Chapter 22 Reflections: Frontiers of Microeconomics

This is the last chapter in the course.  I hope you have enjoyed the course and are saddened to see it end.  What concepts or theories did you find most interesting and/or useful?  Is there an area where you changed your thinking?

Asymmetric Information
This is a situation where one person in a party has more information than the other person. 

Examples would be:

• A seller on eBay is selling an item, they have more information on the product(s) they are selling than the buyer does.
• A real estate agent has more information on a house that they are listing than the potential buyer does.
• A tenant knows more about what is happening in the apartment than the landlord does.
• A congressman knows more about the inner workings on Washington, D.C. politics than the constituents do. 

There are definite instances where, in any of the above scenarios, that information can be used for malicious or greedy intentions. Say for example: you want to sell your car that has been in several accidents so instead of selling it to a dealer, who is more likely to run a background check on the car history, you try to sell it privately to a more uninformed consumer. This is known as adverse (unfavorable) selection. 

The book also used the example of health insurance. The person that needs insuring knows more about their health than the actual insurance company so they may be tempted to fudge information about themselves so that they will be able to get coverage. Maybe they say that they don't smoke or that they weigh less than they do so they will not have to pay higher premiums. 

Behavioral Economics
This type of economics deals with decisions that people make from a psychological standpoint. 
The sections include:

• People Aren't Always Rational
• People Care About Fairness
• People Are Inconsistent over Time 

Being a former psychology major I can definitely see how behavior affects economical decisions in their life. So many people carry a large amount of debt due to their sense of "immediate gratification", the "I have to have it now, I can't wait!" attitude. I bet a lot of the time people just buy things to buy...you've seen the show "Hoarders" right? Those people are the epitome of shopping to satisfy an emotional emptiness, mask painful situations from the past, fulfill a part of themselves that seems unfulfilled, or to control something (like spending) when they feel so out of control in other areas of their lives. Yes, people are irrational and are very inconsistent. They do not think about their future and they definitely don't plan for it very well.

I am a big Dave Ramsey fan. Dave Ramsey is a financial author, radio host and money motivational speaker. He has a saying that goes something like this: "Live like no other now so you can live like no other later." By this he means scrape, save and pay off debt and live frugally now so that by the time you retire you are retiring comfortably without having to worry about your finances in your "golden years." I have slowly incorporated some of his ideas into my financial repertoire, paying off debt, putting more money away in retirement funds, saving for my son's college education and forgoing certain luxuries like vacations, a new car, new clothes...anything that would seem frivolous. I'm not perfect, I do splurge every now and then. But planning for the future now will help me and my family make more rational, fair and consistent decisions...at least I hope so!

Author's Note: This will be my last post for this Microeconomics class. I have really enjoyed using this blog as a way for me to express my thoughts on the reading material on the book "Principles of Microeconomics, 6th ed." by N. Gregory Mankiw. I wanted to say a huge "Thank You" to my professor at CMC Lisa Cheney-Steen!

Chapter 21 Reflections: The Theory of Consumer Choice

People Face Trade-Offs

In this chapter I learned about the trade-offs that consumers have to make when deciding on what to purchase. The theory says that "when a consumer buys more of one good, he can afford less of other goods." 

Budget constraints are limits pertaining to a person's income. You only have so much income and you have to make purchase decisions based on that income. 

Consumer preferences (represented by indifference curves) allows the consumer to choose "bundles"or combinations of goods or services that he/she wants to buy, that is, how many items of each good/service can the consumer buy with the amount of money that he has. 

Example:
Let's say I have $100 a month to spend on movies (@ $10 a movie) and  popcorn (@ $5 for a bucket of popcorn). 

#of Movies   # of Popcorn     $ Spent on Movies      $ Spent on Popcorn        Total $ Spent          
                                                                                         
10                         0                           $100                                0                        $100
9                           2                           $90                               $ 10                      $100
8                           4                           $80                               $ 20                      $100
7                           6                           $70                               $ 30                      $100
6                           8                           $60                               $ 40                      $100
5                          10                          $50                               $ 50                      $100
4                          12                          $40                               $ 60                      $100
3                          14                          $30                               $ 70                      $100
2                          16                          $20                               $ 80                      $100
1                          18                          $10                               $ 90                      $100

In this scenario I would probably choose the highlighted scenario because I would be able to buy 2 tickets and a bucket of popcorn for 4 separate times, that is if I wanted to take someone to the movies with me and share a bucket of popcorn! That would be my consumer preference using these budget constraints. 

