Professional Documents
Culture Documents
ECONOMICS BOOK REVIEW NAME OF THE BOOK: HIDDEN ORDER- THE ECONOMICS OF EVERYDAY LIFE
life the author explains price. It is derived that the price equals both cost of production and value to the user, both of which must therefore be equal to each other.
According to Friedman theory of multiplying benefits makes one think that a single dime spent in the city can help enrich everyones life because it passes on to many people who spend it again before it gets out of the city. The mayor thought the same way while estimating that GMs $20 million expenditure on payrolls and purchases in the city will mean that the company will mean that the company will add $100 million to the incomes of the residents. The mayor might be confusing revenue with profit while making the estimation. For firms with either multiple or single inputs to production the logic of simple production can be divided into three steps i.e. Choosing what to produce considering the implicit profits that are reaped from the production. Deciding how much to produce. Combining the decisions of many individual producers. Producers that are very good at producing a good A or very bad at producing any other good will produce the good A even at a lower price. For a producer a backward bending is analogous to the curiosity of the theory of a Giffen Good-a good whose demand curve slopes in the wrong direction implying that consumers buy more of the good when the price rises. The backward bending supply curve for labour suggests that as the wages increase the number of hours worked will increase until a certain point after which they keep decreasing.
PTOLEMAIC TRADE THEORY, OR CAN WE BRING THE NEW YORK TIMES INTO THE TWENTIETH CENTURY?
In most popular economic discussions the following three propositions can be found. High costs or low quality is the reason why Japan and America have a trade deficit. To improve the trade balance America needs to impose tariffs while the Japanese dont. A trade surplus is good while a trade deficit is bad for both the countries. Friedman further explains how declining marginal values motivate two parties to exchange goods and how this exchange of goods makes both the parties better off. One can concur that an exchange of goods makes sense when one of the parties is very good at producing the good and has plenty of it, and the other party is not good at producing it. This argument is defined as the principle of comparative advantage. Exchanges and bargains only work when both the parties are sure that the exchange will bring them profit. Friedman further explains that a balance has to be struck in case of a bilateral monopolistic bargain making both parties feel that they are gaining some value from the trade and the surplus is being shared fairly. Both parties try to convince one another of the value they offer by the trade but there is a chance of one getting ripped off in the process. Feeling that the other party is ripping
you off does not essentially mean that they are charging more than the real price; instead it means that the price that you are paying is not worth the good.
preferences define how much of a good will be produced and at what price will the consumer buy it. In order to put it together the author starts with individual preferences and productive capabilities and find complete set of equilibrium prices and quantities. In real world situations the production of one good requires another good hence the price of any good is dependent on the price of the required goods. In contrast to partial equilibrium author describes this as a general equilibrium that exists in interdependent economies.
things will help to calculate the supply curve of the firms. And this supply curve of the firm helps to find the supply curve of the industry. The shape of the graphs of these cost curves depends on the shifting balance between economies and diseconomies of scale. Based on the equation MRP=P the author explained weather the firm should continue with the product or to shutdown the firm. This situation comes depending on how the small firms are competing with the large firms. He also explains, the entrance of new firms to the industry. He says that these new firms are entering to industry because of the attractive profits. But in a long run these firms are shutting down because of the negative profits.
Price takers: Those firms which decide the price of the product based on the market price. Eg: rice, wheat and vegetables etc. Price searchers: Those firms which can sell their products on a considerable range of prices. Eg: automobiles, biscuits etc. Price discrimination: This is one of the methods implemented by monopolies to increase their profits. In this method a single product is given two prices based on the quality of the product. This method helped the firms to reach one of the determinants of the demand willingness to pay for a product. But it also has some disadvantages:1) It will lead to problem in distinguishing customers who will buy the
price to poor customers if they turn around and resell it to rich ones.
interpersonal relations and sociology. And he considered monopolistic competition and oligopoly as two quite ways of analyzing situations somewhere between monopoly and perfect competition.
TIME
In this chapter the Author speaks about the change in prices with respect to time. The price of a good would depend on when you buying it. Every Decision is evaluated on its Current effect and Future Effect. A Firm trying to decide whether to produce a good would convert all future gains & losses into present values and adds them. If the sum is positive it decides to produce and if the sum is negative (loss) it decides not to produce. It compares the alternatives in terms of the present value of all gains and losses and chooses the one which it is highest. i.e.. Only if(Income > Market Interest Rate* Investment).
