Mankiw's Principles of Microeconomics Chapter 6

In April there was a flurry of blog posts from economists on price controls and inflation in Venezuela. Read this article from the Times: http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?_r=1 .

How does this relate to the theories from the chapter? 

One of the ten principles of economics is that markets are a good way to organize economic activity. When the topic of price controls comes up, it is assumed by most economists that a competitive free market will utilize price as a means to ration. In the case of the Venezuelan government, while their intent was to make food affordable for the poor in a market where income disparities between the rich and poor were rather wide, price control actions actually caused suppliers to not be motivated by profit, which is counter intuitive to a capitalistic economy. 

In some cases, the imposed price controls caused suppliers to stop producing goods that had inelastic demand, goods that modern society views as necessities such as liquid milk. The situation was exacerbated when the Venezuelan government tried to correct the issue by increasing the supply of currency within the country, in effect increasing inflation at the rate of nearly 28% in a year.

Now consider a different case.  After Hurricane Katrina speculators brought in bottled water, but charged quite a lot for it.  What might have happened had price controls been imposed?  Where does the concept of fairness fit into this theory?

During Hurricane Katrina potable drinking water was in short supply, at the same time since this product is a necessity of life demand is constant. As with any inelastic product, the impact of price controls affects the black market for the product. A decrease in supply through normal sales channels leads to increased demand on the black market along with increased prices. If the government would have imposed temporary price controls on water it would have limited the black market since speculators would have had more competition. When we think about fairness in the potable water market during this hurricane, questions arise about the people’s right to products that are essential to life. In my opinion, setting price controls may have decreased the amount of civil unrest. Then again, drafting such laws is irrelevant unless they can be enforced even in times of extreme disaster.

Mankiw's Principles of Microeconomics Chapter 5

1.      This is one of the most practical chapters you ever read in an economics text. Many years ago when I was an economist for GTE (not Verizon) we spent significant amounts of time estimating cross-price elasticities as the basic decision-making tool for package design --deciding whether or not to package call-waiting or caller ID with other phone features for example.  Including features consumers really want with other, not-so-popular features in a package can increase sales of all features. Give an example of sales based on price elasticities that you have seen or used.  Why do you think it worked (or didn't work)? 

Soon the holiday season will be upon us. Prior to the infamous Black Friday sales, many of us will receive newspapers that are less news and more ads. In those ads we will more than likely see prices of goods drastically reduced. For example, USB flash cards that normally go for $15 priced at $5, or laptop computers that normally sell for $800 priced at $250. Hopefully for the retailers, these sales will lead to an increase in demand of not only the products on sale, but also other products in the store. 

Since retailers are all about increasing total revenue for their business (P x Q), they will analyze the price elasticity of demand of the products they put on sale. In order to increase profitability, a retailer’s goal in setting price should be to obtain unit elasticity, meaning that on a percentage basis, the increase in demand of a product is equal to any increase in price. In the case of Black Friday sales, retailers will often take a loss on a few products that are drastically reduced; however, if priced correctly they’ll make up for those losses because of the increased demand on other products in their store. 

What topic made the least sense to you in this chapter?

Naturally, as a consumer I had an easier time understanding price elasticity of demand. I found the concept of elasticity of supply harder to grasp since you have to take it from the perspective of a business owner.

Mankiw's Principles of Microeconomics Chapter 4

1. The news in April (when I set this question up) was all about oil speculators driving up the price of oil, and thus the price of gasoline which was averaging close to $4.00/gallon.  In light of this chapter what role do speculators play in the market?  Are they responsible for large price hikes? 

Oil is the lifeblood of our society; as such drastic swings in price tend to grab the attention of the powers that be in DC. Most of the time, if Washington is involved there are probably questions of whether or not the market for the product is fair and competitive. In a competitive market, due to the fact there are multiple buyers and sellers, the impact that sellers have on price is perceived to be minimal since there are several buyers and sellers for the product. In the case of speculators in the oil market, commodities research provided by Bloomberg supports the fact that the percentage of commercial positions in the commodity markets have decreased since 2000, while the percentage of index fund speculators has risen.

  

http://www.theatlantic.com/business/archive/2012/04/would-obamas-war-on-speculators-really-reduce-the-price-of-oil/256076/

According to Joseph Kennedy II, an op-ed columnist for the New York Times, “The United States placed limits on pure speculators in grain exchange after repeated manipulations of crop prices during the Great Depression.” If that is the case, then why would we allow this market activity to continue when we know based on our history that speculation leads to price manipulation? Demand is affected by several factors, one being the prices of substitute goods. In the case of oil, without drastic lifestyle changes on the consumer’s behalf, there are no immediate substitutes. The question of whether or not speculators are responsible for large price hikes is a debatable topic. In my opinion, while they are not directly affecting the immediate price since it’s the futures contract they are purchasing, considering the amount of hedging going on, they are skewing the perceived levels of consumer demand.

http://www.nytimes.com/2012/04/11/opinion/ban-pure-speculators-of-oil-futures.html

Mankiw's Principles of Micrneconomics Chapter 3

1. What surprised you most about the concepts in this chapter?  Why?           

In discussions concerning trade, one controversial issue has been trade between US and China. On one hand, proponents of trade with China argue that the trade relationship between both countries is beneficial. On the other hand, organizations such as our labor unions contend that the consequences of unequal trade, such as resource re-allocation, can damage industries that were once pillars of our economy. In my own view, trade requires both parties to be dependent upon one another. If executed properly, this mutual understanding that trade requires an interrelated dependency can drive a productive relationship.

2. What is your opinion about international trade?  Overall is it good or bad?  Why?

Imagine a world in which you would be solely responsible for producing everything you currently consume (food, books, electronics, cars, gas). I would imagine that at some point you would consider the opportunity cost between consuming a multitude of products and just getting what you needed to survive. The same concept applies to trade.

Assuming there is equality, trade amongst individuals, businesses, and countries benefits all involved. It opens the path to variety and can even out the inadequacies of struggling economies. Prior to introducing trade, a country should determine whether they have the comparative or absolute advantage.

   

Mankiw's Principles of Microeconomics Chapter 2

1. How does the use of a very simplified model of the economy such as those found in a production possibilities frontier help you to understand the economy?

The model of production possibilities frontier helps me to understand the levels of efficiency an economy is producing at. While it’s not possible to produce beyond the arch of the production possibility frontier, points that fall inside the arch show that an economy is not producing at its full capacity. One of the reasons for limited production could be because of inadequate demand. The mathematical measurement of opportunity cost can also be obtained by using the slope formula m=rise/run. It’s also important to note that growth in technological advancements can push either axis outward.

2. Give an example of a positive or normative statement about the economy.  Why does it matter which it is?

Positive Statement: Re-distribution of household income limits economic growth

Normative Statement: It’s immoral for government to re-distribute income

Differentiating the two types of statements is important since economists play both the role of scientist and policy adviser. Policy makers may make more normative statements since their role is to consider the best solution, while positive statements should be able to be evaluated based on the evidence presented.