Mankiw's Principles of Microeconomics Chapter 22

This is the last chapter in the course.  I hope you have enjoyed the course and are saddened to see it end.  What concepts or theories did you find most interesting and/or useful?  Is there an area where you changed your thinking?

What I found most interesting about this last chapter is that the motives of people are not always transparent. Take for example the section on behavioral economics. Two of the principles of economics are that people think at the margin, and most people respond to incentives. Behavioral economics proves that people are not always as rational as you may think, and there may be other incentives the person is working towards other than the profit maximizing outcome. 

Take for example the issue of the fiscal cliff our nation is facing. With 22 days left in the year both parties are steadfast in their views of how to solve this problem. Even with the election behind us, politicians are still sticking to their respective party’s opinions, even if those opinions are not in the best interest of the country overall. For politicians, it’s not about what’s fair, it’s about showing your constituents that you stood by their views until the very end, in hopes that when your re-election bid comes up the voters will remember what you stood for. Many people are angered that we’re so close to the end of the year and we don’t have a deal yet; however, I find it amusing that the general public really thinks a deal is possible in anything prior to the 11th hour with our government. 

In my opinion, the presidential election proved that society cares about equality, and with that in mind the concept of fairness should be what molds the future of our economic policy. 

Mankiw's Principles of Microeconomics Chapter 21

This is a complicated chapter.  What did you find most confusing?  What do you think about the concept of indifference curves in the context of budget constraints?

“I can get no remedy against this consumption of the purse: borrowing only lingers and lingers it out, but the disease is incurable.” -Shakespeare

We are a nation of consumers. Even though we may not want to admit it, most of us wish to consume more of the luxuries of life with little to no trade off. The headwinds against consumption are our preferences and our budgetary constraints. In this chapter we define and graph the consumer’s budget constraints. We also measure the preferences of the consumer through indifference curves. An indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction. We can utilize the slope of the indifference curve to determine the rate at which a consumer would trade one good for another, otherwise known as the marginal rate of substitution (MRS). 

A consumer’s choice is dependent on his budget constraint and his preferences for consumption. If we were to display this graphically, the optimum point of consumption would at the point which the indifference curve is tangent to the budget constraint. For the consumer to obtain maximum consumption, he would need choose the point at which the MRS= relative price (rate at which the market would trade one good for another).

Shifts in income can impact the budget constraints line shifting it outward. This shift leads to increase consumption since the consumer will most likely choose the higher indifference curve.

The most confusing part of this chapter for me was trying to find out why there are 2 indifference curves in every example. From my understanding, indifference curves represent different combinations of bundles the consumer could have. If each graph has 1 budget constraint, because there’s only one income, then wouldn't there only be 1 indifference curve, because there’s only one consumer? 

Mankiw's Principles of Microeconomics Chapter 20

The standard way of thinking about income inequality would have us believe that the rich get richer, and the poor get poorer, however that’s not always the case. In fact according to the US Bureau of the Census, in 1935 the top 5% of income earners were earning 26.5% of total income, in comparison to 1980 the top 5% of income earners were earning 15.3% of total income. During this time period the rich actually got poorer by 11%. If we ask ourselves where that money went, the data will show us that over the same time span, the bottom fifth of income earners earned 4.1% in 1935 and 5.2% in 1980. These data support the findings that income is redistributed through the establishment of government policies. Questions about equality across the pay scale can stir up quite a debate in today’s economic climate, but one thing we can all reach an agreement on is that some form of government assistance is necessary in our society in order to keep a civilized culture. The point at which a disagreement brews is when we ask the question of how much of a role the government should play in redistributing income.

There are several factors that influence the level of compensation for a worker, reasons such as the amount of human capital an employee brings to the table, their natural ability, what career field they decide to work in, and surprisingly discrimination plays a role in our compensation as well. Workers can also experience transitory shifts in income and because of this they may need additional support from those that are better off in our society. This is where the concept of income redistribution comes into play. 

The poverty rate is defined as the percentage of the population whose family income falls below an absolute level. In 2008, this income level was $22,025. Surprisingly, even though the average household income has continued to rise since 1970, the poverty rate has never dropped below the lowest rate it was at in 1973. These findings add weight to the argument that if the rate of inequality is on the rise, and the poverty line has remained relatively unchanged, it essentially disproves what we hear concerning the theories of trickle-down economics. In other words, just because the rich get richer doesn't mean that the poor get richer too. 

Nonetheless, poverty continues to be a difficult problem to solve. The solutions to poverty are not as simple as just allowing the government to freely reallocate resources as elected officials see fit. While the government can intervene, any form of intervention decreases efficiency in the marketplace, and the result is not always fair to all parties involved. Some of the policies and programs our government uses to reallocate resources are in-kind transfers such as food stamps, housing programs, and medical services. In this chapter, a question was posed about the 2 different views on in-kind transfers. On one side, advocates of the program will often argue that offering these benefits as opposed to cash payments is most beneficial. They believe that avoiding cash payments to the poor ensures that the money spent by the tax payers on these programs goes towards what it was intended for (food, housing, medical care). On the other side, advocates of cash payments believe that the poor should be given the choice to make their own decision on how the monetary value of these programs would be best spent. They believe that most poor people still retain the drive to succeed; as such the individual will spend the money in a manner that attempts to accelerate their economic mobility. 

Whichever side you choose to put your flag on, the ultimate goal of all government assistance programs is to create a utilitarian objective. For it is the assumption of society that all actions should create more happiness than pain, therefore as taxpayers we may all pay into a social insurance program that we may never use, however, the protection against the risks of an adverse event having a major impact on our wellbeing is at least partially averted; and that in and of itself leads to a happy productive society. 