Indifference curves show consumption "bundles" or options that give the consumer the same level of satisfaction. Below in Illustration A you'll notice that in order to get Good A (using the above scenario A is movies) and Good B (buckets of popcorn) you have to set a budget, shown here by the blue vertical line. Points a and e are outside the budget, they are more than the budget will allow. The points b and d lie on the indifference curve but d is the cheaper of the two. At point c the consumer is equally satisfied with the number of movies and the number of buckets of popcorn that can be bought. 

Illustration A. 

As people will usually want more of a good or service than less you can see where the trade-off might be. I think most of us try to live within budget constraints without even thinking about it in those terms. We work, money comes in, we want to buy things, money goes out. We can't spend more than we have and we have preferences as consumers as to what we will spend our money on. The graph might be a little confusing but if you think about it it's pretty straightforward.

Chapter 20 Reflections: Income Inequality and Poverty

How do we determine who is rich and who is poor? 

To be considered rich in the United States a person has to make more than $200,000 annually, this is the top 5%. The bottom 5th would be those who make $27,800 annually or less. Everyone else is in the middle. I think it also depends on how many people that annual salary has to take care of, what kind of bills one has, what kind of debt one has and many other factors but for the sake of this entry we will be talking about annual salary only.

I recently watched a movie on Netflix called "The Queen of Versailles," a documentary on the lives of David and Jackie Siegel. David is owner and founder of Westgate Resorts, the largest time-share company in the world. To everyone they would be considered rich, with the huge mansion that they live in, the 90,000 square foot one that is currently being constructed for them, the limos, the private plane, designer clothes, and endless "things." David is portrayed as the always-working provider while his wife is in constant spend-mode. Only he and his accountants know his true wealth but it would seem to me that he is stressed because he knows how much money he owes his banks and creditors and he also knows how much he is actually bringing in. I wonder how "rich" he considers himself.

I don't have to tell you who would be considered poor or what constitutes poor. Poor people don't have enough to feed themselves of their families. They may or may not have a home to live in. They may or may not have a car. They are unable to pay their bills. They may be swarming in credit card debt or they may just not have enough, if any, income to help sustain a comfortable lifestyle. They may be on welfare or some other types of government assistance. They may not be well-educated.

Measuring inequality.

Inequality is measured in terms of income distribution over time. "In 2008, the top 5% of families received 20.5% of total income, which was greater than the total income of the poorest 40%" Mankiw writes. When we look at the poverty rate, or the percentage of the population whose total family income falls below an absolute level that has been set by the federal government. On page 421 it talks about the richest 5th U.S. households in 2006 made a little less than $150,000 annually while the poorest 5th made a little less than $10,000. Granted, the wealthiest will always pay a higher percentage of its income to taxes while those at the bottom will pay very little, if any.

What constitutes as poverty?

Click here to see how the Census Bureau of the United States constitutes poverty. 

Redistribution of Income 

There are two schools of thought when it comes to redistribution of income:

• The government has an obligation to take care of its people.
• The citizens have an obligation to take care of themselves.

The political philosophies of the redistribution of income are made up with several types of thoughts:

• Utilitarianism- Says that the government should choose to maximize the total "utility" of everyone in society. Find out what makes them happiest. As their income rises so does their happiness.

• Liberalism- The government should choose policies that are deemed as "just." The goal is to raise the welfare of the worst-off person. 

• Libertarianism- Believe that the government should not take from "some individuals and give to others" or redistribute income. They believe that the equality of opportunities is more important, make sure that everyone is playing on a level playing field.

How can we help the less-fortunate?

This chapter talks about several ways to help reduce poverty: setting appropriate minimum wage laws, government programs such as welfare, negative income tax (subsidies for low-income households, high-income households are taxed which creates revenue), in-kind transfers (charitable contributions of goods and services), and lastly antipoverty and work incentive programs. 