In addition to individual borrowing and lending, there are also firms borrowing in order to invest.. If interest rates are high then firms invest only in projects with higher returns, the lower the interest rate, the larger the number of projects that yield a positive net present value. One way of producing future goods from present goods is by building factories; another way is to put present goods somewhere same & wait .
CHANCE
Sunk costs are the costs that have already been incurred and cannot be recovered. A firm will enter an industry only if the price it expects to receive is enough to cover all costs; including constructing a factory or designing a new product- costs are not sunk until they are incurred. If Price is insufficient to cover sunk costs, it is not worth replacing old factories when they wear out, so the number of factories will gradually decline and the price will gradually rise. Eventually price will be equal to average total cost. A Speculator buys things when he thinks they are cheap and sells them when he thinks they are expensive. A Speculator makes a fortune on other persons Misfortune. In order to make money, the speculator must sell as well as buy. If he buys when good is plentiful, he does indeed tend to increase the price then; but if he sell when it is scarce, he increases the supply and decreases the price just when additional grain is most useful. Speculators if successful, smooth out price movements, buying goods when they are below their long run price and selling them when they are above it, raising the price toward equilibrium in one case & lowering it toward equilibrium in the other. Buying when prices are low raises low prices; selling when prices are high lowers high prices. Thus Successful speculators decrease price fluctuations. The Rational Gambler You are betting on whether a coin will come up heads or tails. Your problem is to decide what bets to take. This is an example of declining marginal Utility. Buying Information You are trying to decide between 2 goods as to which to buy. You expect you will like 1 of the cars better than the other, but unfortunately do not
know which. By paying some search cost you reduce the uncertainty, improving the average outcome of your decision.
WHO GETS HOW MUCH WHY? When a Psychiatrist wants to get his audiences attention, he talks about sex. Economics speak about the income distribution. In both the cases the audiences interest is prurient, puritanical and personal. You read in a paper that the bottom 20% of house old receive less than 5% of all the income, while the top 20% receive more than 40%.That sounds like a world of radical inequality. But there are atleast 2 things wrong with the figures. The first is that they do not distinguish between differences in peoples lives and the differences where in their lives people are. Some people are retired people living comfortably on their savings in a home they own, or college students with part time jobs. One thing about which every1 agrees is that he is paid less than he should be. Being paid less means receiving less than your fair share of the worlds goods- and if i am getting less than fair share, someone else must be getting more than his. This raises 2 obvious questions: What determines how much each one gets? And what determines how much each of us ought to get? An employer is deciding whether to hire another worker. He calculates how much more output he could produce as a result. As long the market value of the increased output is larger than what he must pay the worker, he hires and profit goes up. He stops hiring at the point where one more worker is worth exactly what he costs. A Worker free to choose how many hours he wants to work will work up to the point where his wage equals the marginal value of leisure.
SUMMING PEOPLE UP
They keep coming to us with questions: Should we have a tariff?, Should we have rent control? Economists said they dont know anything about should go and talk to a philosopher. But our self-described economic imperialist cannot leave it at that. He thinks that economics can define a concept, efficiency, "that is an important part of what I suspect most of you mean by 'good'". As soon becomes apparent, he uses his notion of efficiency to pre-empt much of the job of ordinary morality.
"Simple," apparently, means "readily graspable by Mr. Friedman"; and to our author, nearly all rational behaviour reduces to the pursuit of cash. He himself notes that "[m]oney is no more the only thing with value than yardsticks are the only thing with length", but it soon transpires that the warning is pro forma. Indeed, the very sentence following the warning is: "Life, health, wisdom, all has value provided someone is willing to give up money to get them." How reassuring! Conventional economists hope to avoid the need for controversial ethical judgments in this way: Suppose some change makes at least one person better off and no one worse off. Then, salvation is at hand: while making no interpersonal comparisons of utility we can nevertheless say an improvement has taken place. But improvements of this kind, called Pareto superior moves, are few and far between. Usually every change will make someone worse off; and, if so, the Pareto criterion cannot be used. Our author has thus set himself a difficult task. He recognizes the limitations, if not outright failure, of the conventional Pareto approach. Nevertheless, he proposes not to give up: he does not wish to abandon questions of good and bad to the philosophers.
WHAT IS EFFICIENT ?
