Chapter 17 Reflection

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?

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

                I think that anti-trust laws are important to regulate the cell phone industry just as they are for all other oligopolistic enterprises.  If anti-trust laws were not in place this would allow AT&T to have a monopolistic hold on the cell phone industry.  According to a press release on the Department of Justice’s website (31 Aug. 2011), their position holds as “the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.”

                The one example of a controversial business practice that relates to cell phones is tying.  This practice is one of three from our text that anti-trust laws can regulate.  When Apple introduced the cell phone they had a type of software installed on the phone that only made it possible for the phones to use AT&T’s network.  A federal and state lawsuit ensued claiming violation of anti-trust laws.  Since then iphone’s have become available on networks such as Verizon, Sprint, T-Mobile, StraightTalk, Net10 and others I’m sure I’m not aware of. 

                Since anti-trust laws are in pursuit of curbing monopoly power, I think it is important for cell phone companies to be regulated since some to the disadvantages of monopolistic power are higher prices, restriction of other new innovative products to the market, reduction in economic welfare and fewer consumer choices.  Personally, I just got my first iphone in Dec. 2013 and live in a place where AT&T coverage is non-existent.  If it weren’t available on the Verizon network, I’d never had had the opportunity to use an iphone.

                In regards to the cell phone industry as an oligopoly, I think it already does exist as one.  AT&T, Sprint, Verizon and T-Mobile currently control almost 90% of the country’s cell service market.  To answer this question in respect to a monopoly, the answer would be no.  Just like the antitrust suits Microsoft has faced as far as integrating their Internet browser into their operating system was dismissed because it would have created too much market power, the same would be true if the government allowed AT&T to purchase T-Mobile or any other carrier.

                A decision box is used in game theory.  Our text defines game theory as “the study of how people behave in strategic situations.”  When a situation calls for strategic thinking, people use the information they have to design the best possible plan to reach their objective.  Game theory is sort of a version of a cost-benefit analysis one would use to make a decision.  The only real difference is that game theory, as specific to oligopolistic competition, encompasses decisions that are interdependent among the other firms.  A decision box is the illustrative expression of such a process. 

                What is most unclear to me about oligopolies is collusion.  Under what circumstances is collusion illegal?  In a certain sense is it just frowned upon?  Why is price-fixing illegal to even mention in conversation?  Wouldn’t there have to be evidential support to get someone in trouble?

Chapter 16 Reflection

     The way I think about it, advertising limits the amount of competition a monopoly faces.  Through advertising efforts, a company has the ability to convince potential byers that their product is better and / or different from that of its competitor (product differentiation). If they succeed in doing so, they will be able to charge a higher price and also limit what their competitors sell.  I think this would be less and less so in the case of oligopolies and fair markets.  I consider pricing to be a form of advertising, and if the goal of marketing is to communicate to potential buyers the value of a firm’s product, then selling it for a certain price point is indicative of that goal.  For example, I know that I have been in retail pursuit of certain things that I may not be very familiar with, e.g. electronic goods and end up buying an item that may not be the most expensive, but also not the least expensive.  I usually choose the middle price point.  If I only have two choices for a certain good, I will probably choose the more expensive as long as the marginal cost is not too great.

          The effectiveness of advertising also has to be taken into consideration.  For example, any money spent of advertising should, hopefully increase gains in revenue.  If a certain marketing technique is clever and turns out to be worth the money because it increases sales, then it makes the cost worthwhile.  On the other hand, if a marketing technique fails to entice or attract customers, then that leaves room for the competition to fill the void.  Good advertising limits competition; poor advertising invites competition.  Advertising is not cheap, not to mention instrumental in the promotion of a good, thereby placing it as a priority in the marketing of a product. 

          The most interesting thing I learned in this chapter was about price discrimination.  Just as by any other kind of discrimination, it sounds like a bad thing.  However, in regards to maximizing profits, it seems like the logical thing to do especially in the given example in our text.  Selling books to two different groups with two different interest levels in the material may not sound fair, but if marketing shows that the die-hard fan base is willing to spend more for a copy – it makes sense to charge what they are willing to pay.  The most interesting outcome of price discrimination is that it actually increases economic welfare.  The Australian buyers, who would have initially been excluded from buying the book due to too high of a price are included when price discrimination is in effect, thus letting them enjoy the book.  This seems to be a win-win situation for consumers and producers.

Chapter 9 Reflection

What was your opinion about restrictions on international trade before reading this chapter?  Have you changed your mind? Strengthened your opinion? In what ways and why?  What was the most interesting part of the chapter to you?  Why?

