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.

Mankiw's Principles of Microeconomics Chapter 13

1. Why do marginal costs first fall and then begin to rise?

The effect of diminishing marginal product impacts the cost curve. Diminishing marginal product is defined as, the property whereby the marginal product of an input declines as the quantity of input increases.

2. Why are marginal costs important to a firm when making decisions to increase or decrease production?

Imagine company that was at the top of its game. It produced at a high level of efficiency and as a result, the stockholders where happy with the outcome, and they choose not to invest in the future of the industry as a whole. This lack of investment in infrastructure would be a good example of a contributing factor to increasing the slope of the company’s marginal cost. If a company chooses to not invest in its infrastructure, then it will take on more cost in order to obtain the same level of efficiency to produce at an equal level of output. To resolve this, the company would want to find the point at which its marginal costs meets its total costs and that would tell them the maximum quantity of output they’ll need in order to maintain an economy of scale.

3. How can you apply these cost concepts to your own life?

If found the readings concerning economics of scale as the most helpful in this chapter. Understanding that there are 2 ways to look at adjusting cost, long term, and short term prove critical in order to maintain constant returns to scale. As a business manager, knowing the point at which your marginal costs (MC) meets your average total cost (ATC) should guide you in your decisions to invest in additional production facilities.

 

Mankiw's Principles of Microeconomics Chapter 12

1.       If you want to read more about government expenditures one source is the Economic Report of the President, available online here: http://www.gpo.gov/fdsys/pkg/ERP-2012/content-detail.html.  Now that you have had a chance to think about tax systems which type do you prefer - progressive, flat tax, income, consumption - there are quite a few possibilities.  How do you think the concept of equity or fairness fits into a tax system?

To think that back in 1902, total government revenue as a percent of GDP was at around 15% is absurd. With today’s rate hovering at a little over 25% it really puts into perspective the amount of money we Americans spend on our government. America’s balance sheet has never been as complex as it is today. Federal spending pays for programs that most of us would agree are necessary functions of government such as national defense. There has always been much debate about what programs should be a functions of government. Take social security for example; while some will argue that the government should play a role in making sure its citizens have a source of income once they reach retirement, others will argue they should have control of those funds and make investment choices that ultimately cover more than just the rate of inflation. 

Be that as it may, come April 15^th most of us will sit down at the computer and crank out deduction upon deduction watching that refund amount rise, or if you’re on the wrong side of the coin, the amount owed increase. I don’t know about you, but at the end of the day, once you’ve transmitted your tax return to the IRS, you ask yourself if there’s a better way of doing this. I’d like to believe there is. I would tend to lean towards the side of doing away with income tax and switching to a consumption tax. If my salary is $40,000 per year then I’d like to get every last penny of it. Consumption tax is an equitable and fair way to distribute taxes throughout our country. In my opinion, a consumption tax is more progressive in nature since the higher income people would most likely continue to spend their disposable income at the same rate. I realize the price of everything would go up, in some cases substantially, but in the end, it’s the consumer’s choice to make that purchase.