I would also add education in there. By educating the less-fortunate we give those who have less the opportunity to better themselves, not just putting a band-aid on the wound but actually healing the wound and giving them clean dressing for the wound. The use of pell grants, scholarships and other aid help those who have fewer opportunities to gain an education a way of bettering themselves!

Chapter 19 Reflections: Earnings and Discrimination

Post three of your "margin notes" from your reading of the chapter to your blog.  Why did you make the comment you made in the margin?  What did you find confusing, useful, or important about the passage you commented on?

Margin note #1: The Beauty Premium. 

More attractive people get paid more, especially in jobs like acting, sales, and service industries. I think this is true initially but once a "pretty" person starts working they also have to prove that they are good at their job. If you are an attractive actor but can't act you'll be playing roles in cheesy horror films or relegated to being an extra, it's highly unlikely that you'll be winning an Oscar anytime soon. I think attractive people might initially get hired because they are good-looking but they too have to put forth the effort into becoming successful in their careers. The not-so-attractive people usually have to rely on their education or great references to get their foot in the door. They have to work harder at getting ahead. If you have model-good looks you may have an easier time getting an interview or the job but looks will fade with time and if there isn't any substance you may  have a hard time keeping that job unless you have proven your worth to the company. 

Margin note #2: Education and Terrorism.

The book talked about the younger the terrorist the less educated that they are likely to be. I guess this section of the chapter caught my eye with the recent bombings at the Boston Marathon just last week. You have two brothers, one who is 19 and the other 26. The news reports focused a lot on their education or lack there of. They were looking for a reason that these two might have done what they did. They want to see if they were educated here in the United States or abroad. Did they go to college? What were they studying? What were their interests? Were they outgoing or introverted? The "Even for Shoe Bombers, Education and Success Are Linked" article written by Austan Goolsbee for the New York Times August of 2006 was very eye-opening. He said that a study that had been done showed that the older and more educated the terrorist the less likely that they would be caught on their mission. "Experience and education improve productivity." Success for terrorists is measured in numbers, numbers killed. There is usually a mastermind behind these plots to hurt so many but there will always be young, impressionable young people who are willing to carry out the wishes of that mastermind. 

Margin note #3: Discrimination in the workplace.

I found it interesting that job-seekers were likely to be discriminated against before they even got a chance to interview for a job. The section labelled, "Is Emily More Employable than Lakisha?" really got my blood boiling. It talked about so-called Equal Opportunity Employers discriminating potential employees just because of the names on their resumes. I never even thought about something like that. I realize that racial discrimination still happens but the staggering 50% more call backs for white names than African-American names just boggled my mind. 

Discrimination doesn't just have to do with racial differences. Whether you're a man or woman, rich or poor, blond or brunette, educated or not there will unfortunately always be some sort of discrimination going on in the workplace. One worker will get paid more and one worker will be paid less. 

Chapter 18 Reflections- The Markets For the Factors of Production

Pretend for a moment you are the instructor developing this course.  Write 3 short answer questions for an exam over this chapter that you believe cover the most important points in the chapter. Post all three questions on your blog.  Remember that an exam only has 10 questions and yet has to assess the students' understanding of the entire unit.

Question 1: What are the three most important factors of production?

a) demand, opportunity, time
b) labor, land and capital
c) trade-offs, capital, and investors
d) none of the above

Question 2: Because factors of production are used together, the marginal product of any one factor depends on the quantities of all factors that are available. A change in the supply of one factor alters the ________________ earnings of all the factors. 

a) potential

b) assumed

c) equilibrium

d) reported

Question 3: Give an example of a trade-off an individual might have to face in the workforce? Describe the pros and cons of each. 

Chapter 17 Reflections- Oligopoly

"This chapter and blog post wraps up this module with the last type of market - oligopoly.  Oligopoly is a great word to use in casual conversation, so pay attention to this chapter.  The next time someone talks about how nice it would have been if AT&T had bought TMobile you can say "I agree!  The phone industry would still have been an oligopoly, there was no risk of creating a monopoly."  Of course a few people will wonder if you have perhaps started drinking, but most people will be really impressed." --Lisa Cheney-Steen

My thoughts about anti-trust laws with respect to the cell phone industry...

