7/31/2019 Microeconomics Summaries

1/25

Summary of Mankiws Principles of economics

Enver Figueroa Bazn

201210117

Chapter 13

Competitive markets have three main features, namely:

1. There are many buyers and sellers and any of them are

organized,

2. The goods or services produced and sold are mostly the same.

3. Firms can freely enter and exit the market.

4. I would like to add this last one: customers and sellers have

perfect information about the prices.

In a competitive market, firms and costumers are not big or

powerful enough to influence prices, so they have to take the

prevailing price at each moment and for that they become to be

called price takers.

For a competitive or price taker firm, its revenue progress at a

constant rate that is given by the price. As long as each unit it sells isat the same price, lets say P, every additional unit sold brings the

same additional revenue: P; this is the marginal revenue.

Accordingly, it the firm does a balance of its revenues, the average

revenue will also be P. For that, marginal and average revenue are

the same for a competitive firm. At drawing these functions in a

diagram, they yield horizontal lines that go forth from the Y axis at

the P level, parallel to the X axis.

On the other hand, a competitive firm uses resources to produce.

Those resources cost, so it has to pay for them or invest time, effort

and other valuable resources to get them. When each additional unit

of the good is produced, the total cost increases in an amount related

to that unit. That is the marginal cost: what costs to produce the last,

or the marginal unit. The marginal cost tends to be increasing,

7/31/2019 Microeconomics Summaries

2/25

7/31/2019 Microeconomics Summaries

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0

10

2030

4050

6070

80

90

100110

120

130

140150

160

170

180190

200

210

220230

240250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Units

PriceMR ATCAVC SCMC Long-runclose point

Regarding the market as a whole, the short-run supply curve is thehorizontal sum of every firms production for every price. In the

long-run however, short-run profit will attract more similar firms to

enter, and then the market supply curve will move outwards

pressing the price to fall. So, prices will increasingly fall until it is

equal to the minimum ATC, and since all firms are similar,

incentive to keep entering the market will vanish. Hence, the long-

run equilibrium will be P=50 and Q=8 for every firm. The long-run

Market Supply Curve will not turn into a horizontal line at P=50,however, because there are increasing costs in the long-run that have

to be paid by firms wishing to enter, like research and development,

acquisition of new productive factors, adapting infrastructure and

training labor force, among others.

7/31/2019 Microeconomics Summaries

4/25

7/31/2019 Microeconomics Summaries

5/25

In a central bank sees that the secondary creation of money is taking

place too fast and then people will find themselves with too much

money in hands, it can recover some of that money by offering the

banks a rate of interest in they deposit part of the money in their

vaults in the central bank vaults. The central bank will not loan that

money to nobody else, so reducing the money supply in the

economy. Another policy to control money supply is by raising the

rate of reserves the banks must deposit in the central bank to

guarantee public deposits.

Summary of Mankiws Principles of economics

Enver Figueroa Bazn201210117

Chapter 10: Externalities

Externalities are uncompensated effects that one person causes on

elses well-being. When the effect is beneficial it is a positive

externality, and a negative one if not.

In the example drawn, the cost of producing aluminum to society is

larger than to the factories because it includes the production costs

plus the health risks arisen by the pollution they create. As the social

cost is larger than the private one, the socially optimum level of

production should be smaller than that that equals S and D, but

factories will continue to produce this quantity because they dont

embody the cost to society within their cost function. So, a measure

to make them internalize the externality is by taxation in an amountthat reflects the social cost. The opposite happens when externalities

are positive, as in the case of education. Thus the government

responds by subsidizing education, from elementary school to

university.

7/31/2019 Microeconomics Summaries

6/25

Regulation of economic activities that pollute is usually exercised

through prohibitions and mandates to produce using cleaner

technologies, but market incentives and disincentives like subsidies

and taxes are sometimes preferred. Taxes in this case, unlike strict

pollution limits, give firms the flexibility to adapt their production

size to reach the efficient level of pollution and also they receive

incentives to move toward cleaner technologies over time. These

corrective taxes are efficiency increasing and even let government

collect incomes. Another way to induce a reduction of pollution is

by allowing free market exchange of permits to pollute.

