Mankiw: Elasticity

Chapter 5:

A person may need to tie his income the elasticity of the supply and demand realities of his chosen means of earning a living.  One would need to understand the nature of necessities and of luxuries.  Items can be affected by substitute for a commodity.This helps to define the market, where it ends. Cyclical demand shifts can force the change of value for a commodity.  Ideally a seller would like to know a middle point for the prices, so that he can charge the right amount of money.  This has ramifications  for almost all sectors of the economy.  Even knowing how much for a ticket for an event must correlate with these types of fluctuations.  Overcharging can seriously impact the desire for making a profit.

The chapter goes through a number of mathematical exercises to compute these types of fluctuations.
Graphs are developed to show short and long term consequences and to discover trends. Actually a good year for farmers can cause a bad year for prices.  The chapter investigates the OPEC manipulations of the 1970s, and discovers the reason why the group could not maintain the high prices.  They collapsed because of the whole supply and demand coupled with elasticity.  The relationship with drug trafficking and government programs demonstrates some of the same economic elasticity issues.

This fifth chapter has enlightened me about the frustration of trying to alter prices artificially.  It may work short term, but it will eventually backfire.  The price will find its own level.  This remind me a great deal of concepts in Ayn Rand's books.

Chapter 6  The effects of the Government

Price controls have consequences.  A price ceiling will affect the market.  During the 1970s the government did try to manipulate OPEC with decisions concerning oil products.  (I was in Europe.  The Germans had no-drive Sundays.  These Sundays put together greatly impacted the supply of gasoline in the country, and gave the Germans considerable leverage with OPEC.)  The chapter even investigates the effects of a drought.  Of course 2012 will be a case study in the future, and will undoubtedly be used tin the future to clarify that type of effect.  It destroys some crops, driving the prices up because of the supply demand relationship.  In this the government has considerable connection because of ethanol production.  We have seen gasoline in 2012 around 4 dollars--caused by a number of factors including the drought.
Just as there is a ceiling there is also a floor to consider.

A big city like New York can attempt to control rent prices.  If taken too far, rentals will disappear, or the renters may look elsewhere.  The chapter takes on minimum wages.  If the government forces the rise, it may affect some business owners to let go of some their employees.  Such a hike will affect some parts of the economy positively and some rather negatively. Entry level employees are especially affected, often as teens trying to enter the work force.  Some are so determined to enter that they will do internships.  These are not paid by the business--if paid at all it comes from the government.  The government has a constant discussion on whether the minimum wage helps or hinders poverty, because it affects numerous other issues.  Labor goes up and the price of things compensate.

Governments raise revenues through taxes.  Depending on the rates, the businessman must adjust his labor and production rates.  Both the buyer and the seller must meet the tax.  Government uses payroll taxes for the revenues collected for employee benefits.  (I do not like the word entitlement for something that an employee pays as an investment in his own welfare as in old age or in health.)  In reality, both the firm and the employees are affected.  It lowers the income of the employee.  (Fine, but that same employee needs to get over immediate self-gratification.)  Elasticity also enters this picture.  (Consider the current anger over reducing benefits and raising ages for employees because of the weak economy and the aging boomer populations.)

Then comes the luxury tax.  Who does that hurt?  Those who build second homes, yachts, diamonds, etc.  It destabilizes parts of the economy and specific markets.

This chapter takes a mostly neutral position on taxes, but it does show the adverse effects of some decisions to raise certain taxes.  I felt this was mostly taken from business's point of view.  It must also consider the well being of a human being.  This is one of those arenas where both must work together.

These two chapters are going to cause me to think a great deal about the current national squabbles about the middle class, taxes, and the unemployment realities.  I don't buy trickle down, but I am not sold on super-stimulus experiments either.  I did not like Bush's direct checks to the taxpayers--too gimmicky.  I admire Obama for his interventions with the car industry.  Time will tell the ultimate effect of that manipulation.  National self interest and ethical treatment of the less fortunate are part of the equation.  But Obama's national infrastructure ready to dig ideas?  True, I'd like to see people work.  But I don't like increasing national deficits.  Wild cards like military and national security play roles.  We have two dominant and competing beliefs in this country.