The “Critical Thinking Questions”

Critical Thinking Questions 1

Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?

The Answer:

In the Figure3.4, the supply curve shows the quantity that firms are willing to supply at each price, and the demand curve traces consumers’ willingness to pay for different quantities. For instance, point E in Figure 3.4 illustrates that, at $1.4 per gallon, firms are willing to supply 600 million gallons of gasoline. And also, point E in Figure 3.4 illustrates that, at $1.4 per gallon, consumers are willing and able to purchase 600 million gallons of gasoline. It's an equilibrium. 

Now, the government decided to put a price ceiling below the equilibrium price at $1.3 per gallon. After the price ceiling is imposed, at $1.3 per gallon, firms would still have been willing to supply a quantity of somewhere between 500 and 600 million gallons. But the demand curve shows that, at $1.3 per gallon, the consumers are demand more than they did at $1.4. In this case, because the government imposes the price ceiling, the price control is blocking some suppliers and demanders from transactions they would both be willing to make. This demonstrates the economic inefficiency of the market equilibrium because it is cut down the deals and transactions, which benefit both demanders and suppliers. Moreover, the reduction in supply means fewer jobs, less investment, and lower quality. For the consumers, it transfers the producer surplus to the consumer surplus which implies the consumers often favor them. But as I mentioned before, the economic inefficiency of the market equilibrium may end up with fewer jobs, less investment, and lower quality, it's should be considered carefully.

Critical Thinking Questions 2

Other than the demand for labor, what would be another example of a “derived demand?”

The Answer:

As I learned from the textbook, shifts in the demand curve for labor occur for a reason such as the demand for more new Mac consumers demand, the greater the number of engineers and programmers will need to hire, the demand for engineers and programmers is called the “derived demand.”

Nowadays, more and more business operating very dependent on modern information technology, even households supply more labors with computing capabilities and shopping online. As a result, the demand for computers and wireless gadgets rises. Components required to produce the computers rises as well. The demand chain shows the derived demand for computers, as well as the materials used to produce them.

Reference

(n.d.). Retrieved from https://cnx.org/contents/aWGdK2jw@11.330:g7yTQfC4@11/Price-Ceilings-and-Price-Floors

What Is Elasticity?

What Is Elasticity? 

Elasticity is a measure of a variable's sensitivity to a change in another variable. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service's price such as hamburgers, coffee drinks, or accommodations. For instance, if Starbucks rises its Tall Blonde Caffe' Americano from $2.45 to $3. Will you stop drinking coffee? How much total quantity of coffee consume will reduce? Likewise, in order to make maximum profits, business owners need to know the degree to which consumers change their demand in response to price changes. 

An Inelastic Good

Necessities and medical treatments tend to be relatively inelastic because they are needed for survival. Due to the COV-19(Coronavirus), medical masks have seemed as necessities recently. In Taiwan, the quantity demand of medical mask has increased dramatically even if the price of a medical mask has been doubled in the very first period. Normally, medical masks are necessities for those in medical services careers, but not for all people. It's an event that changes the demand for specific goods, in this case, medical masks.

An Elastic Good

Typically, elastic goods are either unnecessary goods or services or those with many available substitutes. Normally, airline services are elastic because there are so many substitutes such as so many other airline companies for consumers to choose. If one airline decides to increase the price of its price for an economy class, consumers can use another airline, and the airline that increased its fares will see a decrease in the demand for its services. Again, due to the COV-19(Coronavirus), the airlines for travel and business has dropped down drastically. For now, no matter how attractive the discounts are, it hardly increases the demand for airline travel.

What Makes Those Goods Elastic or Inelastic?

Typically, Elastic goods are often mean unnecessary goods, unnecessary services, or those with many substitutes are available. 

In the case of the medical mask, the unpredicted event(COV-19) affects the demand for medical masks. As a result, It's has become a necessity for the public around the world even if it is fairly not necessary before.

In the example of airline services, so many substitutes causing the airline services to be fairly elastic. Another reason for this is that airline services are not a necessary service for normal people. For managers or business owners, it's might be necessary to do a business journey, but not for everyone. 

