up providing a public good if the social benefit is greater than the cost. Some of the most important examples of public goods are national defense, basic research, lighthouses, and programs to reduce poverty (such as food stamps). However, some public goods have to follow a cost benefit analysis, which is a study for comparing the costs and benefits to society of providing a public good. This idea is applied to the value of a life, when people determine the own value of their life intrinsically.

Similar to free-riders, common resources have their own problem which is the Tragedy of the Commons. The problem illustrates the idea of the overuse of common resources, using sheep and shepherds as an example. Common resources to know and remember are clean air and water, congested toll roads, and food resources. Property rights are important in how they could causes a market failure because resources don’t have an owner associated with it. Examples of property rights are cows being raised as a private good instead of hunted and pollution permits.

Chapter 10: Externalities

Chapter 10 is about externalities and the efforts at regulating them.

An externality is an effect of a person’s actions on a bystander. These can be both good and bad, or beneficial and negative. The idea of a social cost accompanies externalities, which is the private cost of producing a good and the cost of a bystander. A negative externality would cause the supply curve to shift up, making the optimal quantity less than the equilibrium quantity. However, for positive externalities, the demand curve is shifted up because the optimal quantity is greater than the equilibrium quantity. The externalities can be taken into account when the externality is internalized, making it so that people take into account the external effects of their actions. Governments would internalize positive externalities by imposing subsidies, but taxes on negative externalities.

Technology spillover is a positive externality that refers to the impacts of a firm's research on the access of another firm’s access to technology. The government would attempt to internalize the externality by subsidizing the production of robots, leading to the supply curve shifting down and the equilibrium quantity going up. The government’s use of subsidies to promote technology enhancing industries is called industrial policy, but is in debate between economists about the precision of industrial policy. But, firms themselves would deal with rt technology spillovers through patent protection, giving them exclusive use of their inventions, and gives them property right. So, if other firms would want to use the new product, they would have to go to the original firm for permission, which gives an= incentive to engage in research to advance technology.

The government could also control an externality by prohibiting the behavior that leads to it altogether. The government would need to set a good ground basis for the rules, and so they need specific details of each industry. However, the details are hard to obtain.

The government’s use of taxes to deal with negative externalities are called corrective, or Pigouvian taxes. An ideal tax would equal to the cost from an activity with negative externalities and ideal subsidies would equal the benefit with positive externalities. Corrective taxes places a price on an externality (such as pollution), and it moves pollution to only the firms that spend the most to reduce it. The supply curve would be perfectly elastic because firms could produce as much as they want, as long as they pay the tax.

Governments could also issue pollution permits, which imposes a cost and a set amount of pollution that firm could produce. In this case, the supply curve would remain perfectly inelastic because the quantity of pollution is fixed based off the permits. Pollution permits are seen as a more cost effective and efficient way of keeping the environment clean. With the use of government intervention to reduce the negative externality of pollution, it would reduce the cost of environment protection and increase the public's demand for a clean environment.

An idea proposed by Coase, the Coase Theorem suggests that if private parties can bargain without cost over allocation of resources, they can solve the problem of externalities on their own. The initial distribution of rights does not matter for the ability to reach the efficient outcome. No matter how the rights are initially distributed, it only determines the distribution of economic well being, and both parties could reach max efficiency.

Chapter 8: Application: The Costs of Taxation

Chapter 8 continues on from chapter 6’s brief introduction to taxes. It amplifies the effects of taxes on the economy and introduces a new idea concerning taxes called deadweight losses. Deadweight loss is defined as the fall in total surplus when a tax changes the market. This occurs when taxes reduce the amount of marginal buyers and sellers, so the size of the market decreases (as discussed earlier in Chapter 6). Deadweight loss is determined by the elasticity of the supply or demand curve. Deadweight loss increases as a curve goes closer to elasticity. For example, if the demand curve becomes more and more elastic, the deadweight loss increases. The same applies to the supply curve. As the supply curve becomes more and more elastic, the deadweight loss increases.

Furthermore, deadweight increases with the size of the tax. A small tax would result in a relatively small deadweight loss but also a small tax revenue. A medium tax would result in a slightly larger deadweight loss and tax revenue. The largest tax would result in the most deadweight loss but also the most tax revenue. This occurs because as the tax increases, the area used to calculate the tax revenue increases, but also as the tax increases, marginal buyers and sellers leave the market which results in a higher deadweight loss.

