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. 

Mankiw's Principles of Microeconomics Chapter 16

Muse a little about the role of advertising in industries classified as monopolistic competition or even oligopoly. Can advertising make markets either more or less competitive?  How?

Now that the political ads are over with we can all resume our normal programming which includes copious amounts of advertising. While most of us usually use this time to hit the fast forward button of our DVR, or run to bathroom, it’s not often that we ponder about the purpose of advertising as a business, and its benefits or disadvantages on the marketplace. One of the first questions any business asks is does it need to advertise. As with any decision there are pros and cons to this additional expense. Opponents of advertising will argue that it offers no benefit to the consumer since the purpose of it is to manipulate the consumer’s perceptions of the product. Proponents of advertising argue that it divides market resources more equally through educating the consumer and if every business advertises, consumers will have the knowledge to know about price variances and will make an informed decision when making their purchases. In the case of monopolistic competitors or oligopolies, advertising and reinforce brand loyalty as well as sends a message to the consumer that the product that they’re paying a premium for is of higher quality than the inferior product. Also, with only a few choices given to the consumer, every bit of market share that business can pull away from their competitors’ results in increased market share.


What was the most interesting thing you learned in this chapter?  Why was it interesting to you?

I found the most interesting section of this chapter the case study on the article by Lee Benham; which was published in the Journal of Law and Economics in 1972.
In today’s dollars consumers saved $49.00 between firms that advertised and those that don’t. That’s a significant consumer surplus increase. As a result, some of that surplus would increase overall consumer product demand, which would be beneficial for the economy as a whole.

Mankiw's Principles of Microeconomics Chapter 15

1. How did your understanding of monopolies change after reading this chapter? What do you see differently now?

Monopolies can occur in several different forms such as government created, private industry, and natural monopolies. Monopolies occur due to one firm selling a product that has no close substitutes. Unlike a competitive market, monopolies are price makers so they try to maximize profit by selling their product at the demand level above the point at which the marginal cost meets the marginal revenue. When determining the profit of a monopoly the quantity sold at the monopoly price minus the average total cost times the quantity equals the profit of the monopoly firm. 

While reading this chapter, I was already familiar role that our patent laws play in maximizing profit for a monopoly; however, I was surprised to learn that in the prescription drug market patent laws extend to the inventing firm for a period of 20 years. It made me recall the section of our course that spoke about the benefits of research and how the government subsidizes research costs in order to promote the social well-being of the economy. It would seem to me, a patent that allows a monopoly to continue for 20 years until a competitor can compete with them is enough incentive to influence a firm’s decision to invest a larger portion of their profits into research.  

2. Trash removal is sometimes a government monopoly.  Why do you think that is?  Is your trash removed by a single hauler?  If yes, who chose the company and why?  If not, would you prefer a single choice? Why or why not?

Trash removal could be considered a government monopoly in some cases because it’s a public utility depending on where you live. In my current township, the town includes trash removal in a consolidated bill (trash, sewer, and water). In the case of a trash removal firm, they are guaranteed a revenue stream paid by the residents of the town. Even though the revenue stream is guaranteed and fixed, the owners of the firm can maximize profits by keeping costs low and running their operation at an economy of scale.

Mankiw's Principles of Microeconomics Chapter 14

1. Why does a perfectly competitive firm maximize revenues where P=MC? 

Profit maximization is the goal of any competitive firm. In order to accomplish this, several factors such as average total cost, average variable cost, and marginal costs must be analyzed. If a firm realizes that marginal revenue exceeds marginal costs then increased levels of production will contribute to maximizing the firm’s profit.

2. Why is P=MR in this market type?

Price (P) would be equal to Market Revenue (MR) because the firm is considered a price taker. In other words a competitive market has many firms and with several options available to the consumer, none of these firms can influence the price at which the good or service is sold at.

3. Name a business you think belongs in this category.  Why?

Auto manufacturing is a good example of an industry that seeks to maximize profit by monitoring the costs of production. Each company considers how those costs impact their supply decisions. Both short term economic conditions and long term economic conditions dictate their levels of production. The auto industry is known for rapidly adjusting production levels in order to maximize the firm’s profit margins.