Summary of Mankiw’s “Principles of economics” Enver Figueroa Bazán 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 is at the same price, let’s 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,

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 the last 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 it’s 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, the firm needs at least to recover its average variable cost. Where the MC curve crosses the AVC curve, that’s 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.

Price 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

MR AVC MC close point

ATC SC Long-run

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

Regarding the market as a whole, the short-run supply curve is the horizontal sum of every firm’s 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 longrun 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.

Chapter 21 The market system could not exist without currency. Money has three main functions well defined by Keynes back in the thirties: it’s a medium of exchange, a unit of account, and a store of value. The money 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 account the 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 public’s 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 those who 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 it’s called secondary creation of money.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 201210117 Chapter 10: Externalities Externalities are uncompensated effects that one person causes on else’s 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 don’t embody the cost to society within their cost function. So, a measure to make them internalize the externality is by taxation in an amount that 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.

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 with agreements 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 markets The 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 worker’s physical marginal product times the price of the firm good equals his salary: P x MPL = W. Under this rule the firm maximizes profits in 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.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 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, let’s 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, 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 the last 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 it’s 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, the firm needs at least to recover its average variable cost. Where the MC curve crosses the AVC curve, that’s 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.

Price 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

MR AVC MC close point

ATC SC Long-run

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

Regarding the market as a whole, the short-run supply curve is the horizontal sum of every firm’s 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 longrun 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.

Chapter 21 The market system could not exist without currency. Money has three main functions well defined by Keynes back in the thirties: it’s a medium of exchange, a unit of account, and a store of value. The money 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 account the 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 public’s 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 those who 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 it’s called secondary creation of money.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 201210117 Chapter 10: Externalities Externalities are uncompensated effects that one person causes on else’s 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 don’t embody the cost to society within their cost function. So, a measure to make them internalize the externality is by taxation in an amount that 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.

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 with agreements 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 markets The 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 worker’s physical marginal product times the price of the firm good equals his salary: P x MPL = W. Under this rule the firm maximizes profits in 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.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 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, let’s 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, 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 the last 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 it’s 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, the firm needs at least to recover its average variable cost. Where the MC curve crosses the AVC curve, that’s 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.

Price 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

MR AVC MC close point

ATC SC Long-run

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

Regarding the market as a whole, the short-run supply curve is the horizontal sum of every firm’s 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 longrun 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.

Chapter 21 The market system could not exist without currency. Money has three main functions well defined by Keynes back in the thirties: it’s a medium of exchange, a unit of account, and a store of value. The money 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 account the 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 public’s 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 those who 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 it’s called secondary creation of money.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 201210117 Chapter 10: Externalities Externalities are uncompensated effects that one person causes on else’s 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 don’t embody the cost to society within their cost function. So, a measure to make them internalize the externality is by taxation in an amount that 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.

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 with agreements 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 markets The 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 worker’s physical marginal product times the price of the firm good equals his salary: P x MPL = W. Under this rule the firm maximizes profits in 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.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 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, let’s 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, 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 the last 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 it’s 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, the firm needs at least to recover its average variable cost. Where the MC curve crosses the AVC curve, that’s 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.

Price 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

MR AVC MC close point

ATC SC Long-run

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

Regarding the market as a whole, the short-run supply curve is the horizontal sum of every firm’s 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 longrun 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.

Chapter 21 The market system could not exist without currency. Money has three main functions well defined by Keynes back in the thirties: it’s a medium of exchange, a unit of account, and a store of value. The money 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 account the 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 public’s 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 those who 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 it’s called secondary creation of money.

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 Mankiw’s “Principles of economics” Enver Figueroa Bazán 201210117 Chapter 10: Externalities Externalities are uncompensated effects that one person causes on else’s 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 don’t embody the cost to society within their cost function. So, a measure to make them internalize the externality is by taxation in an amount that 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.

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 with agreements 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 markets The 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 worker’s physical marginal product times the price of the firm good equals his salary: P x MPL = W. Under this rule the firm maximizes profits in 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.

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).

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