Mankiw's Principles of Microeconomics Chapter 19

Post three of your "margin notes" from your reading of the chapter to your blog.  Why did you make the comment you made in the margin?  What did you find confusing, useful, or important about the passage you commented on?

Margin note #1:
The value of a worker’s ability: Unskilled labor vs. skilled labor

When we consider equilibrium wages in a global economy, we can’t just look at the workforce in our own country; we must consider the workers in every country. Many of the jobs that have been outsourced require unskilled labor. Why is that, and does it make sense? Keep in mind that when it comes to trade, the country that will benefit will be the one that has the comparative advantage. Since labor is a major cost of production, firms will outsource this cost at the cheapest wage since as the human capital required is low and training on the task is relatively easy.

Margin note #2:
Street smarts vs. Book smarts

The true value of an education cannot be underscored. Today’s businesses seek individuals with highly educated backgrounds because those workers usually contribute to a higher marginal product. With that said employers who hire workers with higher education levels don’t always get the brightest bulbs in the lantern because book smarts are much different than real world experiences. While a firm that chooses to hire an applicant with a college degree may not get an immediate boost of production out of that new hire, signal theory sets out to prove that the graduate/new hire is capable of completing long term objectives that require a consistent ability to think critically.

Margin note #3:
Employer Discrimination: Intentional or not, it all reflects the same

Employer discrimination is a highly debated topic. While some will argue that it is as rampant as ever in today’s job market, others will contend that when you expand on the data, employer discrimination is a hard case to prove since the compensating differentials between sexes, races, or religions vary so much. Either way, one point that remains hard to argue is the effects of discrimination on competitive markets. I found the specific example about blonds and brunettes interesting. If an employer decided to pay brunettes more than blonds, yet the skill sets between the two hair colors were the same, a smart competitor would hire blonds at a lower wage thereby reducing their costs of production and increasing their profit. Over time the discriminatory firm would fall victim to the firm with the lower costs of production. This proves the point that profit prevails over discriminatory practices.

Mankiw's Principles of Microeconomics Chapter 18

Pretend for a moment you are the instructor developing this course.  Write 3 short answer questions for an exam over this chapter that you believe cover the most important points in the chapter. Post all three questions on your blog.  Remember that an exam only has 10 questions and yet has to assess the students' understanding of the entire unit.

Most of us think we’re really just a bunch of wage slaves drudging through the doldrums of the day in order to pay for our debts, while at the same time adding to the riches of others. As a worker, we don’t always think about the market for us, for our services, for what we bring to the table as a factor in the production process. 

“Workers of the world unite; you have nothing to lose but your chains” –Karl Marx

Like any market, the market for labor is driven by supply and demand. As a worker we control the supply, and the demand is controlled by the firm looking to increase production. A profit maximizing firm will measure the marginal product of labor as they hire in order to minimize the effects of diminishing marginal product. No firm wants to be over staffed which can create inefficiencies during the production process. As a firm owner, knowing what I’m paying for when it comes to labor is a critical piece of managing the overall business. One of the ways an owner does this is by calculating the marginal product of labor (MPL= ∆Q/∆L). Determining how much more the firm can produce with an extra worker and multiplying the value of that result by the price will give us the value of the marginal product of labor (VMPL= P x MPL). If we subtract the wage from this result it will give us the marginal profit. If marginal profit falls into the negative then the breaking point at which it turned negative is would give you the amount of workers needed to produce at the maximum profit point.

1) As a firm grows, it usually requires more labor in order to produce more output. What measurements would a firm want to get prior to hiring additional workers and how would the firm use the data?

2) If you were to graph the value of the marginal product of labor, what is one factor that contributes to the line sloping downward? Give 2 reasons why the labor demand curve could shift in either direction?

3) Consider the supply of labor for a moment. How would government policies surrounding the extension of unemployment benefits impact the amount of labor supplied in the marketplace? In what direction would the supply curve shift and why?

Mankiw's Principles of Microeconomics Chapter 17

Credit to Tina Brown for providing the clip in the discussions

This chapter and blog post wraps up this module with the last type of market - oligopoly.  Oligopoly is a great word to use in casual conversation, so pay attention to this chapter. The next time someone talks about how nice it would have been if AT&T had bought T-Mobile you can say "I agree!  The phone industry would still have been an oligopoly, there was no risk of creating a monopoly."  Of course a few people will wonder if you have perhaps started drinking, but most people will be really impressed.

1. What do you think about anti-trust laws with respect to the cell-phone industry?  Do you think the cell phone industry could be an oligopoly? Why or why not?

I am of the opinion that the cell phone market is an oligopoly. To take a case in point, if AT&T were allowed to merge with T-Mobile, Verizon would lobby for the same permission to merge with Sprint. With the eventual combination of only 2 providers, that would influence the production levels of both of them. Based on the Nash Equilibrium, it would also lead to both supplying more which would cause lower prices for consumers because of increased supply.

2. Take a few moments to explain how a decision box works.  What about Oligopolies is most unclear to you?


There isn't much that's confusing about Oligopolies; it's a market structure in which only a few sellers offer similar or identical products? The first one that comes to mind is the oil cartels. The cartels control the supply but as Adam Smith once said, "In competition, individual ambition serves the common good." Groups can organize, cartels can form, but the human spirit of greed will drive each to attempt to outmaneuver the other. Oligopolies will always be out for their own best interests. As a result, price decreases due to competition. 
Corporate psychological warfare is game theory at its best. The decision box is a tool that each contender uses in an attempt to reach their own dominant strategy. However, this box is in perpetual tension and what’s driving that is the need for each to increase their market share.