Prior to reading this chapter, I thought that restrictions on international trade were a bad thing.  The idea that any countries would not be able to trade with others and experience the benefits of a greater variety of goods, lower costs through economies of scale and increased competition led me to believe that any restrictions on international trade would cause both producers and consumers to be at a disadvantage.  However, chapter 9 makes very clear that you need to take into consideration the changes in total surplus and what effect that has on trade.  My opinion of this was strengthened by the two respective conclusions of importing and exporting that when trade is allowed, although one party (consumer, producer) is better off, no matter who is worse off, the benefits exceed the drawbacks thereby making it beneficial for society as a whole.  In light of this new understanding I still think that restrictions on international trade are a bad thing, only now for a completely different reason.  This is a good example of what was most interesting in not only this chapter, but economics as a field of study so far, which is a greater understanding of economic concepts that dismiss some seemingly logical perspectives. 

Chapter 8 Reflection

1. How important do you think the concept of a deadweight loss to taxation is?  Why or why not?
2. Should politicians and other taxing authorities consider DWL when making their decisions?

The concept of a deadweight loss to taxation is very important.  As the text explains, the welfare of both consumers and producers falls because when a tax is imposed because buyers buy less, as the good becomes more expensive and producers sell less as it becomes more expensive to produce the good.  These acts combined reduce total surplus.  Furthermore, it not only reduces total surplus, but does so at the expense of superseding the total revenue raised for the government.  I think it is extremely important to take this into consideration when voting for excise tax increases because if you only operate from the perspective that the tax gains are beneficial in some way (federally or locally) it wouldn't be a well-rounded decision on the individual level.  One may not realize the adverse effects it has on their own personal economic welfare.

Politicians should absolutely consider the deadweight tax loss when making their decisions.  Although initially tax revenue increases, will begin to decrease if the tax becomes too large.  I enjoyed learning why this is because without doing so logic may lead you to believe that the larger the tax, the larger the tax revenue, but as the text explains this is not the case.  Since the DWL of a tax is the area of a triangle computed by the square of its size, the DWL rises exponentially is response to the size of the tax.  An overzealous politician or one that is more concerned with equality than efficiency may choose to implement a tax increase that ultimately compromises the economic welfare of society as a whole.

Efficiency

Efficiency is the economic idea that output cannot be maximized beyond what it is without increasing the number of inputs.  "The most bang for your buck", if you will.  When taking into consideration a free market economy there are two ideas that contribute to whether or not resources are being allocated efficiently - consumer/producer surplus and market failure.  Consumer surplus is a buyer's willingness to pay minus what they actually pay for a good.  Similarly, producer surplus is what a seller is paid minus what it cost to produce a good.  Resources are considered efficient when the sum of consumer and producer surplus is maximized.  In more practical terms, producers who sell a good at the highest price possible are going to yield the smallest amount demanded by buyers thereby not being very efficient.  Sellers in this situation basically have produced too much with very few people willing to buy.  In contrast, producers who sell their good at the lowest possible price are going to yield the greatest amount demanded, thereby by maximizing the total amount of producer surplus and becoming most efficient.  Relatedly, goods will be sold to buyers who either value the good the most and/or have the greatest willingness to pay.  Both of these resource allocations lead to market efficiency.

In contrast, market failure - which can be characterized by market power and externalities - are the forces that prevent markets from existing efficiently.  Market power is the idea that a small group, or perhaps just one producer is the driving force behind market prices due to not having any competition.  For example, say Sony was the only manufacturer of TV's and for this reason charged as much as it costs for a car to purchase a television.  This act would disrupt the otherwise natural equilibrium of supply and demand of TV's.  No one is going to want to nor be able to afford a Sony television making the market for TV's inefficient.  The other disruptive force of efficiency are externalities.  These are influences beyond either the producer or consumers control.  They are not things taken into consideration on either side when deciding how much to purchase or how much to manufacture.  As a result of these unforeseen influences, it  can alter the equilibrium of what is in the best interest of all people affected, again making the market inefficient.

Module 1

1.  Should the minimum wage be increased annually at the rate of inflation? (Or alternatively, to $15.00) 

(2013) 1.6% 2.0% 1.5% 1.1% 1.4% 1.8% 2.0% 1.5% 1.2% 1.0% 1.2% 1.5% 1.5%(avg.)

(2012) 2.9% 2.9% 2.7% 2.3% 1.7% 1.7% 1.4% 1.7% 2.0% 2.2% 1.8% 1.7% 2.1%(avg.)

