Privacy Policy

Privacy Policy for www.study-microeconomics.blogspot.com

If you require any more information or have any questions about our privacy policy, please feel free to contact us by email at cindycantik87@gmail.com.

At www.study-microeconomics.blogspot.com, the privacy of our visitors is of extreme importance to us. This privacy policy document outlines the types of personal information is received and collected by www.study-microeconomics.blogspot.com and how it is used.

Log Files
Like many other Web sites, www.study-microeconomics.blogspot.com makes use of log files. The information inside the log files includes internet protocol ( IP ) addresses, type of browser, Internet Service Provider ( ISP ), date/time stamp, referring/exit pages, and number of clicks to analyze trends, administer the site, track user’s movement around the site, and gather demographic information. IP addresses, and other such information are not linked to any information that is personally identifiable.

Cookies and Web Beacons
www.study-microeconomics.blogspot.com does use cookies to store information about visitors preferences, record user-specific information on which pages the user access or visit, customize Web page content based on visitors browser type or other information that the visitor sends via their browser.

DoubleClick DART Cookie
.:: Google, as a third party vendor, uses cookies to serve ads on www.study-microeconomics.blogspot.com.
.:: Google's use of the DART cookie enables it to serve ads to users based on their visit to www.study-microeconomics.blogspot.com and other sites on the Internet.
.:: Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy at the following URL - http://www.google.com/privacy_ads.html

Some of our advertising partners may use cookies and web beacons on our site. Our advertising partners include ....
Google Adsense


These third-party ad servers or ad networks use technology to the advertisements and links that appear on www.study-microeconomics.blogspot.com send directly to your browsers. They automatically receive your IP address when this occurs. Other technologies ( such as cookies, JavaScript, or Web Beacons ) may also be used by the third-party ad networks to measure the effectiveness of their advertisements and / or to personalize the advertising content that you see.

www.study-microeconomics.blogspot.com has no access to or control over these cookies that are used by third-party advertisers.

You should consult the respective privacy policies of these third-party ad servers for more detailed information on their practices as well as for instructions about how to opt-out of certain practices. www.study-microeconomics.blogspot.com's privacy policy does not apply to, and we cannot control the activities of, such other advertisers or web sites.

If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites.

Recent Trends in Economic Volatility

Charles Notzon and Dan Wilson of the San Francisco Fed summarize "papers presented at a conference on 'Recent Trends in Economic Volatility' (we may soon find out if the recent trend, i.e. The Great Moderation, was truly Great, or just a flash in the pan):

Recent Trends in Economic Volatility: Conference Summary, by Charles Notzon and Dan Wilson, FRBSF Economic Letter: Over the last 25 years, the U.S. economy has become much less volatile; that is, the swings from boom to bust have been greatly reduced, as has the pain typically associated with such cycles. As Figure 1 illustrates, the volatility of GDP growth has fallen by more than half since 1985. Many observers refer to this phenomenon as the "Great Moderation." To what can we credit this improved environment? Researchers have uncovered several potential drivers, including improved technology (especially related to inventory and supply chain management), better monetary policy, and simple good luck, but to date they have found little consensus on which factor is most important.

Source: Bureau of Economic Analysis.

Also in dispute is the extent to which the decline in aggregate volatility has been mirrored in the microeconomic data on income and employment. In other words, have households and businesses also experienced a decline in volatility? The seven papers presented at the Center for the Study of Innovation and Productivity's conference on "Recent Trends in Economic Volatility" investigate these questions. Although the debate is not over, the papers have moved the research forward and highlighted key questions for future work.

