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FSU ECO 2023 - The Labor Market

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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 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 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 nobody would 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 to move- 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 would increase so much that people would drive insteadRole of Government- the


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