I absolutely think that anti-trust laws are necessary in regards to the cell phone industry. One wireless/broadband company should not be able to dominate the playing field. Good healthy competition between carriers is best for everyone, especially the consumer. Not only does it keep the prices competitive but one company should not be able to control the "airwaves." If AT & T (or whichever cellular service provider) were allowed to monopolize the market not as many people would be a part of the market. It would be bad for everyone.

Do I think the cell phone industry could be an oligopoly? Why/Why Not?

First, let's explain what an oligopoly is. This market is one in which there are only a few sellers who offer similar or identical products. I don't know if I would categorize the cell phone industry as being an oligopoly. If I am thinking of cell phone manufacturers there are quite a few: Sony Ericsson, Nokia, LG, Motorola, Sanyo, Samsung, Audiovox, Kyocera, Apple, HTC just to name a few.

If we are talking about cell phone service I would maybe consider this as having oligopolistic characteristics. T-Mobile, Sprint, AT &T, Verizon are the ones that come to mind. There are fewer cell phone service providers than there are manufacturers of the cell phones for sure. This is a highly competitive market and it is hard to break into this industry.

Explain how a decision box works: 

The book used the example of Bonnie and Clyde who had been caught and taken into custody after just having robbed a bank. They are each taken into separate interrogation rooms. They each have two options: Confess or stay quiet.

If Clyde and Bonnie confess: They each get 8 years in jail.
If Clyde confesses and Bonnie does not: Clyde goes free.
If Clyde and Bonnie stay quiet: They each get 1 year in jail.
If Clyde remains silent but Bonnie confesses: Clyde gets 20 years in prison.

 Since neither knows what the other is going to do each person has to do what they think is right. The example in the book says that they each end up confessing, getting 8 years in prison. If they had each just stayed quiet, they would have only gotten 1 year. These are the decisions that we have to make all the time, not necessarily to this level of losing actual freedom but on a much smaller scale.

What about oligopolies is most unclear to me?

The only thing I wonder about oligopolies is how do those few firms remain competitive? Everyone is selling the same product for about the same price. I guess this is where marketing of said product comes in to the picture. The firm is trying to sell a product that is virtually the same as its competition but has to differentiate itself as superior.

Chapter 16 Reflections-Monopolistic Competition

Musings about the role of advertising in industries classified as oligopolistic/monopolistic competition...

Can advertising make markets either more or less competitive? How?

Absolutely! Think about the campaign ads for Coke or Pepsi. Those two have been battling it out for decades when it comes to advertising. Pepsi is currently using Beyonce in their ad campaign to get people to buy their soda. A slogan of theirs is "Pepsi: The New Generation"which always seems to have the most popular and current celebrities hocking their product. Celebrities such as Britney Spears, Bob Dole, Shaquille O'Neil and David Bowie have all been celebrity endorsers of Pepsi. Who could forget Michael Jackson's infamous Pepsi commercial shoot where his hair caught on fire?!

Not to be outdone, Coke has had many famous commercials that are a part of television history. Think about the "I'd Like to Buy the World a Coke" commercial or the Mean Joe Green commercial. Coke has recently used country music star Taylor Swift in their Diet Coke ads. Other celebrity endorsers of Coke include: Bill Cosby, Olympic ice skater Michelle Kwan, Jennifer Lopez and a host of others.

Commercials create a buzz, why do you think those coveted spots during the Super Bowl go for millions of dollars? It's all about competition!

Print ads also have a way of creating a more competitive market. If I think about the cigarette/tobacco market the first companies that come to mind when thinking about their ads is Marlboro and Camel. The Marlboro Man was portrayed as this rugged, handsome, hardworking cowboy. Joe Camel was the face of Camel brand cigarettes which showed a fun-loving, cool, hip camel who was always shown with the slogan "Smooth Character." In a New York Times article from 1997 Eric Solberg, the executive director of Doctors Ought to Care, said that, ''Joe Camel represented an icon that refueled the moral outrage of the anti-smoking movement." Camel was trying to compete with Marlboro to take the top spot in cigarette sales. 