Of course economic agents by themselves can come up with actions

and deals that induce the adequate level of externalities for the

parties involved, for instance by charity for education or withagreements among neighbor producers, based on the Coase theorem

that states that if private parties can bargain without cost over the

allocation of resources, they can solve the problem of externalities

on their own. However, private solutions find their limit when

transaction costs become too high.

Chapter 18: Factors of production marketsThe factors to produce goods and services are usually summarized

as labor (L) and capital (K). As other goods, they are sold and

bought in markets and reach a unit price as a result of demand and

supply interaction.

In the case of labor, a firm will hire workers until the last workers

physical marginal product times the price of the firm good equals

his salary: P x MPL = W. Under this rule the firm maximizes profitsin the short run. The amount of labor the firm has hired until that

last worker makes its labor demand. So, the labor demand curve that

turns out has downward slope and it changes its position due to

changes in the output price, technological changes that affects the

physical marginal product, and the supply of other factors like

capital and land.

7/31/2019 Microeconomics Summaries

7/25

The labor supply on the other hand comes from the leisure work

(for a salary) decisions made by people. This curve shifts due to

changes in preferences for leisure, immigrations, and so on.

The interaction between labor demand and supply determines the

salary of equilibrium. The same happens to the other factors,

basically capital (and land).

Summary of Mankiws Principles of economics

Enver Figueroa Bazn

201210117

Chapter 13

Competitive markets have three main features, namely:

5. There are many buyers and sellers and any of them are

organized,

6. The goods or services produced and sold are mostly the same.

7. Firms can freely enter and exit the market.8. I would like to add this last one: customers and sellers have

perfect information about the prices.

In a competitive market, firms and costumers are not big or

powerful enough to influence prices, so they have to take the

prevailing price at each moment and for that they become to be

called price takers.

For a competitive or price taker firm, its revenue progress at a

constant rate that is given by the price. As long as each unit it sells is

at the same price, lets say P, every additional unit sold brings the

same additional revenue: P; this is the marginal revenue.

Accordingly, it the firm does a balance of its revenues, the average

revenue will also be P. For that, marginal and average revenue are

7/31/2019 Microeconomics Summaries

8/25

the same for a competitive firm. At drawing these functions in a

diagram, they yield horizontal lines that go forth from the Y axis at

the P level, parallel to the X axis.

On the other hand, a competitive firm uses resources to produce.

Those resources cost, so it has to pay for them or invest time, effort

and other valuable resources to get them. When each additional unit

of the good is produced, the total cost increases in an amount related

to that unit. That is the marginal cost: what costs to produce the last,

or the marginal unit. The marginal cost tends to be increasing,

reflecting the increasing cost of opportunity of the resources

employed, so the marginal cost curve is upward sloping.

Since the marginal revenue tells the firm how much it gains from thelast unit sold and the marginal cost how much it cost, the firm will

produce until marginal revenue and marginal cost be equal.

Producing beyond will cost more than what is get from customers.

Therefore, the condition to maximize profits is MR=MC, as its

drawn below, where the profit maximizing quantity is 12 at price of

100.

That is a short-run equilibrium. In order to stay in the market, thefirm needs at least to recover its average variable cost. Where the

MC curve crosses the AVC curve, thats the point above which the

firm can keep producing in the short-run. That point corresponds to

a price of 23 and a production of 5 in our example. In the long-run

the firm will not obtain profits over its minimum average cost, a

point which is crossed by the marginal cost from below. That

determines the long-run equilibrium, in which the firm produces 8 at

a price of 50.

The short-run supply curve can be derived from the marginal cost

now. It is made by all the points in this curve over the minimum

AVC. The long-run supply curve corresponds to all points over the

MC curve over the minimum ATC.

7/31/2019 Microeconomics Summaries

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0

10

2030

4050

6070

80

90

100110

120

130

140150

160

170

180190

200

210

220230

240250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Units

PriceMR ATCAVC SCMC Long-runclose point

Regarding the market as a whole, the short-run supply curve is thehorizontal sum of every firms production for every price. In the

long-run however, short-run profit will attract more similar firms to

enter, and then the market supply curve will move outwards

pressing the price to fall. So, prices will increasingly fall until it is

equal to the minimum ATC, and since all firms are similar,

incentive to keep entering the market will vanish. Hence, the long-

run equilibrium will be P=50 and Q=8 for every firm. The long-run

Market Supply Curve will not turn into a horizontal line at P=50,however, because there are increasing costs in the long-run that have

to be paid by firms wishing to enter, like research and development,

acquisition of new productive factors, adapting infrastructure and

training labor force, among others.

