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?