I took a statistical approach to answering this question and believe that the minimum wage should be increased annually at the rate of inflation.  The above percentages show inflation rates for each month over the last two years, with the last value representing the average, according to the Bureau of Labor Statistics.  For example, take the average inflation rate for 2013.  The minimum wage for both years is $7.25/hr.  For the minimum wage to have been increased at the rate of inflation would have equaled .11 raising the rate to $7.36/hr. and .04 raising the rate to $7.40/hr., respectively.  If we look at a greater number of historical inflation rates as well as minimum wage rates we can statistically determine whether increasing the minimum wage at the rate of inflation has either a significant or negligible effect.  Taking into consideration the last ten years (2003-2013), the minimum wage has increased three times: starting at $5.15 from ’03-’06 to (1) $5.85 in ’07, to (2) $6.55 in ’08 then to (3)$7.25 from ’09-’13.  The overall wage increase was $2.07 ($7.25-$5.30) and the average inflation rate was 2.78%.  Although there was a steady increase in the minimum wage, the average inflation rate over the last ten years was neither higher nor lower than any value by a large standard deviation.  This leads me to believe that as long as inflation rates fluctuate, which they certainly always will, it will offset by how much the minimum wage will rise.  Opponents of this issue say raising the minimum wage will not reduce poverty, but I believe that the greater an increase of the cost of living, the more money people will recirculate into the marketplace, thereby increasing demand as well as supply – leading to the favorable equilibrium price.  To answer the question more specifically, though, I think the increase of the minimum wage at the rate of inflation has a relatively negligible effect on the government (or the state, if their price floor differs from the government) to really be of much consequence to them while increasing the purchasing power of the working class (as long as inflation rates don’t get too high).

2.  Should a tax be imposed on "Cadillac" health insurance plans?

                In a word, no.  If in 2014 it became mandatory for all individuals to purchase health insurance, I am inclined to think that those who did not have it before and did choose to get it this year are those people who opted to get low-premium, high deductible plans.  You can think of this as people trying to do what they are told, but at the same time doing the least they can to be in compliance, since mainly so many people disagree with the mandate.  If a person opts for a “Cadillac” health plan that covers conditions that lesser plans have always denied like mental health, travel consults (deeming them not medically necessary) they are still putting more money into the pool to help even out the costs for everyone else, as I think is the goal of Obamacare.  I suppose opponents would argue that like higher tax rates for the wealthy, it would make sense to tax the policy holders or employers of more expensive plans.  Also, if a person is able to purchase a “Cadillac” plan when they could easily get away with a less expensive plan, but choose to do it anyway – why should they be burdened with a tax?  I believe there are many individuals who whether they are engaged in high-risk activities, have many family dependents or for employers with a disproportionately older work force, according to the United Health Care website, should not be penalized with an excise tax.  I think the key to lowering medical cost does not lie in excise taxes or public mandates, but rather to focus on cost control of services.  There should not be such a variance of cost from one facility to another if you need to get an MRI done or have your appendix removed.   Our text also states that when the supply curve is elastic (supplier = insurance company) and is elastic because their supply doesn’t change much based on the change in price of policies and the demand curve is inelastic (buyer = policyholders) because their demand doesn’t change significantly due to changes in price – most people want health coverage, the price received by sellers falls only slightly while the price paid by buyers rises substantially.  As a consequence the buyers take on most of the burden.

3.  Should the Federal government impose a price ceiling on essential items such as bottled water during an emergency such as Hurricane Sandy?

                Yes.  This is no more complicated than to be explained by the concept of fairness.  According to a Sept. 13, 2013 article in the Denver Post “Colorado floods: Price-gouging not illegal during emergencies” law enforcement said as long as consumers agreed upon a price there was nothing illegal about price-gouging, except when it came to prescription drugs.  According to the Colorado Assistant Attorney, as long as there is full disclosure it is not considered a scam.  Who cares?  Ethically and morally it is reprehensible for suppliers to increase their prices so as to exclude certain buyers from being able to purchase if they can’t afford the product.  As long as the government doesn’t impose a price ceiling that is below the equilibrium price, creating a shortage and forcing the sellers to ration their goods; a price ceiling that is not binding would control the cost and make it illegal to take advantage of people in such dire circumstances.  Opponents take the position of it being entrepreneurial and in theory does undermine our free-market economy, but from the same article, a University of Denver finance professor said “"There's no economic justification for the increase in price when the supply can come back," he said, "It's a huge issue in the finance and business world, of a company's social responsibility, of being a good corporate citizen.

Chapter 6 Reflection

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 and this post from Cafe Hayek: http://cafehayek.com/2012/04/but-hes-our-leader-exploiting-our-economic-ignorance.html. (If this doesn't open see below).