7/31/2019 Microeconomics Summaries

10/25

Chapter 21

The market system could not exist without currency. Money has

three main functions well defined by Keynes back in the thirties: its

a medium of exchange, a unit of account, and a store of value. Themoney used all around the world for making market transactions if

fiat money, which is the kind of money with little intrinsic value, in

opposition to commodity money such as gold that has a huge

intrinsic value.

Money has different forms. The more usual one is currency, which

corresponds to the bills and coins we all have in pocket. Other forms

of money are the banking deposits such as savings and checking

accounts, term-deposits, and others. In all countries, currency is

issued by a government institution called Central Reserve Bank.

Those institutions make people sure that money is reliable and they

also control the amount of money in the economy in order to avoid

inflation. When a central bank issues new money, it does not give

that money directly to the public. When some goods are exported,

the money exporters receive is the foreign currency. So they go to

the central bank to exchange it for the national currency. The central

bank then prints the equivalent amount of money taking into accountthe exchange rate. So there is more money now in the economy.

Eventually the exporters will deposit part of that money in bank

accounts. Those banks are obligated to deposit in the central bank a

fraction of those deposits in order to assure they will have how to

face publics withdrawals. With the faction of deposits available,

commercial banks will give loans to other clients, which they will

use to pay for good and services, like houses or cars, and then thosewho will receive the payments will deposit a fraction of them into

other banks that in turn will do the same than the first bank. This

process of taking deposits and making loans by the banks makes

bigger and bigger the small amount of money initially issued by the

central bank, and for that its called secondary creation of money.

7/31/2019 Microeconomics Summaries

11/25

In a central bank sees that the secondary creation of money is taking

place too fast and then people will find themselves with too much

money in hands, it can recover some of that money by offering the

banks a rate of interest in they deposit part of the money in their

vaults in the central bank vaults. The central bank will not loan that

money to nobody else, so reducing the money supply in the

economy. Another policy to control money supply is by raising the

rate of reserves the banks must deposit in the central bank to

guarantee public deposits.

Summary of Mankiws Principles of economics

Enver Figueroa Bazn201210117

Chapter 10: Externalities

Externalities are uncompensated effects that one person causes on

elses well-being. When the effect is beneficial it is a positive

externality, and a negative one if not.

In the example drawn, the cost of producing aluminum to society is

larger than to the factories because it includes the production costs

plus the health risks arisen by the pollution they create. As the social

cost is larger than the private one, the socially optimum level of

production should be smaller than that that equals S and D, but

factories will continue to produce this quantity because they dont

embody the cost to society within their cost function. So, a measure

to make them internalize the externality is by taxation in an amountthat reflects the social cost. The opposite happens when externalities

are positive, as in the case of education. Thus the government

responds by subsidizing education, from elementary school to

university.

7/31/2019 Microeconomics Summaries

12/25

Regulation of economic activities that pollute is usually exercised

through prohibitions and mandates to produce using cleaner

technologies, but market incentives and disincentives like subsidies

and taxes are sometimes preferred. Taxes in this case, unlike strict

pollution limits, give firms the flexibility to adapt their production

size to reach the efficient level of pollution and also they receive

incentives to move toward cleaner technologies over time. These

corrective taxes are efficiency increasing and even let government

collect incomes. Another way to induce a reduction of pollution is

by allowing free market exchange of permits to pollute.

Of course economic agents by themselves can come up with actions

and deals that induce the adequate level of externalities for the

parties involved, for instance by charity for education or withagreements among neighbor producers, based on the Coase theorem

that states that if private parties can bargain without cost over the

allocation of resources, they can solve the problem of externalities

on their own. However, private solutions find their limit when

transaction costs become too high.