How Might Other Households Respond Differently?

It is common to see many different responses for many events due to the difference in income, tastes, personal experiences, or even educations. Other households may have different preferences on travel, so they may like some specific airline services such as in-flight meals or brand royalty. Some households may hear some bad news from their household members who work in a hospital, so they tend to buy more medical masks to stock. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Federal Reserve Bank of St. Louis. (n.d.). Elasticity of demand - The Economic Lowdown Podcast Series, episode 16. 

Hayes, A. (2020, January 30). Learn About Elasticity. Retrieved from https://www.investopedia.com/terms/e/elasticity.asp

CRITICAL THINKING QUESTIONS

CRITICAL THINKING QUESTIONS 1

Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case?

The Answer :

As we know that elasticity is a measure of a variable's sensitivity to a change in another variable, most commonly this sensitivity is the change in price relative to changes in other factors. For business travelers, it is relatively more necessary than other people. Also, businessmen take their business travel in business class more often. As a result, businessmen are more inelastic.

Income is one of the key factors that cause the different results. Assume the fare of a transatlantic air journey in business class is $2,000 and in economy class, It's $800. Suppose a businessman's income is $30,000 per year and the average wage is $4,000 per year. For most people, a 10% change in the price is a very different feeling. For instance, a 10% change in the price of air journey in business class is $200 and a 10% change in the price of air journey in economy class is $80. As you can see, the $200 is only 0.6% compared to the $30,000 per year income, but the $80 is 2% compared to the average wage. If you compare the result with the time they have to work for it, the result will be much more clear. Suppose they all have to work 8 hours a day and 20 days a week. While the businessman has to work about only one extra hour for the extra fare charge, the people who only get average pay have to work extra 3.2 hours, It's 3.2 times more.

The total assets value is also one of the key factors. For example, if your total asset is $3,000,000, you probably just ignore the extra $200 and decide within one second. Conversely, if your total asset is $90,000, you may cancel the deal also in one second.

CRITICAL THINKING QUESTIONS 2

Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?

The Answer :

If the two goods are complements, like toast and peanut butter, then a drop in the price of one good will lead to an increase in the quantity demanded of the other good. In this case, left shoes and right shoes are complements which means the price for left shoes drop, will lead to an increase in the quantity demanded of right shoes. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Hayes, A. (2020, January 30). Learn About Elasticity. Retrieved from https://www.investopedia.com/terms/e/elasticity.asp

When a demand curve moves

When a demand curve moves

The demand curve traces consumers’ willingness to pay for different quantities, the amounts that individuals are willing and able to pay. The curve is dynamic and very changing over time. 

For instance, if the price of a new iPhone rises, consumers will have an incentive to buy less and substitute it for other brands of phones. As a result, the quantity of the new iPhone that consumers are willing and able to buy will decrease which means the demand for the new iPhone will fall. Figure A shows the graphical representation of the relationship between the price of a new iPhone and the quantity demanded for a given period of time.

Image by Julie Bang © Investopedia 2019

The movement along the demand curve

As the Figure A shows, suppose that at $799 per new iPhone, 200 million iPhones will be demanded which means 200 million deals are willing to be made at the price of $799. As the price goes down, the new iPhone now become more affordable and more attractive compare to other smartphones. As a result, the quantity demand for the new iPhone rises to 500 million, the price which more consumers are willing to purchase. The dynamic and changing balance is our daily life, from supermarket to the bank you choose to deposit your money. The higher interest rate induces you to deposit more money in their bank to gain more profit from the interest income. Notice that the movement along the demand curve focuses on the quantities of the new iPhone demands by consumers that influenced by the different prices they have been offering, not events like increase in income or the preference such as how much they love the brand of iPhone.

Provide examples from your personal or professional life where you believe a demand curve shifted. 

The first thing we need to know that, a shift in demand is not the same as the movement along the demand curve. A movement along the demand curve represents the possible deals and transactions that both buyers and sellers are willing to accept. A shift in demand, on the other hand, represents those possible deals and transactions that are willing to increase or decrease at "each price". In short, It does not focus on the price changes that influence the quantity demand. Instead, it represents how a certain event influences the whole curve to move on the graph.

