Chapter 14 review

This chapter was easier to understand than the previous one. I would give this a rating of 2/3 though because I had a more difficult experience with interpreting the graphs on marginal cost in the supply curve. However, the book explained well enough for me to understand it in the end. Also, something I found interesting in this chapter is the idea of sunk costs.

This chapter first introduces and expands on the concept of competitive markets. In a competitive market, the actions of any single buyer or seller in the market have a negligible impact on the market price. Buyers and sellers are at the mercy of the price, so they are called price takers.

Competitive markets' goals are to maximize profit. This chapter is talking about another way to interpret equilibrium price, as they said that this is done by producing at the quantity at which marginal cost equals marginal revenue. This is because marginal cost is the firm’s supply curve and this curve creates an equilibrium with the firm’s demand curve or the marginal revenue.

Also, competitive firms stay in the market even at zero-profit equilibrium because the total cost factored in include opportunity costs. This means they earn an accounting profit. In this chapter, they introduced the effects on short run and long run. In the short run, if a firm cannot recover its fixed costs, they will shut down. If in the long run, the firm operates below average total cost, the firm will exit the market. Also factored in its decision to exit, are sunk costs. Sunk costs are costs that have already been committed and cannot be recovered. A good example was the one that the book gave, which was about the $7 you lost for a movie ticket. It's long gone, no point in crying about it.

Chapter 13 review.

This chapter was one of the few chapters that I had more difficulty to understand. I would give this a rating of 2.5/3. After where the book talked about accounting profit and economic profit, the terms got more difficult to understand. I especially had trouble with interpreting the graphs and understanding the average and marginal costs. 

Chapter 13 first explains the concept of different costs to production with additional vocab words like explicit and implicit costs. Firms take into account a variety of costs in order to maximize economic profit, which is different from an accounting profit. Accounting profit simply subtracts explicit costs from total revenue whereas economic profit accounts for implicit costs or opportunity costs. This is why economic profit is always less than accounting profit. To help me understand implicit and explicit, I think of implicit as more than just money, and explicit as hard money statistics. This part was not as difficult

The chapter later discussed the marginal costs and the marginal product of producing another good along with a graph showing these costs, which includes variable cost and total cost. Average variable cost decreases over time and goes up in a u shape later on. I had trouble interpreting the graphs. 

Also, Average total cost does the same because marginal cost is smaller in the beginning and gradually becomes larger. Marginal product is the increase in the product produced for each new input. This number gradually decreases. Cost usually increases because of lack of space or material a firm has.  And to minimize cost, at the economy of scale (the lowest point of average total cost) is where firms produce at to maximize profit. 

Chapter 11 Review

This chapter is was relatively easy to understand but I had to look deeper in the "Excludable" and "Rival in Consumption" grid.  I would say that the overall difficulty was a 2/3.  I feel as if this chapter was a bit confusing to understand but the book explained it well with all the examples and case studies.

The chapter first introduces concepts such as excludable goods, which is the property of a good whereby a person can be prevented from using it, and rivalry in consumption, which is the property of a good whereby one person’s use diminishes other people’s use.

Then, the chapter talks about all the types of goods in the market. There are private and public goods, common resources, and goods produced by a natural monopoly. This chapter focuses on the public goods and common resources. Private goods are goods that are both excludable and rival in consumption while common resources are rival in consumption but not excludable. The examples that the book gives of each type of good are very helpful in understanding these terms.

The book introduces a problem with public goods, and a free rider, who is the person that receives the benefit of a good doesn't have to pay for it. The book uses a case study of fireworks as an example. If a small entrepreneur were to put on a show, there would be no incentive to pay because you could be a free rider, meaning there wouldn’t be an efficient outcome in the market. The government can solve this by taxing the people (only if the benefits of a public good exceed the cost) and use the tax revenue to pay for it, making the market more efficient.

An interesting idea introduced is the “Tragedy of the Commons,” which is a situation that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.

Chapter 10 review.

 I thought this chapter was relatively easy to understand and give it a difficulty rating of 2/3.  I did not have any problems with any part of the chapter, only had to look at the concept of corrective taxes a little deeper and the graphs There were lots of new terms that I needed time to process the information. 


This chapter first begins by reinforcing the concept of externalities. Externalities are when the social value or cost of a good is not equal to the equilibrium quantity and price. This was already introduced in the beginning of the book, and thus, not very hard to understand. Externalities happen when a transaction between private parties affects a bystander. An interesting example is when pollution creates a negative externality. 

The part where I had to look deeper into was when the socially optimum output is less than the equilibrium output. To reconcile this, the government can impose a tax for pollution to move the quantity produced to the socially optimal quantity. This is a form of corrective tax, or Pigovian tax.

Interestingly, another way the government may try to internalize the externality is to impose pollution regulations and give out pollution permits. This forces companies to reduce the amount of pollution they produce. If pollution permits are allowed to be sold however, a market will develop for them. Companies that can reduce pollution at a lower cost will sell them to companies that reduce pollution at a higher cost. There are also positive externalities. 

Another way externalities can be solved is through a concept called the Coase theorem. This is where the people are able to solve the problem themselves. In the book, there was an interesting example in where someone may pay another person so that their dog may stop barking if the cost to the dog owner is less than the price paid. Basically, the two parties can bargain with each other to solve thee extrenality problem. In a bigger view, if you there can't be a compromise, then the government has to step in. 

Chapter 8 Review

I would rate this chapter a difficulty level of 1.5/3. I chose this difficulty because most of the information is old news and can be inferred from past chapters. However, the only part I had to look at deeper was the relativity of deadweight loss and tax revenue.

In the beginning of the chapter, the book introduces the idea of "deadweight loss". I already understood this because Mr. Waller talked to us about it in class, so this was easy to understand. Something interesting I found about deadweight loss is how relevant it is to me. If there was a raise in taxes for a certain product (Rolex watch)  I want to buy, I probably wouldn't buy it afterwards because of the tax. My money that was meant to be bought from that would be dead weight loss.

Note: Bigger elasticity of supply and demand = bigger DEADWEIGHT LOSS.

Near the end of the chapter (this was the trickier part), the book gave the ratio between deadweight loss, tax size, and tax revenue. It is important to note that deadweight loss is exponential and Tax revenue looks like a negative quadratic equation.  I found myself staring at the graphs more to try and understand why this works, and I found out that it was because of the size of the T x Q rectangle. Also, elasticity plays a huge role in participants who respond to market conditions.

Tax increase = Less incentives = More deadweight loss.

Chapter 7 Review

I would rate this chapter a difficulty level of 1.5/3. Overall, the concept is easy to understand, but there are some parts where I had to look at more than once to fully grasp the idea.

The chapter begins with talking about the "willingness to pay"(maximum amount that a buyer will pay for a good) of consumers. We use this factor to measure consumer surplus. The graphs and charts for the consumer surplus are not difficult to remember, as it is straightforward. The surplus is the difference between a buyer's willingness to pay for a product and the price at which the product is sold.  Total consumer surplus was something I had to look at a little bit more before I understood. The idea is that consumer surplus is relative to the buyer.

Producer Surplus is the next concept that they talk in the book. Overall, it has the same general structure as consumer surplus, except in the seller's perspective. Also, the consumer surplus is basically the cost for the seller. This portion I got without any confusion.

In the end, I got a better understanding of the deeper meaning of equilibrium price. It's basically "maximizing the sum of consumer and producer surplus."