Chapter 18: Factors of production marketsThe factors to produce goods and services are usually summarized

as labor (L) and capital (K). As other goods, they are sold and

bought in markets and reach a unit price as a result of demand and

supply interaction.

In the case of labor, a firm will hire workers until the last workers

physical marginal product times the price of the firm good equals

his salary: P x MPL = W. Under this rule the firm maximizes profitsin the short run. The amount of labor the firm has hired until that

last worker makes its labor demand. So, the labor demand curve that

turns out has downward slope and it changes its position due to

changes in the output price, technological changes that affects the

physical marginal product, and the supply of other factors like

capital and land.

7/31/2019 Microeconomics Summaries

13/25

The labor supply on the other hand comes from the leisure work

(for a salary) decisions made by people. This curve shifts due to

changes in preferences for leisure, immigrations, and so on.

The interaction between labor demand and supply determines the

salary of equilibrium. The same happens to the other factors,

basically capital (and land).

Summary of Mankiws Principles of economics

Enver Figueroa Bazn

201210117

Chapter 13

Competitive markets have three main features, namely:

9. There are many buyers and sellers and any of them are

organized,

10. The goods or services produced and sold are mostly the

same.

11. Firms can freely enter and exit the market.12. I would like to add this last one: customers and sellers

have perfect information about the prices.

In a competitive market, firms and costumers are not big or

powerful enough to influence prices, so they have to take the

prevailing price at each moment and for that they become to be

called price takers.

For a competitive or price taker firm, its revenue progress at a

constant rate that is given by the price. As long as each unit it sells is

at the same price, lets say P, every additional unit sold brings the

same additional revenue: P; this is the marginal revenue.

Accordingly, it the firm does a balance of its revenues, the average

revenue will also be P. For that, marginal and average revenue are

7/31/2019 Microeconomics Summaries

14/25

the same for a competitive firm. At drawing these functions in a

diagram, they yield horizontal lines that go forth from the Y axis at

the P level, parallel to the X axis.

On the other hand, a competitive firm uses resources to produce.

Those resources cost, so it has to pay for them or invest time, effort

and other valuable resources to get them. When each additional unit

of the good is produced, the total cost increases in an amount related

to that unit. That is the marginal cost: what costs to produce the last,

or the marginal unit. The marginal cost tends to be increasing,

reflecting the increasing cost of opportunity of the resources

employed, so the marginal cost curve is upward sloping.

Since the marginal revenue tells the firm how much it gains from thelast unit sold and the marginal cost how much it cost, the firm will

produce until marginal revenue and marginal cost be equal.

Producing beyond will cost more than what is get from customers.

Therefore, the condition to maximize profits is MR=MC, as its

drawn below, where the profit maximizing quantity is 12 at price of

100.

That is a short-run equilibrium. In order to stay in the market, thefirm needs at least to recover its average variable cost. Where the

MC curve crosses the AVC curve, thats the point above which the

firm can keep producing in the short-run. That point corresponds to

a price of 23 and a production of 5 in our example. In the long-run

the firm will not obtain profits over its minimum average cost, a

point which is crossed by the marginal cost from below. That

determines the long-run equilibrium, in which the firm produces 8 at

a price of 50.

The short-run supply curve can be derived from the marginal cost

now. It is made by all the points in this curve over the minimum

AVC. The long-run supply curve corresponds to all points over the

MC curve over the minimum ATC.

7/31/2019 Microeconomics Summaries

15/25

0

10

2030

4050

6070

80

90

100110

120

130

140150

160

170

180190

200

210

220230

240250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Units

PriceMR ATCAVC SCMC Long-runclose point

Regarding the market as a whole, the short-run supply curve is thehorizontal sum of every firms production for every price. In the

long-run however, short-run profit will attract more similar firms to

enter, and then the market supply curve will move outwards

pressing the price to fall. So, prices will increasingly fall until it is

equal to the minimum ATC, and since all firms are similar,

incentive to keep entering the market will vanish. Hence, the long-

run equilibrium will be P=50 and Q=8 for every firm. The long-run

Market Supply Curve will not turn into a horizontal line at P=50,however, because there are increasing costs in the long-run that have

to be paid by firms wishing to enter, like research and development,

acquisition of new productive factors, adapting infrastructure and

training labor force, among others.