The most interesting thing I learned in this chapter...

The idea that firms can be both monopolistic and competitive. This is a market where many firms sell products that are similar but not identical (Mankiw, 330). Example are: DVD's, computer games, restaurants, and books.
Characteristics of monopolistic competitive firms:

1. Have many sellers competing for the same customers.
2. A product that is slightly different than than its competition. 
3. Are free to move into or out of the market without any restrictions. 

Mankiw, N. Gregory. Principles of Microeconomics. 6th Edition. Ohio: Cenage Learning. 2012. Print.

Chapter 14 Reflections- Firms in Competitive Markets

Firms in Competitive Markets

Why does a perfectly competitive firm maximize revenues where P=MC (Price = Marginal Cost)? 

Investopedia describes a company as "perfectly competitive" as having met these 5 criteria:
1. All firms sell an identical product. 
2. All firms are price takers. 
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices 
charged by each firm. 
5. The industry is characterized by freedom of entry and exit.

A perfectly competitive firm maximizes revenues where price equals marginal cost because the price of a product does not depend on the number of units produced and sold. The total revenue a firm brings in is in proportion to the amount of output. Each firm within this market is the price taker, not the price maker as in a monopoly.

Why is P=MR (Price = Marginal Revenue) in this market type?

P=MR is in this market type because, as this chapter points out, that total revenue is equal to price times quantity. So say you have a $299 product and you have 5000 units of said product. The total revenue is going to $1,495,000. If you have 1000 units the price is still going to be $299 per unit. The price has not gone up or down. 

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

Our book talked about the milk industry being a perfectly competitive market because sellers of milk have to be perfectly competitive because if they raise their price above what the current market is dictating then people will go buy their milk elsewhere. If they lower the price too much then they will just be losing money, they really don't have an incentive to want to drop their price. Another example would be eggs. There are many chicken farmers all selling their eggs. Once at the grocery store a consumer has a choice of buying this egg or that. They are all relatively the same price. I think one way that farmers are trying to be more competitive is to jump on the organic, free-range, hormone-free, bandwagon. Many people will pay more for what they perceive as a healthier alternative or variation. 

Chapter 13 Reflections- The Costs of Production

The Cost of Production

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

They first fall because people learn to do their jobs better as they produce more. Marginal cost indicates "total cost changes for a given change in quantity of output," as amosweb.com puts it. In layman's terms this just means that at first there is always a learning curve. People just learning their jobs are not as efficient, they have to take the time to learn the new way of producing the good. Once they understand how the good needs to be produced they go about their job automatically without having to relearn the whole process over again, it become second nature and they are more efficient.

Think about Henry Ford when he was just starting to role the first cars out from production. It was very expensive and time consuming to do one car at a time. Over time Ford developed a faster, more efficient way of producing cars and getting them out from the factory and onto the roads. He went from having just a few workers to having hundred's and thousands of workers. His assembly line revolutionized the way goods were produced. 

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

Marginal costs are important to a firm when making decisions to increase or decrease production because 
as Chapter 13 points out on page 270, "Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising." A firm must take into account how well a good is selling, the demand for the product, and it's cost effectiveness. 

What immediately comes to mind for me is Apple. Apple worked really hard to put out the very first personal tablet computer called the iPad in 2010. It had all the bells and whistles and it's portability and sleek design made it a very desirable product. The consumer was already familiar with the iPod so there wasn't a need to educate the consumer totally on how to use the product. The price depended on how much memory you wanted in your iPad. The least expensive was the 16 GB, then the 32 GB and lastly the 64 GB. Over 15 million 1st generation iPads were sold. I think that with each generation of iPad Apple has to weigh the demand for the new product (how many people already have an iPad) and how much can the consumer afford to pay (Apple created the iPad mini, virtually the same product as the original iPad just a smaller, less expensive version).   


Personally I am not one of those people that has to have the newest, flashiest, anything. I will usually wait until the hype dies down and the price goes down. I have plenty of friends who will rush right out to the store and spend ridiculous amounts of money to have the newest product. That's fine for them, but as for me and my house, we will wait for the sale!