Finally, another topic concerning taxation is the Laffer Curve. The Laffer curve states that by decreasing tax costs, the total tax revenue increases. This idea was implemented by Ronald Reagan when he ran for president. There is no way to determine whether or not the theory was true because history cannot be altered to make it testable. However, it is an idea that is prominent and known by economists today.

Chapter 7: Consumers, Producers, and the Efficiency of Markets

Chapter Seven is titled “Consumers, Producers, and the Efficiency of the Market”. The chapter primarily focuses around the idea of allocation of goods and resources as well as including market efficiency. The three main ideas discussed in the chapter are producer surpluses, consumer surpluses, and market efficiency.

Producer and consumer surpluses are very similar concepts: both include a difference of a preferred price (stemming from a personal perspective) and the actual price. A consumer surplus is the difference between an amount a buyer is willing to pay and the amount they actually pay for it. A consumer surplus is raised by lowering prices because of the larger difference between the preferred price for the good and the actual price paid for the good. Consumer surplus could be measured through the sum of many consumers’ surpluses if there is more than one person involved in the case specified. Although consumer surplus itself does not reflect economic well-being of a consumer, it is useful for making judgements of the desirability of market outcomes.

Producer surplus is a concept similar to consumer surplus but it applies to the supplier of a good. For the producer surplus, people take the difference between the pay for the job versus the cost to finish the job. However, unlike consumer surplus, a higher price increases consumer surplus due to the fact that it increases the price for a good or service for the same cost of producing said service or good. But, on the other hand, since both producer and consumer surplus are so alike, economists usually use them together (such as to calculate market efficiency).

Market efficiency occurs when the allocation of resources maximizes total surplus (calculated by subtracting the value to buyers and the cost to sellers). This occurs between the equilibrium of supply and demand, but could not reach peak efficiency if there are externalities or market power, making the market more prone to market failure.

A rather unorthodox example of market efficiency is the debate over whether or not there should be a market for organs. Since organs cannot be sold for cash (the federal government imposes a price ceiling of $0), there is always going to be a shortage for organs. People would argue that if there was a market for organs, there would not be a shortage of organs and less people would die from failure to find a suitable organ donor (even though it would benefit the highest bidder the most). The idea of an organ market is controversial, but it could be argued that a market for organs would be helpful for lessening a shortage for people who soon cannot live due to failure of organs.

Chapter 6: Supply, Demand, and Government Policies

Chapter six is titled "Supply, Demand, and Government Policies". The three main methods used by the government discussed in the chapter are price ceilings, price floors, and taxes. A price ceiling is a maximum price that a good can reach, whereas the price floor is the minimum price for a good to be sold. When the price is below the price ceiling, the price ceiling is not binding because there would not be a shortage (in which case the ceiling would be called a binding constraint on the market). As previously stated in chapter five, OPEC could not keep their oil prices high. Through chapter six, we are told that this is due to the fact that a price ceiling that was previously not binding became binding.

Somewhat like a price ceiling, price floors are a bit like the opposite. Price floors become binding when there is a surplus, unlike price ceilings, which become binding when there is a shortage. This relates back to chapter one, when it is stated that one of the principles are that government interference and SOMETIMES be good for the market. Chapter six delves into how the government’s interference could be detrimental to the market by causing either a surplus or shortage.

The final topic discussed in chapter six is tax. Tax impacts the market significantly not only because they are always imposed by the government to increase revenue, but because they have a stronger effect on the market. Taxes would reduce the equilibrium quantity of a good due to firms not wanting to make too many goods to avoid paying too much tax.

An idea within tax is incidence of tax and its relation to tax burdens. The incidence of a tax is the division of a tax burden between buyers and sellers, and it depends on the price elasticities of both supply and demand. Similarly to tax incidence is tax burden, which basically is how buyers would pay less for a good and sellers would receive less revenue when a tax is imposed because some of the money goes to the government.