7/31/2019 Microeconomics Summaries

16/25

Chapter 21

The market system could not exist without currency. Money has

three main functions well defined by Keynes back in the thirties: its

a medium of exchange, a unit of account, and a store of value. Themoney used all around the world for making market transactions if

fiat money, which is the kind of money with little intrinsic value, in

opposition to commodity money such as gold that has a huge

intrinsic value.

Money has different forms. The more usual one is currency, which

corresponds to the bills and coins we all have in pocket. Other forms

of money are the banking deposits such as savings and checking

accounts, term-deposits, and others. In all countries, currency is

issued by a government institution called Central Reserve Bank.

Those institutions make people sure that money is reliable and they

also control the amount of money in the economy in order to avoid

inflation. When a central bank issues new money, it does not give

that money directly to the public. When some goods are exported,

the money exporters receive is the foreign currency. So they go to

the central bank to exchange it for the national currency. The central

bank then prints the equivalent amount of money taking into accountthe exchange rate. So there is more money now in the economy.

Eventually the exporters will deposit part of that money in bank

accounts. Those banks are obligated to deposit in the central bank a

fraction of those deposits in order to assure they will have how to

face publics withdrawals. With the faction of deposits available,

commercial banks will give loans to other clients, which they will

use to pay for good and services, like houses or cars, and then thosewho will receive the payments will deposit a fraction of them into

other banks that in turn will do the same than the first bank. This

process of taking deposits and making loans by the banks makes

bigger and bigger the small amount of money initially issued by the

central bank, and for that its called secondary creation of money.

7/31/2019 Microeconomics Summaries

17/25

In a central bank sees that the secondary creation of money is taking

place too fast and then people will find themselves with too much

money in hands, it can recover some of that money by offering the

banks a rate of interest in they deposit part of the money in their

vaults in the central bank vaults. The central bank will not loan that

money to nobody else, so reducing the money supply in the

economy. Another policy to control money supply is by raising the

rate of reserves the banks must deposit in the central bank to

guarantee public deposits.

Summary of Mankiws Principles of economics

Enver Figueroa Bazn201210117

Chapter 10: Externalities

Externalities are uncompensated effects that one person causes on

elses well-being. When the effect is beneficial it is a positive

externality, and a negative one if not.

In the example drawn, the cost of producing aluminum to society is

larger than to the factories because it includes the production costs

plus the health risks arisen by the pollution they create. As the social

cost is larger than the private one, the socially optimum level of

production should be smaller than that that equals S and D, but

factories will continue to produce this quantity because they dont

embody the cost to society within their cost function. So, a measure

to make them internalize the externality is by taxation in an amountthat reflects the social cost. The opposite happens when externalities

are positive, as in the case of education. Thus the government

responds by subsidizing education, from elementary school to

university.

7/31/2019 Microeconomics Summaries

18/25

Regulation of economic activities that pollute is usually exercised

through prohibitions and mandates to produce using cleaner

technologies, but market incentives and disincentives like subsidies

and taxes are sometimes preferred. Taxes in this case, unlike strict

pollution limits, give firms the flexibility to adapt their production

size to reach the efficient level of pollution and also they receive

incentives to move toward cleaner technologies over time. These

corrective taxes are efficiency increasing and even let government

collect incomes. Another way to induce a reduction of pollution is

by allowing free market exchange of permits to pollute.

Of course economic agents by themselves can come up with actions

and deals that induce the adequate level of externalities for the

parties involved, for instance by charity for education or withagreements among neighbor producers, based on the Coase theorem

that states that if private parties can bargain without cost over the

allocation of resources, they can solve the problem of externalities

on their own. However, private solutions find their limit when

transaction costs become too high.

Chapter 18: Factors of production marketsThe factors to produce goods and services are usually summarized

as labor (L) and capital (K). As other goods, they are sold and

bought in markets and reach a unit price as a result of demand and

supply interaction.

In the case of labor, a firm will hire workers until the last workers

physical marginal product times the price of the firm good equals

his salary: P x MPL = W. Under this rule the firm maximizes profitsin the short run. The amount of labor the firm has hired until that

last worker makes its labor demand. So, the labor demand curve that

turns out has downward slope and it changes its position due to

changes in the output price, technological changes that affects the

physical marginal product, and the supply of other factors like

capital and land.

