Chapter 24: Measuring the Cost of Living

 Chapter 24 is looking at the other side of the economy: the consumers and their cost of living. Instead of measuring GDP, to find the cost of living for consumers (households), we must find the CPI, or the consumer price index. While this form of measuring and comparing prices has many flaws/problems, many economists still use it and relate it to the producer price index. In order to find the value of CPI, you must first construct a basket of goods and then follow steps in order to achieve a value of the entire basket's value. By doing so, you can now have a base year which is helpful in order to compare the CPI's of other years. By comparing the base year with other years, economists can find the inflation rate of prices.

Another topic mentioned in this chapter was the term, indexation. Indexation is the automatic correction of a dollar amount for the effects of inflation by law or contract. This can also be called the cost-of-living allowance, or the COLA. COLA is the place where most transfer payments go, such as Social Security payments, unemployment, tax returns, etc. Discussing tax rates, there is a difference between Real and Nominal Interest rates. Nominal rates are the  interest rates as usually reported without the correction for the effects of inflation. Real, however, is the interest rate already corrected for inflation.

Overall, I would give this chapter a rating of 2.5 because it was a very short read and it had many similar topics discussed in the previous chapter. The only reason I decided to deducted a half point was because I still don’t feel comfortable with indexation and would like some more clarification on this. 

Chapter 23: Measuring a Nation's Income

Chapter 23 talked about GDP, or Gross Domestic Product; what it is, how it is measured, and what it reveals. GDP is defined as the market value of all the final goods and services produced within a country within a given period of time and is used to calculate the total expenditure and total income of a nation. The formula for GDP is the sum of a nation's consumption, investment, government purchases, and net exports. GDP can be measured as nominal GDP, which measures the production of goods and services at current services, and as real GDP which measures the production valued at constant prices according to a base year. Nations with a high GDP can afford better education and healthcare systems, while nations with low GDP often have lowered life expectancy, higher infant/maternal mortality, and less access to clean water.

Chapter 18: The Markets For The Factors of Production

Chapter 18 discusses the effect of supply and demand of the labor market. The chapter started by describing what income was and how it was distributed in the markets for the factors of production. The factors of production included labor, land, and capital. Talking specifically about labor, the demand is determined through marginal product and the value of marginal product. In regards to supply of the labor market, it all depends on the worker's opportunity cost. The opportunity cost is battled between the work and leisure. In addition, the slope of this graph is an upward slope because that means that people respond to an increase in the wage being paid by enjoying less leisure time. The equilibrium reached by the supply and demand is according to the marginal cost. In equilibrium, each factor is compensated according to its marginal contribution to the production of goods and services. This way, any changes between supply and demand will always result in equilibrium.

Chapter 17: Oligopolies

Chapter 17 is all about oligopolies and the certain characteristics this market has compared to monopolies and perfect competitive market. As mentioned before, oligopolies are more similar to monopolies since a small group of firms controls 50 or more percent of the market. In addition, the price is always above marginal revenue, except over a period of time when more sellers enter the market. When more sellers enter the market, the price gets closer to marginal cost and the socially optimal quantity is produced, turning the market into a competitive market. A major problem that occurs with oligopolies is that cartels can be formed, producing a form of cheating. A firm is able to cheat the other seller in the compromise due to self-interest and the incentive provided. A good way at looking at these situations is through the idea of a mind-game.  The game being described is similar to choosing the dominant or most self-interested option. The game can be figured out through the charts presented in the books. 

Chapter 15: Monopoly

Chapter 15 is all about monopolies and their impact on the market and the economy. For starters, monopolies are not price takers, they are price makers. Since monopolies control a the main supply of a particular good, they are able to change the price of the good in order to maximize their own profit. In order for a market to be considered a monopoly, they must have a key resource owned by a single firm, the government gives a single firm the exclusive right to produce some goof or service, and the costs of production make a single producer more efficient than a large number of producers. In addition, when discussing the types of goods in a market in a previous chapter, government created monopolies are called natural monopolies. Natural monopolies included services such as water or electrical supply since the cost of a single firm to produce for the entire demand is less expensive for the consumers than having two or more supply firms.  It is also crucial to remember that that for a monopoly firm, the price must be greater that than the marginal cost and the marginal revenue, and that the profit created by monopolies create a deadweight loss. The government has some ways to control the power of a monopoly such as increasing competition, regulation, turning companies into public enterprises, or by simply doing nothing at all. By doing so, the monopoly will still have power but not too much and that will reduce the price discrimination. Overall, I think it was a long chapter to read and I would give it a rating of 2. I would however like a better understanding of the graphs.

Chapter 14: Firms in Competitive Markets

In Chapter 14, the costs and total revenue discussed in the previous chapter are applied on firms in competitive markets in order to maximize profits. For the market to be defined as competitive, there should be many buyers/sellers who are price takers, the goods are largely the same, and firms can enter or exit the market. A good example the book used was the Smith Family Dairy Farm and their production of milk. For the firms to maximize their profits, the marginal revenue and  the marginal cost should be exactly equal. If the marginal revenue is greater than the cost, the firm should keep on producing more but if the marginal revenue is less than the cost, they should decrease production. Also, the marginal revenue is the price of the good. It is also crucial to know that the marginal cost curve is the supply curve for the competitive market firms. In addition, the chapter discussed how to determine when a firm should exit or shut down their production in terms of price and the average variable cost (AVC). If the price is less than the AVC, then the firm should shut down. A sunk cost is the cost that has already been committed and cannot be recovered, such as the cost of land (a fixed cost). Overall, I understood the general concept of it but I found the charts to be rather confusing. I would rate this chapter a 2 since I really understood the first half of the chapter but the second confused quite a bit.

Chapter 13: The Costs of Production

Chapter 13, The Costs of Production, talked about how to determine the total costs and revenue the supply firms produce over a short and long run. To start off, one of the laws of economics is mentioned and is crucial to remember-the law of supply. According to the law of supply, suppliers are more willing to produce more goods at a higher price. Therefore, the firms will tend to produce more if they have the  money, which results from their profits. To determine, the profits a firm can receive is through the total revenue minus the production costs. The production costs include the amount of money it takes to buy the goods as well as how much opportunity cost is needed and left behind.