Structural change vs. good luck in explaining the Great Moderation

The first paper of the conference, by Galí and Gambetti, begins with a useful summary of the various explanations for the Great Moderation, placing them into two broad categories: structural changes and "good luck." Structural changes include changes in the way monetary policy is conducted and technology-driven changes that affect the way firms operate. "Good luck" essentially means smaller and fewer economic shocks. Galí and Gambetti go on to use a standard empirical model known as a structural vector autoregression in order to characterize the correlations in post-World War II data among key U.S. macroeconomic variables. They posit that if declining volatility is merely the result of "good luck," then the data should show no change in the correlations between them. Their model, however, finds that this is not the case, as correlations between output, labor hours, and productivity have indeed changed since the early 1980s. Having eliminated good luck as an explanation, they attribute most of the decline in volatility to a decline in nontechnology shocks, which have come about due to a change in the Federal Reserve's monetary policy "rules" (specifically, an increased emphasis on fostering low and stable inflation in addition to strong economic growth) as well as a reduction in labor adjustment costs. It is worth noting that the authors' finding that reduced labor adjustment costs may have played an important role in the Great Moderation is consistent with evidence, discussed below, provided by the paper of Davis et al., which explores the secular decline in labor market volatility.

The role of technological change

Several papers ascribe a key role to technological progress in explaining declining volatility. The first of these papers, by Koren and Tenreyro, looks at how development of new technologies affects both the rate of growth and the volatility of growth in an economy. Their model posits that, just as households benefit from investing in a diversified portfolio of stocks (smoothing their returns and minimizing losses stemming from shocks to specific assets), having a larger and more diverse "menu" of technologies available to firms in a country means that each specific technology plays less of a role in production. The diversification of technologies in an economy makes it easier for firms to offset price or supply shocks to specific inputs (oil, for example) by substituting with other technologies that rely less on those inputs. In this way, technological advances reduce firm-level volatility, which consequently reduces overall volatility. Technological change also boosts the level of growth, since it allows firms to move to a new technology before reaching the point of diminishing returns in their old technology. While sensible and consistent with data that Koren and Tenreyro bring to bear, this finding contrasts sharply with the conclusions of previous research, which point to an explicit tradeoff between risk (volatility) and return (fast growth).

Comin and Mulani also examine the effects of technological change on economic growth and volatility and, similarly, find that technological change leads to both faster growth and lower volatility. But in contrast to the previous paper, Comin and Mulani argue that this good result holds only for the national, or macro, measures. Indeed, predictions from their model suggest that firm-level, or micro, volatility should increase as the pace of technological innovation increases. To get this result, they consider an economy with two types of technologies: general innovations (GIs), which are not patentable and are used by all firms in the economy, and research and development innovations (RDI), which are patentable and used by a limited number of firms. They then assume that GIs are produced by large, stable firms and RDIs are produced by smaller, more volatile firms. Under these conditions, they show that increases in RDIs (for example, due to government research and development (R&D) subsidies) lead to market "shake-up," whereby smaller firms gain market share and perhaps even leapfrog ahead of the previous market leaders. Since GI activity relies on the presence of stable market leaders, this shake-up creates both firm-level volatility and lower GI activity. The decline in GIs, which by definition help all firms, reduces the comovement between firms in the economy, ultimately reducing the volatility of aggregate outcomes. Said more simply, if the increase in the innovative activity comes from small firms jockeying for position in the industry, aggregate volatility will go down, as winners and losers will offset each other, but microvolatility will rise, as losing firms compete to get back on top. Comin and Mulani provide empirical evidence showing that increased R&D activity in the U.S. has coincided with increased volatility in sales and market shares for publicly traded firms, reduced comovement across industries, and reduced volatility in aggregate economic growth.

Turning to the purely micro data, Brynjolfsson et al. analyze the impact of information technology (IT) on industry volatility or turbulence. Use of IT allows an innovation to diffuse rapidly throughout a firm, increasing productivity and market share faster than was previously possible. Although first movers on an innovation are able to gain market share quickly creating the opportunity for concentration, the speed of diffusion that IT affords also enables new entrants to leapfrog ahead of leaders in a given sector, thus increasing sectoral turnover rates (turbulence). Empirically, IT-intensive industries have indeed experienced both greater concentration and turbulence. This evidence is consistent with the findings of Comin and Mulani that firms in more R&D-intensive industries tend to have more volatile sales and market shares, since there is a strong correlation between an industry's R&D intensity and its IT intensity.