 How does this relate to the theories from the chapter?

                The concept of price floors can be exemplified from this article in the way of coffee.  The text defines a price floor as a legal minimum on the price at which a good can be sold.  If only a few years ago Venezuela was an exporter of coffee and now finds itself importing the good, you would have to stop and ask yourself, why?  The article goes on to explain that since government price controls have set the retail price for coffee so low that it is below what it costs for farmers to grow it; therefore, practically eliminating the incentive to do so. 

                The text states that when the government imposes a price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce good among the large number of potential buyers.  “Rationing mechanisms” are shown by the article in the way of long lines and people not being able to buy the most basic goods like toilet paper and cooking oil.  These items in a free market are rationed in relationship to their price which occurs through the process of equilibrium.  Venezuela, however operates in a capitalist economy.  The article demonstrates this when it says that the government has taken private ownership of dairy and coffee companies stating “it is in the national interest” to do so.

 

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?

                If a price control had been imposed on bottled water for victims of Hurricane Katrina they would not have been as expensive as they were.  According to my Google search, bottles of water were selling for roughly $7 per bottle.  Anyone who buys it at the store or the gas station during non-disaster times probably pays around $1.  I can only imagine that there were price gougers who charged even more due to the magnitude of Katrina.  Under different circumstances I may have considered this entrepreneurial, however taking into consideration the scale of this catastrophe this is an example of people taking remarkable advantage of others in the most dire of times.  No one is more in need of water than someone else during a time like that, therefore it is certainly unfair to only sell it at such an inflated price to only those who are either able and/or willing to purchase it.  Speculators do nothing more than try to gain a quick advantage from the anticipated increase in the demand of a good.   

 

Chapter 5 Reflection

Chapter 5: Elasticity and its Application

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)?

The law of demand states that there will be a greater demand for a good if the price decreases and consequently a lesser demand for that same good if the price increases (qualitative).  The difference between the law of demand and the elasticity of demand is that the latter illustrates by how much (quantitative) of that impact a change in price (increase or decrease) will have on the demand.  The demand for a good is considered to be elastic is there is a relatively significant relationship between price and demand whereas the demand for a good is considered inelastic if there is an insignificant relationship between price and demand.  Gas, for example tends to be inelastic.  As the price may rise, people still need to get around in their cars and will pay as the increase dictates.  On the other hand, if the price of sugar rises and as a result chocolate prices increase, most people will forgo buying it as it is not a necessity.

The text states that the price elasticity of demand for any good measures how willing consumers are to buy less of a good as it price rises.  The best example of this I can think of from a consumer standpoint is gas.  I don’t mean to copy the textbook example, but even before this class began I realized what I was doing, just not realizing it had to do with an economic concept, like elasticity.  Gas prices are high (been higher, been lower) and I drive 50 miles round trip to work 4 days a week – no way getting around that one.  I once read in a little novelty book filled with someone else’s wisdom that you should always fill up your gas tank when it’s half full/empty.  Great thought, except that lately with the less than desirable prices I’ve been allowing my low fuel light to illuminate before I put any gas in the tank.  Ultimately it is an inelastic good, however elastic to point where I don’t fill up with more than I have to at any given time. 

Another thing that came to mind was gas prices in the 1970’s.  The oil crisis in ’73 and ’79 led prices to rocket while cars idled their engines during long wait times at the gas pumps.  I think this is a good example of how the sale of gas was based on the inelastic demand of the good to consumers.  I don’t think the sale of gas during that time worked well because consumption seemed to be based on fear of shortages; resulted in massive amounts of gas from running engines in line to ironically ‘get’ gas and caused and caused panic-buying among consumers.  As the price per barrel of oil raised in these years and people watched the pump prices rise, the demand for it not only increased, but almost faced a shortage.  This can be exemplified by the implementation of even-odd rationing.  The price elasticity of demand for gas is high considering it is a necessity for most people rather than a luxury.  Considering this, it is best example I can think of to illustrate how willing consumers are to buy more or less of a good based on the fluctuation of its determinants.  As I mentioned before about my own gas tank, if the prices per barrel of oil fell and gas prices dropped, I probably would take the book’s advice and fill up my tank when half-full.

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

                The variety of demand curves (Chapter 5).  I had difficulty getting a concrete understanding of the idea that demand is considered elastic  when the elasticity is greater than 1 and inelastic when the elasticity is less than 1.  Maybe it’s just the way it’s worded, but I can’t think of any practical applications of how this translates into a real world example.  Also, perfectly elastic is an obscure concept so far.  I can identify them on graphs, but still don’t know how these concepts translate practically.

