Chapter 1 Scarcity Fundamental Concept of economics that indicates that there is less of a good freely available from nature than people would like Resource An input used to produce economic goods land labor skills natural resources and human made tools are examples Capital Human made resources such as tools equipment and structures used to produce other goods and services Objective a fact based on observable phenomena that is not influenced by differences in personal opinion Subjective An opinion based on personal preferences and valued judgments Economic Behavior Choosing the option that offers the greatest benefit at the least possible cost Utility The subjective benefit of satisfaction a person expects rom from a choice or course of action Chapter 2 Transaction Cost The time effort and other resources needed to search out negotiate and complete on exchange Production possibility Curve The Curve can be shifted by Investment Technological Advances Improved Institutions Greater Work Efforts Creative Destruction The replacement of old production methods by innovated new ones that consumers judge to be superior Key Points Chapter 3 1 The highest valued activity sacrificed when a choice is made is known as opportunity cost explains human behaviors 2 Mutual Gain is the foundation of trade 3 Transaction Cost Middle Men reduce the costs Law of Demand A principle that states there is an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase As the price of a good goes up Consumer purchases will go down Law of Demand A shift of the curve will occur to the left with a decrease in demand and will shift to the right with an increase in income Chapter 4 I Black Markets and the Importance of the Legal Structure i Exchanges at prices outside of the range set by the Gov when price controls II The Impact of the Tax ii Controlling prices and making a good service illegal doesn t eliminate market are in place are illegal forces 1 Actually are created in spite of the restrictions 2 Created to avoid taxes iii Black Markets a market that operates outside the legal system in which either illegal goods are sold or legal goods are sold at illegal prices terms 1 Enforcement of contracts and the dependability of quality will be less certain 2 Greater risks for suppliers 3 No legal channels for peaceful settlement of disputes 4 Violence is often used to settle disputes a Sometimes associated with crimes gone bad b Or competition among dealers iv A legal system that provides for secure private property rights contract enforcement and access to an unbiased court system for settling disputes is vitally important for the smooth operation of markets i Tax Incidence the way the burden of a tax is distributed among economic units 1 How shared between buyers who pay more for what they purchased and sellers who receive less for what they sell ii Statutory Incidence the legal assignment of a tax 1 Where the government says who buyer seller pays the tax 2 When a tax is imposed statutorily on the seller the supply curve shifts upward The price will go up and quantity will go down iii Actual Incidence could be felt elsewhere 1 Example a tax could be statutory placed on a seller and in return the seller raises the prices to make up for paying the tax in this case the buyer feels the burden of the tax iv Tax base the level or quantity of an economic activity that is taxed 1 Higher tax rates reduce the level of tax base because they make the activity less attractive v Tax Rate the per unit amount of the tax or the percentage rate at which the economic activity is taxed b The Deadweight Loss caused by Taxes i Trade results in mutual gains for buyers and sellers 1 The difference in quantity exchanged is the loss of the mutual benefit ii Deadweight Loss or Excess Burden of Taxation The loss of gains from trade to buyers and sellers that occurs when a tax is imposed 1 A burden imposed on buyers and sellers over and above the cost of the revenue transferred to the government 2 Excess Burden of Taxation is a reflection of the losses that occur when beneficial activities are forgone because they are taxed 3 Deadweight loss to sellers includes an indirect cost imposed on the people who supply resources to that industry c Actual Vs Statutory Incidence i Economic analysis indicates that the actual burden of a tax the split of the burden between buyers and sellers does not depend on whether the tax is statutorily placed on the buyer or the seller ii How market will respond to a statutorily tax placed on buyers 1 Buyers will have to pay an extra amount to the government after paying 2 for the price of the good Imposing a tax on buyers will shift the demand curve downward by the amount of the tax a The height of the demand curve represents the MAX the buyer is willing to pay i Purchase price tax total cost b Sellers will be forced to lower the price because the demand is much lower iii The revenue derived by the government the number of sales eliminated by the tax and the size of the deadweight loss are IDENTICAL whether the law requires payment of the tax by sellers or buyers d Elasticity and the Incidence of a Tax the change in price i The incidence of a tax depends on the responsiveness of buyers and sellers to ii The burden of the a tax it incidence tends to fall more heavily on whichever side of the market has the least attractive options elsewhere 1 The side of the market that is less sensitive to price changes iii Inelastic demand supply curves are steeper less responsiveness to a change in price iv Elastic demand supply curves are flatter a higher responsiveness to a change in price v When demand is relatively inelastic or supply is relatively elastic BUYERS will bear the larger share of the tax burden vi When demand is relatively elastic or supply is relatively inelastic SELLERS will bear the larger share of the tax burden e Elasticity and the Deadweight Loss i Elasticity s influence the size of the deadweight loss caused by the tax because they determine the total reduction in the quantity exchanged ii Demand Supply Demand Supply Inelastic fewer trades elastic more trades Deadweight loss smaller Deadweight loss larger III Tax Rates Tax Revenues and the Laffer Curve a Average Tax Rate tax liability divides by taxable income i ATR Tax libability Taxable income ii The percentage of income paid in taxes b Progressive income tax tax a tax in which the average tax rate rises with
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