Journaling of Chapter 13: The Costs of Production

     Chapter 13 titled The Costs of Production, discusses the part of economics called industrial organization. Industrial organization is the study of how firms’ decisions about prices and quantities depend on the market conditions they fare. This chapter also compares and contrasts the ideas of economists and accountants. Accountants are only concerned with a firm’s flow of money so they only record explicit costs. However, economists are concerned with a firm’s overall decision making so they are concerned with total opportunity costs, which is the sum of explicit costs and implicit costs. Explicit costs are input costs that require money from the firm. Implicit costs are input costs that don’t require an outlay of money by the firm. Thus, economic profit is total revenue minus the sum of explicit costs and implicit costs. But accounting profit is total revenue minus explicit costs only. Chapter 13 also talks about productions functions and processes in the short run using curves. For instance, production functions show diminishing marginal product which is when the marginal product of an input declines as quantity increases. It also displays the total-cost curve which shows the relationship between the quantities of output being produced versus the total cost of production. Readers are also introduced to the average-total-cost curve and the marginal-cost curve. Division of costs between fixed and variable also depends on the time horizon.

     I would give Chapter 13 a difficulty rating of 2 out of 3. It started off being very straight forward and clear but as the chapter went on, the material built up. Hopefully, I will understand cost curves more before I move onto the following chapters.   

Article Review 4: Global Deflation Alert: Hidden EM Debts to China Could Be Immense

Global Deflation Alert: Hidden EM Debts to China Could Be Immense

     The article Global Deflation Alert: Hidden EM Debts to China Could Be Immense written by Carmen Reinhart is about emerging economies that already face the risks of bearing financial crises. Many emerging economies are exhibiting all the telltale signs of financial crises such as significant slowdowns in economic growth and exports, unwinding of asset-price booms, growing current-account and fiscal deficits, rising leverage, and reductions or reversals in capital inflows. Even if an economy seems to stable and rising they could have underlying weaknesses. One weakness that emerging economies are trying to down play is that they may also have to deal with hidden debts. For instance, Mexico, Thailand, and Greece were all hiding economy debts which led to financial crises and currency risks. All these countries financial risks went undetected until it was too late. A prime example Reinhart discusses is China’s current economic situation. China finances many major projects in other emerging economies which sound positive but China fails to report their data to the Bank for International Settlements. This means that countries’ debts to China could be lower than estimated. Detecting debts and keeping track of opaque and evolving financial linkages are now more important than ever.

     Compared to the other articles written by David Stockman, this article was far easier to comprehend. What I didn’t really understand is why countries would keep debt or economic failures hidden? Is it due to political reasons? I don’t see how China would benefit from trying to hide the true value of money that countries owe them because wouldn’t they want the exact amount that they let other emerging economies borrow be accounted for? Other than these questions, I really enjoyed this article’s look into the current state of the global economy.  

Journaling of Chapter 11: Public goods and Common Resources

     Chapter 11 addresses the topic of public goods and common resources. Both of these are free for consumers to use. Though this sounds like a positive thing, it actually causes the market forces that usually allocate resources to be absent. Thus, public goods and common resources are not being consumed in the proper amounts. This is when government can choose to step in and fix this market failure and improve the overall economic well-being. There are four types of goods: private goods, public goods, common resources, and good produced by natural monopoly. We can describe these goods by their excludability and the rivalry in consumption. Public goods are not excludable and have no rival in consumption. Common resources are rival in consumption but not excludable. In these cases, they lead to market failure because property rights are not clearly established. Basically, the main thing to remember is that public goods are underproducced and common goods are overconsumed. The government can solve these problems by selling pollution permits, as we learned in Chapter 10, regulating private behavior, or providing the public good.

     I would give this chapter a difficulty rating of 1 out of 3. In this chapter, though there are four different good categories, the readers are only told more in depth about public goods and common resources. I think this is because both of these are not excludable, meaning they are free. These two are the ones most likely to cause negative externalities which serves as a good follow up from the last chapter.  

Journaling of Chapter 10: Externalities

     Chapter 10 addresses externalities, the uncompensated impact of one person’s actions on the wellbeing of a bystander. There are two types of externalities, negative and positive. Negative externality is when the optimal quantity that maximizes total surplus is less than the equilibrium quantity generated by the market. Positive externality is when the optimal quantity that maximizes the total surplus is greater than the equilibrium quantity generated by the market. To correct market inefficiency the government may choose to internalize an externality which is when they alter incentives in order to make people take into account external effects of their actions. Public policies toward externalities involving government include command-and-control policies which are regulations that limit a certain behavior. Another public policy is market-based policies where the government can place corrective taxes, subsidies, and tradable pollution permits. There are also private solutions to externalities. Private solutions include moral codes, charities, and private markets. This leads the readers into The Coase theorem; people can bargain amongst themselves and reach an efficient solution.

     I would give this chapter a difficulty rating of 1 out of 3. I think this was a very simple chapter because we are already familiar with market failure. Also, this is just an introductory chapter so the following chapters will probably continue going more in depth. The constant references to pollution made the chapter easier to comprehend because it gave us a real-life problem and solution that applies all the economic policies. Overall, I really enjoyed this chapter on externalities and learning about how they can be solved by either government policies or with private solutions. 