Supply chain management

The role of supply chain management in the Great Moderation is the subject of a paper by Davis and Kahn as well as one by Irvine and Schuh. Davis and Kahn argue that dramatic technology-driven improvements in supply chain management in the durable goods sector, combined with a secular shift away from domestic durable goods manufacturing and toward services, is the explanation for the decline in aggregate volatility. They suggest that changes in monetary policy, on the other hand, played a minimal role. Their model of the firm's inventory decision process mirrors observed declines in output and sales volatility, as well as the sales-to-output ratio, and the authors suggest that a shorter lead time for materials orders (more precise inventory control) is the key mechanism through which this change has occurred.

Irvine and Schuh also find that improvement in supply chain management likely played the predominant role in reduced aggregate volatility. Using a multi-sector, vector-autoregression empirical model, they find that a decline in the comovement of output among inventory-holding industries (for example, manufacturing and wholesale trade) can explain a substantial share of the decline in aggregate output volatility. Their model suggests that a change in structural relationships between inventory-holding industries seems to be the cause of this decline, and industries in which firms share supply and distribution chains exhibited the largest decline in covariance in volatility. As in Davis and Kahn, Irvine and Schuh find little evidence that changes in monetary policy or "good luck" are major factors behind the Great Moderation.

Volatility in the labor market

In the final paper of the conference, Davis et al. establish and attempt to explain two interesting facts from the data. The first fact is that volatility of employment levels within firms, particularly those not publicly traded, has declined over the past 25 years. The second fact is that the flows of individuals into unemployment have fallen over time. In the early 1980s about 4% of employed persons fell into unemployment (either voluntarily or involuntarily) in the average month; by the early 1990s, this figure had dropped to just 2%. The focus of their paper, then, is to investigate whether the decline in volatility in employment demand by businesses is responsible for the decline in unemployment inflows. Using industry-level data, they find a strong statistical association between an industry's volatility in employment demand, as measured by the variance in its job destruction rate, and the industry's unemployment inflow rate (the rate at which workers in the industry go into unemployment in a given period). They conclude that the decline in firm level employment volatility likely has reduced flows into unemployment.

Conclusion

While there is broad agreement that aggregate economic volatility has declined over the last 25 years, the relative roles of economywide factors, such as changes in monetary policy and technological change, remain topics of dispute. Also in dispute is the extent to which this decline in aggregate volatility is mirrored in microeconomic variables, such as income and employment. Reductions in aggregate and firm-level volatility do not necessarily translate into a reduction in volatility at the individual level. Rather, some studies argue that household consumption and individual earnings have become more volatile in recent decades, not less. The linkages between the disparate trends in volatility at the aggregate level and at the individual level remain important areas of economic research.

Microeconomics Made Easy. The Basics in Less Than an Hour

What is difficult about microeconomics? Basically nothing. Microeconomics is one of the most rigorous edifices of thought that has ever been built. The two pillars on which it rests - the theories of supply and demand - are completely symmetrical, which gives this edifice transparency, structure, logic, clarity, even an air of beauty, and above all surprising simplicity.

The symmetry and the aesthetic quality that symmetry always creates were achieved at a high price: Supply theory had to be constructed as the exact mirror image of demand theory. This has disastrous consequences: Any beginner can see that substantial parts of supply theory and some important theories derived from it are wrong. As a result, students feel that some of the theories they are expected to learn are faulty and that most of them are rather complicated.

The best way to escape from this dilemma is to learn the essentials of micro as thoroughly and rapidly as possible. This endeavour takes less than an hour and will reveal how simple microeconomics is. Thereafter you must, of course, put some flesh on this structure with the help of the Crash Course or some other textbook. But the impression that you are expected to master masses of complicated and at times confused theories will be gone for good.

