Chapter 9 Reflections- Application: International Trade

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, my thoughts on international trade restrictions were limited. If I thought about trade restrictions I would probably think about North Korea, Cuba and Iran. These are countries that the United States isn't exactly on friendly terms with. Each of these countries is run under dictatorship which goes against our views of democracy, free-trade, and capitalism. When a country doesn't allow trade with another country it is either because they want to restrict that country from entering their culture or that the initial country can produce an equal or superior product to its own people. They do not find benefit with trading with another country.

After reading this chapter I realize that trade has to make financial sense to each country. Not everyone benefits from trade. Each country must decide for itself whether it will be an exporter or an importer of a certain good. Two ideas popped out at me in this chapter:

1. "When a country allows trade and becomes an exporter of a good, domestic producers of that good are better off, and domestic consumers of the good are worse off.
2. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers." (Mankiw, 175).

I've also come to the conclusion that in an ideal situation there would be two winners: the exporter makes money on the product that they are exporting and the importer gets a product that it didn't have before or that they get a more economical product that they themselves were producing beforehand. This may or may not happen. I guess I didn't realize that there was a world price which is the price of a good that prevails in the world market for that good. 

As an additional reading here are two posts on support of manufacturing employment by Gary Becker (Nobel prize in economics) and Judge Richard Posner:http://www.becker-posner-blog.com/2012/04/concern-about-the-decline-in-manufacturing-in-the-united-states-becker.html and the post before this.  This is a great blog with many economics oriented posts. This particular pair of posts is focused whether or not trade restrictions to support US manufacturing employment are a good idea.

Chapter 8 Reflections- Application: The Costs of Taxation

1. How important do you think the concept of a deadweight loss to taxation is?  Why or why not?

I think deadweight loss is very important when considering taxation policies. When levying a tax one has to take into account how to determine the equilibrium between collecting the greatest amount of revenue without driving down demand for the product or service being taxed. If taxes are too high people will try to avoid buying that product or service or avoid paying the tax illegally. If the tax is too low then you can't generate the necessary revenue for governmental services. 

2. Should politicians and other taxing authorities consider DWL when making their decisions?

Yes, politicians and other taxing authorities consider deadweight loss when making their decisions. Those who have the power to increase or decrease taxes must take into account DWL because by levying taxes they impact the market. Increased taxes discourages people from buying more or buying cheaper-made goods. This in turn discourages producers to produce less or products of lesser quality. Just remember, when there is an increase in taxes this doesn't necessarily mean that there is more tax revenue for government spending. 

Remember: deadweight loss is an excess burden, a loss of economic efficiency or the fall in total surplus that results from a market distortion, ie: a tax. 

Chapter 7 Reflections- Consumers, Producers, and the Efficiency of Markets

1.  Describe efficiency from the perspective of an economist?

2.  What was the most difficult concept in this chapter for you?  Why?

An Economist's Perspective of Efficiency

Efficiency is defined as "the property of a resource allocation of maximizing the total surplus received by all members of society." 

Basic tools that economists use to study the welfare of buyers and sellers in a market:

1. Consumer Surplus: value to buyers - amount paid by buyers. Check out this link for more information about consumer surplus http://youtu.be/qTxniCLYgok
2. Producer Surplus: amount received by sellers - cost to sellers http://youtu.be/-V-Y5klejSg
3. Total Surplus: value to buyers - cost to sellers

When something is not efficient this means that buyers and sellers are not realizing the potential gains. For sellers this means that they are not producing at the lowest cost. An inefficiency in terms of the buyer means that the buyer is not consuming a good that he/she highly values. 

There were several concepts in this chapter:

Welfare economics, willingness to pay, consumer surplus, cost, producer surplus, efficiency, equality. I've talked a little bit about consumer surplus, producer surplus and efficiency. The concept that was the most difficult concept for me was the one about efficiency. Efficiency within the free market is not a given, What happens when there is market failure? 

Chapter 6 Reflections- Supply, Demand, and Government Policies

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

How does this relate to the theories from the chapter? 
This chapter was about "Supply, Demand, and Government Policies." The first story is set in Venezuela and  President Hugo Chavez is setting price controls on specific grocery items to make them more affordable to his people. Unfortunately it is backfiring on him because the producers of these goods such as milk, coffee, and sugar, are barely making any profit and it doesn't benefit them to produce large quantities of these items to allow more people to buy them. Therefore, with the minimal amounts of products the people have to wait in these ridiculously long lines for hours at a time with hopes of there being something left in the grocery store to buy when they finally get into the store!