As the COVID-19 spread worldwide, the COVID-19 outbreak hasn’t slowed Amazon down. Quite the opposite, as other businesses are affected by the COVID-19, Amazon's business is on the remarkably well-placed to benefit from the new circumstances. As lockdown orders have trapped people indoors, those huge expenditures are turning to home deliveries via Amazon. In order to keep up with the increasing demand, Amazon even plans to hire 100,000 new workers. Now, Amazon looks like a public utility during the period of lockdown orders. Moreover, It has even partnered with the Canadian government to distribute medical equipment, and with the UK government to deliver at-home testing kits. Obviously, Amazon is benefiting from the shift in demand with its well-placed business since the demand for home deliveries is increased at each price. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074 a9b2bf90b2c6@11.330

Kenton, W. (2020, January 29). Demand Curve. Retrieved from https://www.investopedia.com/terms/d/demand-curve.asp

Liu, W. (2020, April 17). Coronavirus has made Amazon a public utility – so we should treat it like one | Wendy Liu. Retrieved April 18, 2020, from https://www.theguardian.com/commentisfree/2020/apr/17/amazon-coronavirus-public-utility-workers

Micro? Macroeconomics? What're The Differences?

Micro? Macroeconomics? What're The Differences?

Microeconomics is a subject that study, research, and analyze primary in the choices of individuals, households, business owners. 

For instance, business owners are more likely to hire more workers and purchase new equipment to increase their production if they think they can gain much more income by expanding their business. For individuals, they are more likely to choose the high-income jobs as possible as they can and pay for their living as low as they can. For households, they have to communicate with family members to make choices on many expenses or travel plans. Overall, microeconomics assumes that every individual, business owner chooses to do their best interest. If their choices are not in this assumption, the choices could become far harder to study. Despite analysis under the assumption is not 100% accurate, it's still the major part of human nature.

Macroeconomics, on the other hand, is a subject that study, research, and analyze primary in the choices of countries and the economy as a whole.

For instance, a country involves many different entrepreneurs, households, and individuals. Also, the government is consists of members from many different households and individuals. 

The whole economy is more likely to grow when most business owners hire more workers and purchase new equipment to increase their production. For business owners, they are more likely to supply more products in which customers are willing to buy more. Nowadays, smartphones are supplied and demanded in every city. In the 1800s, it almost impossible to make immediate communications if the distances are too far away. The technology development changes the demand as a whole and changes the choices of every business owner. It's an example of how micro and macroeconomics interact with each other. Even more, for households, they made their travel plans based on their budgets, the budgets mostly depend on their income, and the income depends on the salaries that offer by business owners. The most important part is that not everyone and every business owners are all successful, which means some individuals and business owners may fail and lose. Normally, it's happening everyday. Instead of analyzing each reason why they fail, macroeconomics focus on the whole growth. After all, the planet does not stop its rotation while each business stops. And again, despite analysis under the assumption is not 100% accurate, it's still the major part of human nature.

Briefly summarize, macroeconomics and microeconomics are not two separate subjects, or rather they are two complementary perspectives on the overall subject of the economy.

Micro and Macro: The Economic Divide (From https://www.imf.org/external/pubs/ft/fandd/basics/bigsmall.htm)

The author G. Chris Rodrigo is a visiting scholar in the IMF’s Research Department. He wrote that "Economics is split between analysis of how the overall economy works and how single markets function"(Rodrigo, 2020). As I priorly mentioned, macroeconomics and microeconomics are not two separate subjects, or rather they are two complementary perspectives on the overall subject of the economy. This author starts with the physical world to explain the concept of micro and macroeconomics. He said that "Physicists look at the big world of planets, stars, galaxies, and gravity. But they also study the minute world of atoms and the tiny particles that comprise those atoms." To give the readers another way to think and to understand the differences. And the most important part of this article is that he gives an explanation of why they divide and how they differ. About why the divide, he said that "It was not always this way. Back in the late 18th century until the Great Depression, economics was the study of how human societies organize production." There was no separation into microeconomics and macroeconomics during the period of the official economic theory developed from Smith’s The Wealth of Nations and the Great Depression. "In the early 20th century, macroeconomics as a distinct discipline began with Keynes’s masterpiece whereas early economics concentrated on equilibrium in individual markets, Keynes introduced the simultaneous consideration of equilibrium in three interrelated sets of markets for goods, labor, and finance. His approach was taken up by other leading economists and developed rapidly into what is now known as macroeconomics."(Rodrigo, 2020)

