Calhoun s Micro Economics Test 2 Study Guide Chapter 4 The Labor Market Wage Price for employment Employment Quantity of labor Note that is works just like the market for goods just with a different name for price wage and quantity employment Supply goes up employment goes up and wage goes down Demand goes up employment goes up and wage goes up Labor Demand Firms demand labor Labor demand curve is downward sloping because as wage decrease firms will want to employ more people Labor supply curve is upward sloping because as wage increase Labor Supply Workers supply labor people want to work more Changes in Labor Demand An increase in labor demand labor demand curve shift right A decrease in labor demand labor demand curve shifts left Changes in Labor Supply Increase in labor supply labor supply curve shifts right Decrease in labor supply labor supply curve shifts left Linking the Markets There is a close relationship between the demand for the products and demand for the resources used to make those products Price Floor A price floor is a legally established minimum buyers must pay for a good or resource A price floor above price equilibrium does creates a surplus A price floor below price equilibrium does nothing We were not going to have the price that low anyways so it doesn t effect anything When it is below or on the floor it is ok Example Minimum Wage Minimum wage is an example of a price floor Raising the minimum wage increase excess labor supply unemployment Price Ceiling A price ceiling is a legally established maximum price sellers can charge for a good or resource Price ceiling below price equilibrium creates a shortage Price ceiling above price equilibrium does nothing When price ceiling is above it is ok Example Rent Control Rent controls lead to shortages as well 1 Black Markets paying above the legal price and not having the ability to go police enforcement 2 Decline in the supply of future rental housing you dont have as much incentive to make a new rental complex at 400 then you would at 600 3 Decline in the quality rental housing when you get charged a lot for your apartment you have an incentive to keep it nice but when its cheap you don t 4 Shortage of non price methods of rationing you have an incentive to rent the apartment to whoever will pay the most you can be more selective not with rent control 5 Inefficient housing match ups a new family needs to expand in living space but cannot because there isa shortage of bigger ones A tax on a product will cause the supply curve to shift left by the Impact of a Tax amount of the tax Raises the price that buyers must pay Reduces the quantity sold Creates government revenue Reduces the mount sellers receive Creates deadweight loss Deadweight Loss The loss to society that results from the loss of gains to trades that did not occur because a tax was imposed Void that used to have something but now doesn t have anything Tax Incidence Tax Burden among economic units The Tax Incidence is the way the burden of a tax is distributed It DOES NOT depend on whom the tax is imposed Doesn t matter if the buyer or seller has to pay the tax It DOES depend on society The burden of the tax will fall on those who are relatively inelastic Sellers can raise the price a whole lot knowing they If it is elastic the sellers will raise the price but nobody will still sell would buy Deadweight loss will lower if taxes are placed on goods that are inelastic being made It is good because trade are still happening with value Average Tax Rate ATR is the percentage of income paid in The Tax System taxes ATR is equal to tax liability divided by taxable income Make 100 Taxed 5 ATR 5 Make 200 Taxed 20 ATR 5 Make 200 Taxed 20 ATR 10 Make 200 Taxed 5 ATR 25 There are 3 possibilities in the Tax System Progressive Tax Average Tax Rate rises with income The more you make the higher your ATR Regressive Tax Rate Average Tax Rate falls with income The more you make the less you pay Lower ATR Proportional or Flat Tax Average Tax Rate is the same at all income levels This goes by the ATR not the dollar amount The additional tax liability divided by the additional taxable MTR Change in tax liability divided by change in taxable income Marginal Tax Rate income Ex Income 20 000 Taxable Liability 1 000 ATR 5 Income 30 000 Taxable Liability 3 000 ATR 10 MTR Paying an extra 2 000 in taxes with an 10 000 increase in pay 2 000 divided by 10 000 is a MTR of 20 Marginal Tax Rates are what is important in decision making Fairness and Efficiency Is the progressive tax economically efficient No people will have an incentive to work less and make less money because the more they make the more they pay also the tax code is too complicated Whether it is fair or not is a normative statement Rowing boat and healthier people doing it Taking As away from students and giving it to students who get Fs The Laffer Curve the Tax Revenue A curve illustrating the relationship between the Tax Rate and Higher tax rates do not always lead to more revenue If the tax rate was 100 then the revenue would be 0 If tax rate was 0 revenue would be 0 You should either increase or decrease the rate depending on how high or low it is If the tax rate it too high lower it If it is too low raise it Subsidies A subsidy is a payment the government makes to either the buyer or seller when a good or service is being purchased or sold Ex Subsidizing home gyms In actuality you are just shifting the market Anyone paying taxes are paying for subsidies Note that subsidies are costly Chapter 5 move undertaken To be economically efficient know when to move and when not to All actions generating more benefits then costs should be That s when you move All actions generating more costs then benefits should not be undertaken That s when you don t move Marginal Benefits decline the more times longer you do it Marginal Costs increase the longer you do it Optimal amount of pollution non zero it is not optimal to have zero pollution Optimal number of plane crashes non zero we could make air travel so safe that there would be no crashes but the cost of flying would increase it would increase so much that people would drive instead Role of Government the government should Protect the people and their property rights Provide goods that cannot easily be provided by the market or overcome market failure Sometimes when gov fixes these problems they just create more problems and sometimes the market can make better solutions
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