Use our Friends’ link if you cannot read the full text. 🎉
Hello, everyone. I’m back from lunar new year holiday! (Didn’t want to come back, who would?) I might share some photos of Rome and Florence for the sake of my own inner peace :) and maybe yours.
Here in South Korea we are having some troubles with the novel Coronavirus, around 20 people are affected by this infectious disease. Hope we could get over the nCoV soon. Adding to that, I sincerely hope that this outbreak does not get to a point where hatred or racism is permitted against asians or Chinese people. It is heartbreaking to read curses and disrespectful comments on the Internet. 🙏
Anyway, my own daily life is affected by the nCoV outbreak. Our meetings are cancelled, so it is hard for us to co-work on machine learning postings. (maybe only for me, since I desperately need some help from professor and other T.A’s)
So, my idea is to share some economic ideas/knowledges with you, which I feel more confident and secure to talk about than TensorFlow. I will follow the chapters form Economic Theory by Gary S. Becker, 1971 and pick some parts that was mind-blowing and important in Microeconomics.
I. Introduction
The purpose of this [Economic Theory] series is;
1. To motivate myself to read! (I hate reading!!!)
2. To clarify my understandings! (There are things that can be understood while explaining about it.)
3. To provide some new ideas or theories to undergrad Econ majors or Econ lovers! (Sometimes it feels unreal that someone is actually reading my stuff.)
More on the book ; Economic Theory by Gary S. Becker, 1971
1. It was recommended by my Microeconomics professor from last semester (1st graduate year). I started reading this 200 page book to review the Microeconomics course, and found out very interesting. (at this point I’ve read less than 1/3 :), told you I hate reading!)
2. What I know about Gary Becker is that he is a Nobel prize winner and that he first proposed the idea of human capital, that’s all, actually. Although this book is half a century old, he emphasizes the parts that are neglected or taken for granted in the modern world.
3. Qualitative understanding rather than quantitative. He is famous for applying economic point of view on other sociological issues. I felt that such ability came from his emphasis on qualitative analysis of Economics.
II. Circular reasoning — Ceteris Paribus
Enough of introductions! Have you heard of the latin phrase ceteris paribus, meaning all other things being equal? It is too classic to even cite the phrase, however why is it important and when do we use the concept even unnoticeably?
We all have such an experience, while dealing with some complicated economic issues, where the logics are circulating in our brain. Economic variables are very interdependent and there exist infinite number of variables that might influence a single economic phenomenon. So, it seems to have circular reasoning.
We know that an answer to simultaneous system of equation can be derived if we have more equations than the unknown variables. Similarly, according to Walras’ principle on general equilibrium analysis, all p’s and q’s can be determined since there are enough number of independent supply and demand equations. Ok but it is vague and inefficient.
It is time our ‘ceteris paribus’ interfered. By concentrating on the few variables that are important and considering all others to be unchanged, economists can finally be economic.
III. Supply and Demand Analysis
I assume that we all know Supply and Demand curves from introductory courses. It is invented by Alfred Marshall and demand function that is derived from utility maximization is called Marshallian demand, and the equilibrium analysis from such approach is called general equilibrium. For now let’s consider negatively sloped demand curve and positively sloped supply curve.
1. Time
So far it was very basic, however I have to emphasize the importance of time. Quantity is a flow per unit of time. If there were 10 quantities demanded in a week, at the same price there is 40 per month or 520 per year. This is very often neglected.
Also, without the concept of time, we cannot guarantee the continuity of the demand curve. For example, normally we purchase a diamond ring when you are getting married and for important anniversaries. Let’s say people purchase a diamond ring every 20 years in other words, in a discrete unit of time. In this example, can we say that the demand curve is actually a curve rather than a few dots? Since time is continuous, we consider the rate of purchase to be continuous; we buy 1/20 of diamond ring per year or 1/240 per month.
As most of you might know, time interferes when it comes to static analysis v.s. dynamic analysis in which we consider the short-run and long-run equilibrium.
2. A change of an economic variable changes either demand or supply, not both.
To avoid circular reasoning, it is continued concept from the ‘ceteris paribus’. It is buried in our unconsciousness with innumerable practices, however, it is worth reminding. Let’s assume a milk market. Almond milk is a great substitute of cow milk and they are produced with very distinct resources; cow and almond.
What happens if there were subsidy to almond milk corporations. ←shock
(There is an issue that being a vegetarian is too expensive in Korean culture)
With the subsidy factories can produce more almond milks (supply curve shifts rightward) so that it decreases price and increases quantity demanded of almond milk at equil.
Now that the barrier of almond milk is opened, some milk consumers will move from milk to almond milk (demand curve in milk market moves leftward/downward), so that the price and quantity demanded of milk will decrease.
CAUTION!
I said “some milk consumers will move from milk to almond milk.”
We know that the Dm (demand curve of milk) will shift leftward.
Then, does demand curve of almond milk (Da) shift rightward?
NO! At this point we are starting the circular reasoning/loop. We have already increased Sa(Supply curve of almond milk) as a result quantity demanded increased along the Da. It is repetitive to consider shift of Da at this point.
Things that we do not consider.
i. People’s taste.
Among people who tried almond milk might dislike it and come back to milk market shifting the demand curve rightward. This will make any analysis meaningless. Or maybe Da can increase (shift rightward) if people actually liked almond milk and it became a thing in the society. All this information is not provided at this point, so we consider it to be unchanged unless said.
ii. Increase in the price of corn (source of cow food)
It is very plausible variable that we should consider, however, based on our law ‘ceteris paribus’ it is disregarded.
I actually can come up with tons of other variables that we keep out of our range of analysis.
iii. Shift in the supply curve due to decrease in the price of almond milk
As said, we disregard milk suppliers’ reaction to a new policy. With this assumption things are very much straightforward. For example, let’s assume that milk producers decrease their production facing the new policy. Then, we are sure that the quantity demanded decreases, whereas change in price is uncertain. We have to analyze the magnitude of changes of the two curves and their slopes, etc.
However, I am not saying that such analysis is meaningless. They are very important indeed, but at this point we do not have any information regarding the reaction of milk producers to the new policy.
Maybe we could make a good guess. For example in Korea where milk industry is close to oligopoly and very inelastic demand on milk (it’s a guess but back at school we had to drink 200ml everyday so it is apparently plausible), they might decrease supply and maximize their profit. Such qualitative analysis is good enough with this text book.
This has been a very simple D and S analysis. It must have been very easy for all of us, but there were points that has been long gone in memory for me as well. Hope this was a great recap on Econ 101.
In the next chapter, I will cover the SCARCITY and why it is a main tool to explain demand curves without assumption on rational people. A market full of irrational people might show the downward sloping demand curve.
See you and thank you for reading. Ciao!
