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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
3/25
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
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
9/25
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
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).