There could be supply...there definitely is demand. With the government controlling and setting prices the producers and manufacturers of these in-demand products are not incentivized to keep producing. The Venezuelan government is so afraid of capitalism that it is going in a completely opposite direction, and not a good one. I'm not saying that capitalism is the end all and say all but socialism has its drawbacks, especially in this situation. 

Now consider a different case.  After Hurricane Katrina speculators brought in bottled water, but charged quite a lot for it.  
Had Price Controls Been Imposed:
Speculators would not have brought in as much water, if any, knowing they would not have made the profit they would have had there been no price controls. More people would have been able to afford the water but who says there would be any bottles to buy?

The Concept of Fairness and How It Fits This Theory:
Fairness in the case of the bottled water would ideally mean that everyone would be able to buy the bottled water at an affordable price and the speculators would also profit financially. Speculators selling at ridiculously high prices where only the few could afford to buy the water would not be fair to the buyers and selling the water too cheaply is not fair to the speculators who have made the initial investment in the water and need to at least make their money back. 

As a side note, here is an interesting blog posts on price floors and stock pricing:

http://marginalrevolution.com/marginalrevolution/2012/05/should-stocks-trade-in-0001-increments.html

Chapter 5 Reflections- 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)? 

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

Price Elasticity Explained

Elasticity is the a measure of how much buyers and sellers respond to changes in market conditions. 

When the quantity demanded responds only slightly to changes in the price demand is said to be inelastic. 

When does demand tend to be more elastic?

1. If a close substitute is available (the book used the example of butter. If the price of butter goes up you can look to the price of margarine--a substitute--to see if that price is lower).
2. If the good is a luxury and not a necessity.
3. If the market is narrowly defined. (Vanilla ice cream is a more narrowed a category than food). 
4. If buyers have substantial time to react to a price change. 

My example of sales based on elasticity:

Because I do a lot of baking for personal and professional use I buy flour, salt, sugar, eggs, butter, milk and spices on a fairly regular basis. I have noticed that the sugar now comes in 4 pound bags instead of 5 pound bags because the price of sugar has gone up but the manufacturers want the consumer to continue buying sugar at the same price while supplying smaller quantities of it. Eggs are another thing that have gone up in price. I tend to buy organic, free-range eggs but when the price goes up too high I will put aside my want of organic eggs in exchange for regular store brand eggs. My last example of elasticity is butter. Again, I usually buy Challenge Butter because I like that it is not treated with rbST (growth hormone). Lately the price of this has been $3.99 for 1 pound of butter. If I have a $.75 coupon the price goes down to $3.24 which sometimes is less expensive than the store brand. If I do not have a coupon I will buy whichever is cheaper. 

The topic that made the least amount of sense to me in this chapter had to do with the concept of "cross-price elasticity of demand." 

Chapter 4 Reflections- The Market Forces of Supply & Demand

The news in April 2012 had been all about oil speculators driving up the price of oil, and thus the price of gasoline which was averaging close to $4.00/gallon.  In light of this chapter what role do speculators play in the market?  Are they responsible for large price hikes? 


What Role Do Speculators Play in the Market?


First, a market is defined as "a group of buyers and sellers of a particular good or services." Buyers determine demand and sellers determine supply. (Mankiw, 66). 
Speculators do just that, speculate. They use past market trends and make projections about the future. They do research, they may make their own investments to see how their money increases/decreases. Their activity can artificially inflate/deflate the market. Let's take for example here on the Western Slope of Colorado. If oil shale development suddenly takes off and becomes a high commodity a speculator might start buying up the houses in this area therefore raising the housing prices because the demand will be high for those looking to relocate to this area to work with the oil shale companies. Mind you, this is all just speculation. Many times a speculator takes on the risk or reward of his/her investment.  "Moreover, there may be incentive for speculators to self-classify their activities in commodity futures markets as commercial hedging to circumvent speculative position limits" (Shanmugam).

Are These Speculators Responsible for Large Price Hikes?

Speculators are responsible for some large price hikes but definitely not all of them. There are several factors that are responsible for large price hikes: Income, Prices of related goods, tastes, expectations, and the number of buyers. 

• INCOME- Depending on how much people are making this affects how they spend their money. 

• PRICES OF RELATED GOODS- When the price of one good goes up a "substitute" good goes down. 