7/31/2019 Microeconomics Summaries

19/25

The labor supply on the other hand comes from the leisure work

(for a salary) decisions made by people. This curve shifts due to

changes in preferences for leisure, immigrations, and so on.

The interaction between labor demand and supply determines the

salary of equilibrium. The same happens to the other factors,

basically capital (and land).

Summary of Mankiws Principles of economics

Enver Figueroa Bazn

201210117

Chapter 13

Competitive markets have three main features, namely:

13. There are many buyers and sellers and any of them are

organized,

14. The goods or services produced and sold are mostly the

same.

15. Firms can freely enter and exit the market.16. I would like to add this last one: customers and sellers

have perfect information about the prices.

In a competitive market, firms and costumers are not big or

powerful enough to influence prices, so they have to take the

prevailing price at each moment and for that they become to be

called price takers.

For a competitive or price taker firm, its revenue progress at a

constant rate that is given by the price. As long as each unit it sells is

at the same price, lets say P, every additional unit sold brings the

same additional revenue: P; this is the marginal revenue.

Accordingly, it the firm does a balance of its revenues, the average

revenue will also be P. For that, marginal and average revenue are

7/31/2019 Microeconomics Summaries

20/25

the same for a competitive firm. At drawing these functions in a

diagram, they yield horizontal lines that go forth from the Y axis at

the P level, parallel to the X axis.

On the other hand, a competitive firm uses resources to produce.

Those resources cost, so it has to pay for them or invest time, effort

and other valuable resources to get them. When each additional unit

of the good is produced, the total cost increases in an amount related

to that unit. That is the marginal cost: what costs to produce the last,

or the marginal unit. The marginal cost tends to be increasing,

reflecting the increasing cost of opportunity of the resources

employed, so the marginal cost curve is upward sloping.

Since the marginal revenue tells the firm how much it gains from thelast unit sold and the marginal cost how much it cost, the firm will

produce until marginal revenue and marginal cost be equal.

Producing beyond will cost more than what is get from customers.

Therefore, the condition to maximize profits is MR=MC, as its

drawn below, where the profit maximizing quantity is 12 at price of

100.

That is a short-run equilibrium. In order to stay in the market, thefirm needs at least to recover its average variable cost. Where the

MC curve crosses the AVC curve, thats the point above which the

firm can keep producing in the short-run. That point corresponds to

a price of 23 and a production of 5 in our example. In the long-run

the firm will not obtain profits over its minimum average cost, a

point which is crossed by the marginal cost from below. That

determines the long-run equilibrium, in which the firm produces 8 at

a price of 50.

The short-run supply curve can be derived from the marginal cost

now. It is made by all the points in this curve over the minimum

AVC. The long-run supply curve corresponds to all points over the

MC curve over the minimum ATC.

7/31/2019 Microeconomics Summaries

21/25

0

10

2030

4050

6070

80

90

100110

120

130

140150

160

170

180190

200

210

220230

240250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Units

PriceMR ATCAVC SCMC Long-runclose point

Regarding the market as a whole, the short-run supply curve is thehorizontal sum of every firms production for every price. In the

long-run however, short-run profit will attract more similar firms to

enter, and then the market supply curve will move outwards

pressing the price to fall. So, prices will increasingly fall until it is

equal to the minimum ATC, and since all firms are similar,

incentive to keep entering the market will vanish. Hence, the long-

run equilibrium will be P=50 and Q=8 for every firm. The long-run

Market Supply Curve will not turn into a horizontal line at P=50,however, because there are increasing costs in the long-run that have

to be paid by firms wishing to enter, like research and development,

acquisition of new productive factors, adapting infrastructure and

training labor force, among others.

7/31/2019 Microeconomics Summaries

22/25

Chapter 21

The market system could not exist without currency. Money has

three main functions well defined by Keynes back in the thirties: its

a medium of exchange, a unit of account, and a store of value. Themoney used all around the world for making market transactions if

fiat money, which is the kind of money with little intrinsic value, in

opposition to commodity money such as gold that has a huge

intrinsic value.