Chapter 3 Reflection

1. What surprised you most about the concepts in this chapter?  Why?
2. What is your opinion about international trade?  Overall is it good or bad?  Why?

International trade is not only beneficial between two countries, but also essential.  Until a single country can effectively and efficiently produce all the goods they need, it is a very good thing.  Trade among different nations almost ensures that monopolies don't price their goods above marginal costs.  Also, thinking back to chapter 1 in regards to efficiency, trade is important because it forces each company, or nation to produce the most output with the least input.  Two last benefits I thought of for international trade include greater variety of goods/services to consume as well as the ability to expand production beyond just the domestic borders.  If each nation has a comparative advantage and benefits from trade because of specialization, the resulting imports and exports provide consumers with greater variety to choose/benefit from than if they were not even options.  Lastly, if a country specializes in producing a good that is aimed at people worldwide, think how that benefits the producer by being able to export their good to multiple different countries rather than limited to its own borders.

I think one thing I found surprising was the idea that although international trade makes a country as a whole better off, it can make individuals of the country worse off.  To determine whether or not free trade is a good thing, I suppose you have to look at the majority benefit.  The text states that this is because each country has many citizens with different interests.  I think I found this interesting because by definition international trade doesn't really identify with an individual until you break it down to that individual level.  I imagine this is a good perspective to have in policy-making.  Importing good X and exporting good Y is going to have a different effect on the producers of good X and goo Y; negative and positive, respectively.

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

The production possibilities frontier is a graphic representation of how much of a certain output can be manufactured based on our scare limited resources without taking away from the production of another good or service.  The key economic principle here is efficiency.  For all points on the graph curve, these are outputs that are produced most efficiently.  Points inside the graph are those that are able to be produced, but at the expense of being efficient and the points outside the graph are those that are unable to be produced given either the factors of production or available production technology.  This is helpful in understanding how the economy works because it make it easy to see that not all desirable outcomes are possible.  It can also improve productivity by showing those outputs that fall as points inside the graph curve as areas to improve upon by highlighting that in addition to being possible can also enhanced by implementing efficient techniques.

Positive statement:  "The welfare system induces unemployment."
Normative statement: "New standards should be set to receive welfare."

The difference is that positive statements are the "is" and normative statements are the "should be".  The difference between the two matter because as the text explains, positive statements are more easily confirmed or denied through research and/or experimentation.  Whereas normative statements are subjective and take into consideration that of the speaker's values.  Both statements are valid, but positive one's are from a more scientific perspective and normative one's are more from an ethical perspective.  I gather from this chapter so far that this is the reason why economic decisions are difficult to come by. 

Chapter 1

1. What in this chapter made you think about an economic concept differently than your previous beliefs?  
2. What new questions do you have now about the US economy based on this chapter?

After reading chapter 1, the first concept that struck a practical note was that of principle number 3 - rational people thinking at the margin.  It occurred to me that a few years ago during a job interview I was responding to a question from the interviewer without even realizing that it had to do with economics.  She asked about my strengths and I mentioned that I thought time-management skills were at the top of my list.  Of course she asked me to elaborate and I said making marginal decisions is what allowed me to accomplish all of my tasks.  First, identifying everything that had to be done, then determining from those, which had to take priority over the others.  I suppose this could be classified as common sense when faced with multiple responsibilities, but then I began to consider all the other aspects in life where marginal decisions are made as well.  As a mother, full-time employee, student, friend, wife, etc.. it is very easy to come up with examples of how I manage my time and balance life.
The other concept that made me think differently was that of how people respond to incentives.  Prior to reading this chapter I would have simply said that people work hard/harder when they are rewarded for that work.  What I found interesting though, was that based on certain incentives people's behavior changes according to some indirect effects.  It was, as the text explains, these less obvious indirect effects that are the cause.  It made me think about how incentives not only can increase productivity, but also present a potentially negative side effect if the result is something that is taken for granted, exemplified by the text's example of seat belt laws.  Incentives to me have always been something straightforwardly positive; never something to consider as a negative, but that is where another economic concept comes into play: trade-offs.  I can know see where it is in society's better interest to consider the role of incentives when it comes to policy making.

One question I have so far from chapter 1 is why governments increase the quantity of money?  I understand that it is the reason for inflation, but I didn't quite feel like there was an explanation as to why that is ever the case.  Part of principle 10 states that " increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services."  If people only earn what they earn, how does the increase in money stimulate spending?  Does this have to do with the stimulus package Obama provided a few years ago?