What will also be gone is the feeling of helplessness that often accompanies pontificating instruction in economics. The Chapter-by-Chapter Critique enables you to explain precisely why many of the theories you are taught are simply wrong.

Further support for students comes from the References and Further Reading Sections following the Critique. Introducing you to the critical writings of eminent mainstream economists, they reveal that textbook authors not only conceal the criticism levelled at microeconomics by heterodox - i.e. non-neoclassical - economists but also conceal the critical writings by their mainstream colleagues.

So, let's get going. The first step for newbies and self-styled dummies is to get a sound grasp of the logical structure of supply and demand theory. Below you will find the standard graph that illustrates the fundamentals of microeconomics and a chart that summarises them.

GRAPH
The Standard Graph Illustrates the Fundamentals of Microeconomics

This simple graph illustrates demand theory, supply theory, price theory and equilibrium theory. The latter is the culmination of microeconomic theory.
The demand curve slopes downwards. This is due to two laws. (1) The law of demand, which states that more is bought as prices fall. (2) The law of diminishing utility, which states that the utility of additional units diminishes as more is consumed.
The supply curve slopes upwards. This is also due to two laws. (1) The law of supply, which states that more is supplied as prices rise. (2) The law of diminishing returns, which states that marginal costs (costs of additional units) rise as output in expanded because increases in output following increases in some but not all inputs diminish.
The interaction between demand, supply and prices leads to equilibrium at the equilibrium price where the market is cleared.

CHART
The Symmetry between the Theories of Supply and Demand

Quantity Supplied and Demanded
These are the quantities supplied or demanded at particular prices. They are represented by particular points on the respective curves.

Supply and Demand
They are the quantities supplied or demanded at any possible price. They are represented by the respective curves as a whole.

Movements along the Curves
They are changes in quantities supplied or demanded in response to price changes.

Shifts of the Curves
They are changes in supply or demand in response to changes in exogenous variables.

Reasons for the Slopes of the Curves
The slope of the demand curve: The law of demand and diminishing marginal utility.
The slope of the supply curve: The law of supply and diminishing marginal returns.

The Ability to Buy
It is explained by the law of demand.

The Willingness to Buy
It is explained by diminishing marginal utility.

The Ability to Produce
It is explained by diminishing marginal returns.

The Willingness to Produce
It is explained by the law of supply.

Price Elasticity
Price elasticity of supply and demand is measured by a fraction.
Percentage change in quantity supplied/demanded is given in the numerator.
Percentage change in price is given in the denominator.
Supply and demand are elastic if the numerator exceeds the denominator.

Utility/Profit Maximisation
Consumers maximise utility by expanding their purchases until the utility received from the last unit equals the price to be paid for this unit.
Producers maximise profits by expanding output until the price received for the last unit produced equals the cost incurred by producing this unit.

The Equimarginal Principle
Consumer and supplier behaviour is guided by the equimarginal principle.
Consumers buy bundles. Utility has been maximised when the ratio of the marginal utilities of the commodities in their bundles to the market prices of these commodities (MU/P) is equal for all commodities.
Producers employ combinations of factors. Costs have been minimised when the ratio of marginal products (increase in output generated by one additional unit of a factor) to prices of factors (MP/P) is equal for all factors.

Indifference/Isoquant Analysis
These are additional approaches to explain consumer and producer behaviour.
Consumers are indifferent about the contents of the commodity bundles they buy.
Producers are indifferent about the mix of factors they employ.
Consumers buy a bundle when the ratio of their subjective barter prices to actual market prices is equal for all commodities in their bundle.
Producers employ a combination of factors when the ratio of marginal product to the actual price of a factor is equal for all factors.
In either case, the decision on the commodity/factor mix is ultimately determined by budget constraints.