Article Review 3: David Stockman's Contra Corner

     This week’s article is once again a piece written by David Stockman. This article is focused on the false claims of the Federal Reserve and the current state of what he believes to be the global recession. It’s quite clear that Stockman, as always, heavily opposes the Federal Reserve and their handling of the U.S economy. He believes that the United States and other world economies are headed towards a recession due to a variety of different factors. Some factors of many include low interest rates, the excessive money printing that the Federal Reserve is officiating, etc. He attacks claims made by The Fed and Ben Bernanke, a former Federal Reserve representative. 

     Their claims try to prove evidence of a rising economic situation but the statements fail to account for how the economy was before the recession. For example, Bernanke boasts that the job situation in the U.S has faced mass improvement as measured by the unemployment rate. However, Stockman argues that every job gained was not a “new” job, it was a “born-again” job. Thus, the Federal Reserve actually has done next to nothing to improve the state of jobs and the unemployment rate. Stockman also points out that the claim that there is a higher growth rate in the U.S than Europe due to the Federal Reserve’s tactics is false. They purposefully skewed evidence in their favor by picking the right time intervals. As always, David Stockman’s stance on the issues are clear as he takes on the pessimistic perspective towards the current economy and for good reason.  

Journaling of Chapter 8: Application: The Costs of Taxation

     Chapter 8 further dives into the subject of welfare economics and focuses on taxation. This chapter introduces us into the idea of deadweight loss of taxation which is the reduction in total surplus that results from a tax.  The greater the elasticity is for supply and demand, the greater the deadweight loss of the tax will be. Also, deadweight loss increases as a tax increases. This leads us into the ideas of Arthur Laffer. Laffer believed in supply-side economics and came up with the implication that if tax rates are extremely high, instead of bringing increased revenue for the government it will reduce quantity. Thus, a reduction in tax rates would cause an increase in total revenue given to the government.

     I am not sure what economist’s side I am regarding Laffer’s theory. I think that Laffer’s argument would only work in extreme cases such as the situation in the 1980s that took place in Sweden. I think this chapter was pretty simple because readers have already been introduced to how taxation works. This chapter just goes more deeply into it and shows how tax revenue is affected by varying degrees of taxes.  Though taxes are undoubtedly necessary, it does cause society to lose some of the benefits of efficient markets. This chapter gave me a good basis for understanding the economic impact on taxes and I look forward to learning more about taxation and how taxes will influence the overall economy. I give this chapter a 1 out of 3 difficulty rating.

Journaling of Chapter 7: Consumers, Producers, and The Efficiency of Markets

     Chapter 7 discusses consumer surplus and producer surplus. It also discusses market efficiency which seems to be a combination of the two, consumer surplus and producer surplus summed together.  Consumer surplus is the amount a buyer is willing to pay for a good minus the amount that the buyer actually pays for it. Producer surplus is very similar with consumer surplus except the main factors are switched. Producer surplus is the amount a seller is paid for a good minus the seller’s cost of providing it. Now in order to calculate market efficiency, you must find total surplus which is the sum of consumer and producer surplus. If the market is not efficient, it is probably due to market failure which is probably either due to market power or externalities.

     Overall, these three concepts are easy for me to grasp. I liked the examples that the book gave when discussing these topics. The reoccurring examples of CDS in both producer and consumer surplus was especially helpful. This chapter did a good job of laying down the base work for the next two chapters to come that will further elaborate. Chapter 7 was fairly easy to understand. This is probably because it is the introductory chapter of a three part series on welfare economics and market efficiency. I would give this section a difficulty rating of 1 out of 3. 

Article Review 2: David Stockman's Contra Corner

David Stockman's Contra Corner 

     In this article, David Stockman discusses the increasingly troubling problem of global deflation. In fact, he believes that we are in the midst of an unprecedented global deflation. He makes a point of saying that trading companies face falling commodity prices. This decrease has particularly hurt China. He uses this information to lead him to his next point. A prime example he uses while discussing global deflation is the current status of China’s financial market. Some economists think that Chinese involvement will help improve the current economic situation. However, Stockman disagrees and points out several flaws in China’s economy, claiming that China is wrongly handling their business. For example, there is a general decline in prices yet China continues having a surplus of goods. This is evident from the excess of steel, solar, cars and other goods. Stockman is worried that China’s economic situation will flood over and also encompass the United States of America.

     Stockman is not only worried about China’s economy affecting our own, he is also worried about how Brazil will affect the U.S. Stockman also uses Brazil as an example of the worldwide recession taking place. Brazil citizens are facing mass unemployment and are currently experiencing its worst recession in the last half century.

     This article was easier to comprehend than the previously assigned one. Stockman lays down his ideas and opinions very well. He sheds a lot of light on how countries wellbeing can be linked with others. This is a nice follow up from the previous article where we just saw how the U.S economy was going, but now his readers we can see what’s going on internationally.