coffee in US we see the price inc. @ starbucks therefore we know shit went down in brazil or wherever the price change tells us information2. Prices Coordinate the Actions of Market Participantsa) changes in price induce responses on BOTH sides of the market in proper direction to help correct situations (no jersey shore)3. Prices Motivate Economic Playersa) prices provide PROFIT or LOSS reward/ penaltyTHE EFFECIENCY OF THE MARKET DEPENDS ON 2 THINGS (1) COMPETITIVE MARKETS AND (2) WELL-DEFINED AND ENFORCED PROPERTY RIGHTS!CH 4 Supply and Demand: Applications and Extensions4. Link between resource markets and product marketsresource market, businesses demand resources, while households supply them. Firms demand resources in order to produce goods and services in turn Households supply them in order to earn income. The labor market is an important resource market.An increase in the demand for a product will lead to an increase in the demand for the resources used to produce it. and vice versaAn increase in the price of a resource will increase the cost of producing products that use it, shifting their supply curve to the left. A reduction will have the opposite effect.If there is a reduction in supply if a resource, costs will increase, which brings a reduction in supply in the product market. (Leading to higher prices for consumers)F. Price Ceilings: What are they and what are the bad effects of them or secondary effects such as rent seeking? -a legally established price sellers can charge for a good or resource THIS PRICE CEILING PUTS THE PRICE OF GOOD BELOW MARKET EQUILIBRIUM WITH DIRECT AND INDIRECT EFFECTS!1. Direct= the qty demanded will be greater than the amt supplied (inefficiency)2. Indirect=Quality deterioration and change in other non-price factors that are favorable to sellers and unfavorable to buyers. The quantity exchanged will fall and the gains from trade will be less than if the good were allocated by markets.3. Whats this talk about rent control?: rent controls are price ceilings intended to protect residents from high housing prices PROBLEMS? Effects of rent control: shortages and black markets develop, future supply of housing will decline, quality of housing will deteriorate, non-price methods of rationing will increase in important, inefficient use of housing, and long-term renters will benefit at the expense of newcomers.VIII. Price Floor: legally established minimum price buyers must pay for good or resource EXAMPLE MINIMUM WAGEKeeps the price of a good above the market equilibrium, and there are direct and indirect effects.Direct- Surplus: sellers will want to supply a larger quantity than buyers are willing topurchase.Indirect- Changes in non-price factors that are favorable to buyers and unfavorable to sellers. The quantity exchanged will fall and the gains from trade will be less than if the goods were allocated by markets.1. So whats the problem with minimum wage? reduces employment of low-skilled labor, reduction in non-wage component of compensation, less on-the-job training, and may encourage students to drop out of school.B. Black Markets: market that operates outside of the legal system1. Why would you want to enter black market?To avoid the following::: evasion of a price control, evasion of a tax, legal prohibition on the production and exchange of a good2. Whats so bad with the black markets? Not only do you not know what kind of quality of product you are getting, but more violence involvedIX. TAXATION WITHOUT REPRESENTATION!!!! sooooo TAXESSSSSA. Difference b/w tax INCIDENCE and BURDEN?1. Kind of confusing so lets use an example: lets say you sell hot dog at the mom and pop stand and the govt decides to increase tax by fifty cents to you, you can simply charge and extra 50 cents to customers for the hot dog and you (the owner of stand) dont have to pay the tax2. Statutory incidence- the one who writes the check to uncle sam to pay for the tax (***not always the one who bears the burden in the example you the owner are still writing the check for the tax, but u put the burden on consumers by charging 50 cents more per dog)3. actual incidence- the actual burden of the tax! in this example the consumers paid the actual incidence of the tax!4. TERMS! Tax rate: the rate (%) at which an activity is taxedTax base: the amount of the activity that is taxed. Inversely related to the rate at which the activity is taxed.Tax revenues: tax rate multiplied by tax base5. What factors tell whether the burden is placed on the buyer or seller?The actual burden depends on the elasticity of supply relative to demand. As supply is more inelastic, more of the burden will fall on the sellers and resource suppliers. As demand is more inelastic, more of the burden will fall on buyers. 6. MORE TERMS!!!!7. Average tax rate= tax liability divided by taxable incomeProgressive tax= a tax in which the average tax rate rises with incomeProportional tax= a tax in which the average tax rate stays the same across income levelsRegressive tax= a tax in which the average tax rate falls with income.Marginal tax rate= the change in tax liability divided by the change in taxable income. The marginal tax rate determines how much of an additional dollar earned must be paid in taxes. It directly impacts an individuals incentive to earn.8. DO NOT WORRY ABOUT THE LAFFER CURVE NOT COVERED!!!!!!!!!9. Deadweight loss or excess burden of taxation: the loss of gains from trade to buyers and sellers that occurs when a tax is imposed. The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax. 10. THE IMPACT OF A SUBSIDY!: it is a payment the govt makes to either buyer or seller usually on per unit basis when a good or service is purchased or sold. When supply is highly inelastic relative to demand, sellers will derive most of the benefits of a subsidy. When demand is highly inelastic relative to supply, the buyers will reap most of the benefits of a subsidy. IT DEPENDS ON THE RELATIVE ELASTIC TIES OF DEMAND RATHER THAN WHOM THE ACTUAL SUBSIDY PAID BY!CH 5 Difficult Cases for the Market, and role of GovernmentI. Economic Efficiency1. ***efficient ONLY if BENEFIT > Cost (rule#1)a) only these action are to be undertaken2. inefficient COST > benefit (rule#2)a) NOT undertakenA. “if its worth doing its worth doing imperfectly”1. in economics the idea that “if it worth doing its worth doing best of you ability” does not hold correct2.
View Full Document
Unlocking...