• TASTES- If you like something you will buy more of it. 

• EXPECTATIONS- Expectations of the future may sway you into either spending or saving your money. 

• NUMBER OF BUYERS- When the number of buyers goes up this means that supply goes up or the cost of goods goes up. 

For a defense of speculators read:

http://www.econbrowser.com/archives/2012/04/a_ban_on_oil_sp.html

My favorite quote from this article:  

     "How exactly do we define the 'speculators' whose participation in the markets is to be banned? Suppose for example, we stipulate that the only people who are allowed to trade oil futures are those who are actually physically producing or consuming the product. If we do that, what happens if a particular producer wants to hedge his risk by selling a 5-year futures contract, and a particular refiner wants to hedge his risk by buying a 3-month futures contract? Who is supposed to take the other side of those contracts, if all 'speculators' are banned?"

I can absolutely see both sides of the 'speculation' argument. Speculators can drive up the prices of goods making it difficult for those of us who buy the goods to continue to pay these prices. As demand goes down prices should go down but this isn't always the case. Maybe a particular type of buyer is being catered to and those of us who can no longer afford the higher prices are weeded out of the consumer pot. 

Then again, it is the speculator, in this particular article, who takes the initial risk buying 'paper' barrels of oil at a lower price and selling for a higher one. That is the risk that he/she takes. They might end up taking a loss.  

Works Cited

Mankiw, N. Gregory. Principles of Microeconomics. 6th ed. Harvard: South-Western, Cenage Learning. 2012. Print. 

Shanmugam, Velmurugan, and Paul Armah. "Role Of Speculators In Agricultural Commodity Price Spikes During 2006-2011." Academy Of Accounting & Financial Studies Journal 16.(2012): 97-114. Business Source Complete. Web. 15 Feb. 2013.

Policy Assignment

Should the minimum wage be increased annually at the rate of inflation?

The minimum wage is defined as, "The lowest wage permitted by law or by a special agreement," according to the Oxford Dictionary. I think most people agree that the lowest wage deemed by the government is never enough. However, I do not think that the minimum wage should be increased annually at the rate of inflation. Yes, the cost of goods rise over a period of time and the current value of the American dollar isn't stellar in these current times. But minimum wage is just that, the bare minimum an employer is allowed to pay their hourly employees, per the government. 

Graph courtesy of www.project. org

Employers could offer a higher salary to stay competitive in the job market and a potential job seeker does not have to take that minimum wage salary. You can see from the graph above that the minimum wage has steadily increased over the years. A person's wage depends on many different factors including: years of experience in particular field, education and prior salary. 

You may wonder, "Who decides when and how much the minimum wage should be increased?" The United States Congress decides what the federal minimum wage should be but individual states have the right to set it higher if and when it deems necessary. 

My next question would be, "should the minimum wage be decreased when inflation decreases?" I think the resounding answer would be, "NO!" Just like Principle 10 states: Society Faces a Short-Run Trade-Off between Inflation and Unemployment." This just means that when inflation rises unemployment is usually low because the cost of goods is higher and therefore more people may be working. Vice versa, when unemployment is high inflation is usually low. This is also referred to as the business cycle. 

As of January 1st, 2013,  the minimum wage in Colorado is $7.78 per hour. That is $.53 higher than the federal minimum wage. The following information was obtained from the CDLE or Colorado Department of Labor and Employment website. Also, if a person if a federal employee in a state such as Colorado that has a higher minimum wage the higher wage must be paid. 

Colorado State Minimum Wage

Effective Date	Minimum Wage	Tipped Employee Wage
January 1, 2013	$7.78	$4.76
January 1, 2012 - December 31, 2012	$7.64	$4.62
January 1, 2011 - December 31, 2011	$7.36	$4.34
January 1, 2010 - December 31, 2010	$7.24	$4.22

Article XVIII, Section 15, of the Colorado Constitution requires the Colorado minimum wage to be adjusted annually for inflation, as measured by the Consumer Price Index used for Colorado.

No more than $3.02 per hour in tip income may be used to offset the minimum wage of tipped employees.

 I can definitely see why some people are big proponents of the minimum wage being increased with the rate of inflation. When things cost more we need more money to pay for those things. There are millions of people who solely support their families on minimum wage paying jobs and it's tough and many look to the government to protect them and be their voice. Minimum wage should be monitored and studied on a regular basis both at the federal and state level.