Money has different forms. The more usual one is currency, which

corresponds to the bills and coins we all have in pocket. Other forms

of money are the banking deposits such as savings and checking

accounts, term-deposits, and others. In all countries, currency is

issued by a government institution called Central Reserve Bank.

Those institutions make people sure that money is reliable and they

also control the amount of money in the economy in order to avoid

inflation. When a central bank issues new money, it does not give

that money directly to the public. When some goods are exported,

the money exporters receive is the foreign currency. So they go to

the central bank to exchange it for the national currency. The central

bank then prints the equivalent amount of money taking into accountthe exchange rate. So there is more money now in the economy.

Eventually the exporters will deposit part of that money in bank

accounts. Those banks are obligated to deposit in the central bank a

fraction of those deposits in order to assure they will have how to

face publics withdrawals. With the faction of deposits available,

commercial banks will give loans to other clients, which they will

use to pay for good and services, like houses or cars, and then thosewho will receive the payments will deposit a fraction of them into

other banks that in turn will do the same than the first bank. This

process of taking deposits and making loans by the banks makes

bigger and bigger the small amount of money initially issued by the

central bank, and for that its called secondary creation of money.

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In a central bank sees that the secondary creation of money is taking

place too fast and then people will find themselves with too much

money in hands, it can recover some of that money by offering the

banks a rate of interest in they deposit part of the money in their

vaults in the central bank vaults. The central bank will not loan that

money to nobody else, so reducing the money supply in the

economy. Another policy to control money supply is by raising the

rate of reserves the banks must deposit in the central bank to

guarantee public deposits.

Summary of Mankiws Principles of economics

Enver Figueroa Bazn201210117

Chapter 10: Externalities

Externalities are uncompensated effects that one person causes on

elses well-being. When the effect is beneficial it is a positive

externality, and a negative one if not.

In the example drawn, the cost of producing aluminum to society is

larger than to the factories because it includes the production costs

plus the health risks arisen by the pollution they create. As the social

cost is larger than the private one, the socially optimum level of

production should be smaller than that that equals S and D, but

factories will continue to produce this quantity because they dont

embody the cost to society within their cost function. So, a measure

to make them internalize the externality is by taxation in an amountthat reflects the social cost. The opposite happens when externalities

are positive, as in the case of education. Thus the government

responds by subsidizing education, from elementary school to

university.

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Regulation of economic activities that pollute is usually exercised

through prohibitions and mandates to produce using cleaner

technologies, but market incentives and disincentives like subsidies

and taxes are sometimes preferred. Taxes in this case, unlike strict

pollution limits, give firms the flexibility to adapt their production

size to reach the efficient level of pollution and also they receive

incentives to move toward cleaner technologies over time. These

corrective taxes are efficiency increasing and even let government

collect incomes. Another way to induce a reduction of pollution is

by allowing free market exchange of permits to pollute.

Of course economic agents by themselves can come up with actions

and deals that induce the adequate level of externalities for the

parties involved, for instance by charity for education or withagreements among neighbor producers, based on the Coase theorem

that states that if private parties can bargain without cost over the

allocation of resources, they can solve the problem of externalities

on their own. However, private solutions find their limit when

transaction costs become too high.

Chapter 18: Factors of production marketsThe factors to produce goods and services are usually summarized

as labor (L) and capital (K). As other goods, they are sold and

bought in markets and reach a unit price as a result of demand and

supply interaction.

In the case of labor, a firm will hire workers until the last workers

physical marginal product times the price of the firm good equals

his salary: P x MPL = W. Under this rule the firm maximizes profitsin the short run. The amount of labor the firm has hired until that

last worker makes its labor demand. So, the labor demand curve that

turns out has downward slope and it changes its position due to

changes in the output price, technological changes that affects the

physical marginal product, and the supply of other factors like

capital and land.

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The labor supply on the other hand comes from the leisure work

(for a salary) decisions made by people. This curve shifts due to

changes in preferences for leisure, immigrations, and so on.

The interaction between labor demand and supply determines the

salary of equilibrium. The same happens to the other factors,

basically capital (and land).