Calhoun’s Micro Economics Test 2 Study GuideChapter 4The 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 upLabor Demand- Firms demand labor- Labor demand curve is downward sloping because as wage decrease, firms will want to employ more peopleLabor Supply- Workers supply labor- Labor supply curve is upward sloping because as wage increase, people want to work moreChanges in Labor Demand- An increase in labor demand, labor demand curve shift right- A decrease in labor demand, labor demand curve shifts leftChanges in Labor Supply- Increase in labor supply, labor supply curve shifts right- Decrease in labor supply, labor supply curve shifts leftLinking the Markets- There is a close relationship between the demand for the products and demand for the resources used to make those productsPrice 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 okExample: 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 cancharge 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 okExample: 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 onesImpact of a Tax- A tax on a product will cause the supply curve to shift left by the 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 lossDeadweight 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 anythingTax Incidence/Tax Burden- The Tax Incidence is the way the burden of a tax is distributed among economic units- 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 will still sell- If it is elastic, the sellers will raise the price but nobodywould buy- Deadweight loss will lower if taxes are placed on goods that are inelastic- It is good because trade are still happening with value being madeThe Tax System- Average Tax Rate (ATR) is the percentage of income paid in 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******Marginal Tax Rate- The additional tax liability divided by the additional taxable income- MTR: Change in tax liability divided by change in taxable incomeEx.- 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 makingFairness 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 FsThe Laffer Curve- A curve illustrating the relationship between the Tax Rate and the Tax Revenue- 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 itSubsidies- 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 costlyChapter 5To be economically efficient: know when to move and when not tomove- All actions generating more benefits then costs should be undertaken- That’s when you move- All actions generating more costs then benefits should not be undertaken- That’s when you don’t moveMarginal Benefits decline the more times/longer you do itMarginal Costs increase the longer you do itOptimal amount of pollution?- non-zero, it is not optimal to have zero pollutionOptimal 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 wouldincrease so much that people would drive insteadRole of Government- the
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