His answer has at least the virtue of simplicity. We count up the dollar gains and losses of a proposal, and adopt it if a net gain will ensue. More specifically, Friedman's plan makes use of the concepts of consumer's and producer's surplus. Oddly enough, this proposal falls victim to exactly the same difficulty that besets the potential-Pareto rule. The gains and losses go to different people: how, then, can an economist judge whether, "society" is better off? Further, estimates in dollars of gains and losses cannot be taken as measures of utility, since the utility of money may differ from person to person. Friedman recognizes these problems with his standard. As our author elsewhere notes, a policy can sometimes benefit one country without producing any gain for the world's economy. In a discussion of tariffs, he sums up: "So if the United States is a price searcher in international markets, the outcome without tariffs is efficient if all interests are considered but inefficient if only American interests are". And if our goal is to maximize total surplus, should we not encourage a large population increase? The more people, the more potential gains in surplus. Or are we supposed to be maximizing surplus over a constant population? But the problems Friedman recognizes himself are quite enough. He has not offered the slightest reason to think that efficiency, in his sense, is a good at all, let alone an important part of what we mean by good. The mistake in most discussions of natural monopoly is the assumption that the problem is monopoly. The problem is a particular kind of production function: one for which minimum average cost occurs at a quantity too high to permit perfect competition.
MARKET FAILURE
The author focuses on market failures because they fail to produce the efficient outcome by citing rational action of every member of the group that makes it worse off. He describes the form of market failure as public-good problem. The solution to this is to produce public goods privately in number of ways .For example-by unanimous contract i.e. getting all the receivers together and deciding. The other is by privileged minority which means by forming small sub groups from the receivers who can be persuaded to bear the cost. Also by making public goods private temporarily and by combining two public goods. The other alternative is to let the govt. produce and pay for it from taxes. He connects the externalities (net cost or benefits ones action imposes on others) with cost and benefits. If cost is greater than the benefits, it will not lead to any work but if vice-a-versa is the case, it will. He emphasizes that efficiency can be controlled by imposing regulations and externality by proprietary community in which neighbours affect the decision and merger in which one company can control the cost and resources of the other company.
As Coases points out that externality can be treated by negotiations with both the parties involved as he talks about airport noise reduction or pollution problems but this solution depends on ability to measure the damage. Externalities can be implemented by contract / merge. Consider sharecropping both landlord and farmer contributes input and share the profits, same with publisher and author. The two kinds of mistake associated with externality according to the author are failure to distinguish benefits from external benefits and to include both positive and negative externalities which have been explained by in context of population growth, driving rules etc. which shows that the externality is pecuniary (positive effects=negative effects). He highlights the adverse selection behaviour of the users to go on searching unless and until they find the required satisfaction. The barter system has also been explained with respect to the customers in monetary terms because they have what the other want and vice-a-versa. Market failures should be seen as unfairness rather than inefficiency.
RATIONAL CRIMINALS AND INTENTIONAL ACCIDENTS : THE ECONOMICS OF LAW AND LAWBREAKING
The author even ventures to find the economics of crime. The economic approach to crime starts from one simple assumption that the criminals are rational. A rational mugger prefers defenceless old lady over younger ones. The author observes that the essential objective in any conflict is neither to defeat your enemy nor to make it impossible for him to defeat you but merely to make it no longer in his interest to do whatever it is that you object to. Considering broader version of market for political influence, market for illegal drugs, stolen goods market for sex (legal & illegal). Economics apply to illegal as well as legal market when one input to production is estimated, substitutes become more variable. The author deduces that increased enforcement raises the street price of drugs. We can have three different explanations for drug related violence. One implies that marginal increase in enforcement will decrease violence; two that they will increase violence if demand is inelastic, decrease it if demand is elastic. All imply that legalizing drugs would eliminate drugrelated crime. Dealing with the cost of crime the author is of the opinion that even though left appears to be merely a transfer he goes on to prove that it is not a transfer but a net cost. The author opinions that a better solution to the accident low is to charge by the result ie If I cause an accident then I must pay the cause. Externalities are internalised .I have an incentive to engage in an efficient level of accident prevention of every margin. Hence we have switched from safety regulation to civil liability for damages. A different approach is to make each party fully liable for the entire cause if the accident not to the other party but to the state. This approach may prove faulty because if both parties face lines for their role in the accident i.e a good reason not to report it.
demand, but in part also a problem of sorting different people according to different tastes and attitudes.