Reflections on Chapter 14: Firms in Competitive Markets

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

A competitive firm maximizes revenues where the market price equals marginal costs because the market price is a reflection of the firm's marginal revenue. So then it becomes obvious that a firm's marginal revenue shouldn't be less than its marginal costs. If its marginal revenue (or price) is more than its marginal costs, it should increase output to maximize its revenue. If marginal revenue or price (since MR=P) is less than its marginal cost, it should decrease production, to reduce costs and maximize revenues. That is why the only perfect place for output to be is where price meets marginal costs. 

2. Why is P=MR in this market type?

Because in a competitive market, the firm is a price-taker which means every firm in the market must settle for selling their product at the market price. Since the price remains constant, a firm's revenue is proportionate to the quantity produced, or output. So, since total revenue is really only price times quantity, the only thing that changes in a perfect market is quantity. Then since average revenue and marginal revenue divide by quantity, which takes quantity changes out of the equation, the price is the only variable that matters, and again the price remains constant at the market price, regardless of quantity produced.

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

Gas stations are businesses that belong in this category because the products they supply are identical to other gas stations, there are many seller of gasoline and certainly many buyers, and they are free to enter and exit the market for selling gas.

Reflections on Chapter 13: The Costs of Production

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

At low levels of production, each additional unit produced increases the marginal product so marginal cost declines initially. As output increases, marginal product diminishes since each additional unit of input no longer produces as much additional output which leads to rising marginal costs. 

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

Firms are always trying to maximize profit which is total revenue minus total costs. If marginal costs are rising, then profits are less. So firms are trying to find a way to minimize marginal costs and that could mean decreasing production or increasing it.

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

The "marginal" concept has been a tough one to grasp - ever since learning that "rational people think at the margins". But I think I finally understand. Last night I was eating dinner with some friends at a Mexican restaurant. I'd had two margaritas and when the waiter came by and asked if I wanted another, I thought about the "marginal" concept. My total margarita consumption was not as important as was the idea of adding one more margarita, the marginal one. I was feeling good and having fun, like my marginal experience was rising but I knew that if I increased my input by one unit (drinking one more marg), my output (fun experience) would not be increased as much as it had been from the unit before (diminishing marginal product) and that my marginal cost (headache in the morning) would increase. I decided to not increase input. 

Reflections on Chapter 12: Designing the Tax System

I was rather pleased to see how the tax burden was distributed in Table 8 from the text, The Burden of Federal Taxes. It looks pretty equitable to me, except that I would like see the top 1% paying more. So I do favor progressive taxes. I'm suspicious of the consumption tax instead of the income tax. First of all, since wealthy people usually spend less of their income than do the poor, a consumption tax would affect the lower class more than the upper class. Secondly, I wonder, wouldn't a consumption tax discourage people from spending and thereby slowing the economy?

I believe that equity and fairness are very important to the tax system. We would all like to see the tax codes become less complex so they were easier to process and understand. However, I understand that they are so complicated because people who knew much more than I are trying make the system more equitable. Or at least I hope that's what they're doing.

Reflections on Chapter 11: Public Goods & Common Resources

Public school are an example of a public good. The costs of providing this good include the cost of building the school, the cost of the property the school is on, and the utility costs of maintaining and operating the building. There are also the salary costs for the teachers and other employees of the school, the cost of transportation and the cost of the materials and equipment. The benefits are that members of the community will be educated, as well as providing jobs for the community. The good could be provided  privately where the parents of children attending the school had to pay for it. However, households without children would be the free-riders, reaping the benefits of an educated community without paying for it.

This chapter did make me think about public goods differently. I never thought about the mechanics of public goods and why the government really needs to pay for these goods. Now I understand that, because of free-riding, it's the most efficient way to allocate the resources for everyone's benefit.

Reflections on Chapter 10: Externalities

When thinking about my favorite example of a negative externality, I tried to think of one that wasn't given in the text book. I chose the fast/processed food market. The problem of obesity has become a health epidemic in our country mostly as a result of the negative externality of the food industry.

I don't believe that this problem can be solved via negotiation (Coase Theorem). Many groups, including government agencies, have launched huge pro-health campaigns over the last decade or so in order to educate and persuade the public to make better decisions in regard to their diet choices. These efforts have made a difference by putting pressure on the food industry to reduce the negative impacts of their actions. However, it seems their efforts have done little to influence individuals to reduce the negative impacts to their bodies.  We still have a very long way to go before we reach optimal quantity for maximizing benefits to society. I believe that market-based policies, namely a corrective tax, are the most effective way to influence people to make healthy diet decisions. The government could use the tax revenue to subsidize health insurance.

Reflections on Chapter 9: Application: International Trade

This is my favorite chapter so far, and one of the most challenging for me, mentally. I like the relevance of the topic to today's social and political issues. When I watched the presidential debate, one candidate would point the finger at the other for sending jobs overseas. It's such an unpopular idea but, according to the author of our text book, it's the economically correct one. There seems to be such a huge gap between how economists view international trade and how non-economists view it. That made me skeptical.

Since I took Macroeconomics last semester, and the test book is identical so far, I had a good understanding about the benefits of free trade. From an economic standpoint, I saw how free trade would increase the economic well-being of every country that allowed it. I remembered the arguments in the text and how economists had an answer for each of them. This time around, I finally see why I'm not totally on board and why most of the county isn't either. Economic well-being for a nation does not translate into economic well-being for individuals. That's the problem. As Paul Krugman pointed out in his article, Trouble with Trade, the upper and upper-middle classes are reaping the benefits from international trade, while the middle and especially lower classes are mostly disadvantaged by it. In our country, manufacturing jobs - usually held by the middle and lower classes are declining while jobs in higher education, usually held by the middle to upper class, are increasing. It all makes sense in broad economic terms but to that person who suddenly lost their manufacturing job at the age of 40, it's completely irrelevant that careers in higher education are on the upswing. In the text, the answer is for those misplaced workers to prepare themselves, via education and training, for a career in a field that is growing. It's just not realistic to expect someone in the latter half of their life to be able to do that, especially now that they have no income! And for the few that can, their chances of getting a job after school and/or training are slim at best. That's why I take issue with Steven E. Landsburg's article, What to Expect When You're Free Trading. I see nothing wrong with expecting those benefiting the most from free trade to use some of their newly acquired resources to help their fellow Americans benefit as well. I'm totally taken aback by people like Landsberg, who have no shame in taking all they can for themselves while declaring that the less fortunate are the morally corrupt portion of our society. GRRRR!

In short, free-trade benefits everyone, but it benefits some much more than others. In order to increase the well-being of a nation, I believe that equality has to become part of the economic equation.

Reflections on Chapter 8: Application: The Costs of Taxation

How important is the concept of deadweight loss to taxation? It's the other side of the taxation coin and it must be considered when deciding what to tax. Policymakers should do their best to minimize it whenever possible by only taxing markets with inelastic demand or supply. The text didn't examine the results of a deadweight tax on a market with both inelastic supply and demand but I assume that would have less of a deadweight loss than any other scenario. If I was employed in an industry that was affected by taxation and deadweight loss then I would probably consider it very important. Just studying the phenomenon, I see it as an unfortunate but unavoidable result of taxation.

I found the concept of the Laffer curve very interesting. I never would have thought that lowering taxes could increase government revenue but it definitely makes sense now. The challenging part for advising economists is knowing where we are (our present tax levels) on that curve, so we can know which way we need to go.