Article Review: http://www.salientpartners.com/epsilon-theory/crisis-actors-reichstag-fire/

The thing about the article is that it is all about a conspiracy theory, in particular, crisis actors. The theory revolves around the fact that government agencies purposely hire people to hyperbolize the evils that are being done to the U.S. For example, the theory would go with the idea that ISIS is not actually a terrorist organization, and that it did not really kill people. Conspiracists would say that ISIS was created by the government.

Furthermore, the author says that he is trying to prevent us from becoming patsies like the other people influenced by the governments, but there is one huge flaw in that logic. First, we have to be able to believe in the fact that the government are hiring people to make others feel more patriotic. Only people who believe in the conspiracy theory and still believe in everything the government says are the only patsies. The author is trying to prevent us from becoming weak and succumbing to the government, but in doing so, he is calling the reader as weak (since most people who would read this type of article would believe in the conspiracy themselves).

Although the author does have some flaws in his logic, there are some interesting points that he does make. He takes examples from films and such, and inserts them into his article to fortify his argument. Although he does speak of the theory, he also connects it to global and national crises. I find this interesting because he is saying that the government’s use of crisis actors could bring exactly what the government does not want to occur. I find that very interesting, in how what we do can turn around and bite us when we are not looking, and how their little actions can cause a whole mess.

Chapter 5: Elasticity and its Application

Chapter 5 is all about elasticity, which is a measure of how demand or supply responds to a determinant. First off is the price elasticity of demand, which measures how much the quantity demanded changes in response to a price. This is determined through substitutes, luxuries/necessities, market, and time. If a good has no close substitutes, it would be closer to inelastic, whereas if two goods are closely related, prices could change dramatically. Luxuries and necessities depends on a person’s point of view on what either is, but the general idea is that necessities are more inelastic than compared to luxuries. The market changes demand based off how we define it, so if we categorize a good into a more broad category, it would be less inelastic and more elastic for a specific category. Meanwhile, there is the income elasticity of demand measuring how demand changes with consumer income and the cross price elasticity of demand which measures how much the demand of one good changes the price of another. Finally, time is a determinant based off the long or short run. We can compute the price elasticity of demand by using an equation of the percentage change in demand divided by the percentage change in price. However, given a graph, we could use another equation if we are given two points on the graph. The equation in this case would be ((x2-x1)/((x2+x1)/2))/((y2-y1)/((y2+y1)/2)). Finally, the last equation we could use to help us define elasticity would be total revenue = price*quantity, and the resulting number helps illustrate some rules concerning the elasticity of a product or good. Besides demand, elasticity also applies to supply. Similar to elasticity of demand, the elasticity of supply compares how the supply responds to a change in price. The elasticity of supply is determined by the flexibility of sellers to change how much they produce and time periods. Time is a major determinant for both the elasticity of supply or demand. Elasticity of supply is measured through dividing the percentages of supply and price, given values. The supply curves change with the values that are calculated using the equation, and the values determine the kind of graph. Like demand, supply has 5 graphs. The shape and size of the graph is found through the equation, and using the information provided, we calculate the number and create the graph that way. This is a general summary of Chapter 5 in “Principles of Economics” by George Mankiw: Elasticity and its Application.

Chapter 4: Supply and Demand

     Chapter 4 focuses on the idea of supply and demand as well as how it affects the market economy. Without supply, there would not be a demand, and without demand, there would not be a supply. One cannot exist without the other, but they can and will change often. For example, generally, if the supply of a good increases, the price would usually decrease IF the consumption remains constant. To take it one step further, if the prices decrease, consumption may also increase, leading to a change in the supply and demand curves. But as they are changing, the supply and demand are also trying to reach a state of equilibrium in the market, which means that supply = demand. The equilibrium can be reached by either changing the price to either promote or lower consumption, or firms could either increase or decrease the supply in order to create the state of equilibrium.

     There are two major laws that influence market: the law of demand and the law of supply. The law of demand claims that when other factors are equal, the quantity demanded of a good falls as the price rises. For example, if a coffee company increases their prices during the summer as the weather remains constant, the demand for hot coffee would decrease. Meanwhile, the law of supply states that when all other factors are equal, the supply of a good rises when the prices rises. These two laws deal with the equilibrium in the market as well as the market economy, and are important in understanding the idea of supply and demand.