Chapter 11: Supply and Demand (pages 129-142)

Summary in haiku form

One short phrase explains
The mystery of prices:
Supply and demand.

Summary in one paragraph

In competitive markets buyers and sellers are all price-takers, i.e., they all take the market price as given; but then where do market prices come from? Economists spend many years debating whether market prices were determined by supply (i.e., cost of production) or by demand (i.e., willingness to pay) until finally Alfred Marshall convinced everyone that arguing whether it’s supply or demand is like arguing “whether it is the upper or the under blade of a pair of scissors that cuts the paper.” Prices are determined by supply and demand: the market equilibrium price is the only price at which the amount that buyers want to buy at that price equals the amount that sellers want to sell at that price. (At any other price, individual incentives will push prices towards the equilibrium.) It follows that any change in the market price is caused by underlying changes in supply and demand, e.g., increased cost of fertilizer will reduce supply, pushing the supply curve to the left, leading to a higher market equilibrium price.

Notes on specific pages

Links to Marshall

Chapter 12: Taxes (pages 143-154)

Summary in haiku form

Tax equivalence:
Where does the tax burden fall?
Don’t ask a lawyer.

Summary in one paragraph

Lawyers determine the legal incidence of taxes—i.e., who formally pays the taxes—but the forces of supply and demand determine the economic incidence of taxes, i.e., who ultimately bears the burden. In fact, the tax equivalence result says that a tax on the sellers produces the same economic outcome as an equivalent tax on the buyers, meaning that the Social Security tax—which is legally divided between employees and employers—would have the same economic outcome even if it were placed entirely on one side or the other. As we’ll see in Chapter 14, in many markets the long-run economic burden of taxes falls entirely on the buyers.

Notes on specific pages

Carbon taxes

Social Security

Chapter 13: Margins (pages 155-168)

Summary in haiku form

True optimizers
Don’t want one more or one less.
Think at the margin.

Summary in one paragraph

Supply curves tell us how much sellers want to sell at certain market prices, but they can be reinterpreted as marginal cost curves, which tell us the additional cost of producing one more unit of output. And demand curves, which tell us how much buyers want to buy at certain market prices, can be reinterpreted as marginal benefit curves that tell us the additional willingness-to-pay for consuming one more unit of output. Every story about supply and demand therefore has a parallel story about marginal costs and benefits, e.g., a tax on sellers that reduces supply—thereby shifting the supply curve to the left—can also be seen as a tax that increases the sellers’ marginal costs of production, thereby shifting the marginal cost curve up.

Notes on specific pages

Page 156: “Just as we can learn about pool sharks by studying physics…”

The analogy of the pool player comes from Milton Friedman, who won the 1976 Nobel Prize “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.”

Page 162: John Hicks and the relationship between demand curves and marginal benefit curves.

John Hicks shared the 1972 Nobel Prize (with Kenneth Arrow) “for their pioneering contributions to general economic equilibrium theory and welfare theory.”

Chapter 14: Elasticity (pages 169-180)

Summary in haiku form

Responsiveness to changes.
How much do you stretch?

Summary in one paragraph

Elasticities measure responsiveness, e.g., the price elasticity of demand measures the percentage change in quantity demanded produced by a 1% increase in price. (More generally, the X elasticity of Y measures the percentage change in Y produced by a 1% increase in X.) Like a rubber band, more elasticity corresponds to greater responsiveness.

Notes on specific pages

Elasticity formula

Laffer curve

Elasticities and monopoly revenue

Chapter 15: The Big Picture (pages 181-192)

Summary in haiku form

Competition needs
Lots of tender loving care
Plus a carbon tax.

Summary in one paragraph

Need to add this…

Notes on specific pages

Link to Edgeworth Box

Page 185: Amartya Sen

Amartya Sen won the 1996 Nobel Prize “for his contributions to welfare economics.”

Page 189: “Now that’s an idea worthy of a Nobel Prize!”

Marty Weitzman is on my short list to win the Nobel Prize any day now for his work on environmental economics, including his pioneering “Prices versus quantities” paper comparing pollution taxes and cap-and-trade.

More on carbon taxes and cap-and-trade.

Chapter 16: Conclusion (pages 193-204)

Summary in haiku form

Is the big question
Still unanswered in your mind?
Study more econ.

Summary in one paragraph

Need to add this…

Notes on specific pages

Page 198: Ken Arrow, Gerard Debreu, and the “Invisible Hand Theorems”

Ken Arrow shared the 1972 Nobel Prize (with John Hicks) “for their pioneering contributions to general economic equilibrium theory and welfare theory.”

Gerard Debreu won the 1983 Nobel Prize “for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium.”

Page 198: “Nash’s poker model…”

Page 199: Joseph Stiglitz

Joseph Stiglitz shared the 2001 Nobel Prize (with George “adverse selection” Akerlof and Michael Spence) “for their analyses of markets with asymmetric information.”

Page 200: Daniel Kahneman and behavioral economics

Daniel Kahneman shared the 2002 Nobel Prize (with Vernon Smith) “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” His colleague and co-author Amos Tversky would almost certainly have shared the prize had he lived long enough.

Page 200: “Save More Later”

Page 201: Gary Becker and the economics of crime

Gary Becker won the 1992 Nobel Prize “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour.”

Page 203: “Does anyone know where I can find a one-handed economist?”

This quote is popularly attributed to President Harry Truman, but there’s no proof that he actually said it.

Page 204: “Macroeconomics… That’s what our next book is going to be about…”

It’s true… publication date is January 2012!