How they differ？It's has always been controversial. The microeconomic theory evolved how prices are determined. Macroeconomics, on the other hand, is rooted in empirical observations that existing theory could not explain. But those methods and concepts are all great tools for us to better analyze economics activities. "Microeconomics and macroeconomics are not the only distinct subfields in economics. Econometrics, which seeks to apply statistical and mathematical methods to economic analysis, is widely considered the third core area of economics. Without the major advances in econometrics made over the past century or so, much of the sophisticated analysis achieved in microeconomics and macroeconomics would not have been possible."(Rodrigo, 2020)

Sunk Cost

As the word "sunk", it's a cost that you already pay in the past. The cost could be the time, the money, or any other forms of cost. When we mention the sunk cost, we always facing some choices. For instance, while you are traveling, you book accommodations for your stay near the places you visit. Assume you prepaid the cost, but when you check-in and open the door of your room, you find it not as clean as the pictures you saw online where you booked. What would you do? Do you stay for your sunk cost? Or do you just ignore the cost and getting out to find another one? It's an example of the sunk cost because you make the choices after a big nonrefundable payment. However, if the cost is refundable then it is not sunk and you are not making the choice in the condition of sunk cost.

Marginal Cost

In the previous accommodation case, we focus on how the nonrefundable payment affects the choices we made. Now we look at the margin of the payment. Assume that you ignore the sunk cost and to find another hotel for your stay, the key point here is that you are more likely to choose the other cheaper, clear, or even more expensive accommodation not to choose between sleep in the street or sleep in a hotel. 

How does the sunk cost differ from a marginal cost? 

As we know that in the accommodation case, we normally made the choice between ignoring the cost and getting out to find another one, not between sleeping in the street or sleeping in a hotel. In this case, the first choice is a yes or no choice, ignore the sunk cost or not. The second choice is a numeral question, how many or how much should I pay for the extra payments of my travel plan? To make it clear, the first choice is made under the condition of the sinking cost, to continue or not. Although it is a conceptual difference between marginal cost and sunk cost, there is a basic core value is the same, the opportunity cost. Both marginal and sunk cost is based on the concept of opportunity cost and scarcity, which means we all have to make the choice and tradeoff. Furthermore, both of them have to forgo some alternative use of time or money.

Marginal Cost Are Our Daily Life

Under the law of diminishing marginal utility, we rarely make all-or-nothing choices, just like the previous case. I remember the first time I stay in a 5-star hotel, I did some homework before I booked. I drew the curve of the comparative advantages and all of the three hotels are under the budget of US$600.

The hotel A(Point A) has the best facilities(gym, swimming pool, car parking, 24-hour security, sea view), hotel C offers the best food dishes in their roof restaurant, the facilities and the food of hotel B are somewhere between hotel A and hotel B. Now I have to choose on the scarcity of my time and money since I only have a two-day trip, one-night accommodation, and the limitation of my budget. But the truth is, I don't have the energy and time to use all those facilities. I also can not just eat all the time during the time I stay in the hotel, it's unhealthy and ridiculous. So I prefer to choose somewhere in between not the extreme options which are a little more or a little less on food or hotel facilities. 

Reference

(n.d.). Retrieved from https://cnx.org/contents/aWGdK2jw@11.330:6RH0nLs4@8/What-Is-Economics-and-Why-Is-It-Important

Rodrigo, G. C. (2020, February 24). Finance & Development. Retrieved from https://www.imf.org/external/pubs/ft/fandd/basics/bigsmall.htm