Exam 2 Review Chapters 4, 5, & 8Chapter 4Resource market- typically downward sloping and the supply curve upward-sloping. It is the inverse relationship between the amount of a resource demanded and its price exists because businesses will substitute away from a resource as its price rises. • When the price of a resource—such as labor—changes, the prices of goods and services produced with that resource will change in the same direction • When demand for a product changes, the demand for (and prices of) the resources used to produce it will change in the same directionPrice Controls- force buyers or sellers to alter the prices of certain products. Price Ceiling- maximum price a seller is allowed to charge for a product or service. Price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practice. Shortage- will result because the quantity demanded by consumers exceeds the quantity supplied by producers at the new controlled price. • Two ways sellers can raise prices: 1) raise their money price, holding quality constant. 2) Hold the money price constant, while reducing the quality of the good.• Scarcity is inescapable • Shortages are a result of prices being set below their equilibrium values—a situation that is avoidable if prices are permitted to rise Price floor- establishes a minimum price that can legally be charged. When price floor is imposed above the current equilibrium price, it will alter markets operations. (see page 76 for example graph)Surplus- results when the quantity supplied by producers exceeds the quantity demanded by consumers at the new controlled priceMinimum Wage- is an example of price floor. Minimum wage is currently $7.25• In the labor market an excess supply will take the form of an abnormally high rate of unemployment. Thus, economic analysis indicates that minimum-wage legislation will lead to high unemployment rates among low-skilled workers. • When a price floor pushes the wage rate above equilibrium, employers will have less incentive to offer nonwage benefits to employees because they will have no trouble hiring low-skilled workers. Black Markets- Markets outside the legal system. (Example: drug deals)• A legal system that provides for secure private property rights, contract enforcement, and access to an unbiased court system for settling dispute is vitally important for the smooth operation of markets. Tax incidence- indicates how the burden of a tax actually shared between buyers and sellers.Statutory incidence- legal assignment (ex: when the government makes the buyer or seller legal for the tax)Actual incidence- lies elsewhere (if tax is on seller, the seller might increase the price of the product, so the buyers end up bearing some tax burden)Tax base- the tax revenue derived from a tax is equal to tax base. (ex: the number of used cars multiplied by tax rate) (graph page 80)Deadweight loss- the loss of the gains from trade eliminated by the tax and does not generate any revenue for the government. (graph page 80)Excess burden of taxation- deadweight loss is a burden imposed on buyers and sellers over and above the cost of the revenue transferred to the government. • Economic analysis indicates that the actual burden of tax—or more precisely, 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. Elasticity and the incidence of a Tax• When demand is relatively inelastic, or supply is relatively elastic, BUYERS will bear the larger share of the tax burden. • When demand is relatively elastic, or supply is relatively inelastic, SELLERS will bear the larger share of the tax burdenHow do to find ATR (Average Tax Rate)• Tax liability/taxable incomeProgressive Tax- is defined as a tax in which the average tax rate rises with income. So people with a higher income pay a larger PERCANTAGE of their income taxes. Proportional Tax- a tax rate remains the same across all income levels. Everyone will pay the same percentage.Regressive tax- a tax In which the average tax rate falls as income rises. Meaning the percentage paid in taxes will decline with income, the actual dollar amount of the tax bill might still be higher for those larger incomes. How to find Marginal Tax rate (MTR)• change in tax liability/change in taxable income • Reveals how much of ones additional income must be turned over to the tax collector and how much is retained by the individual taxpayer. (page 85 detailed example)Laffer curve-a graph that illustrates relationship between tax rates and tax revenues• When tax rates are already high, a rate reduction may increase tax revenues. Correspondingly, increasing high tax rates may lead to less tax revenue. Subsidy- is a payment to either the buyer or the seller of a good or service, usually on per-unit basis. Typically makes the purchase of a good more affordable. Chapter 5Economic Efficiency- Use of resources so as to maximize the production of goods • Either failure to undertake an efficient action or the undertaking of an inefficient action will result in economic inefficiency. What is a rule to apply when thinking on the margin? (economic efficiency)- If the costs outweigh the benefits you shouldn’t do it Factors that cause inefficiencies: lack of competition, poor information, externalities, public goods Lack of Competition- competition is important in keeping the market stable (don’t want to create a monopoly) Externalities- when private property rights are unclear or poorly enforced the actions may “spill over” onto others and affect their well being without consent. (Ex: when someone in yourapartment is playing loud music and you’re trying to study, you are being affected and therefore experiencing and externality) External costs- when the “spill-over” causes harm to third partiesExternal benefits- when the “spill-over” enhances welfare Public Goods- a commodity or service provided to all members if society. Have two characteristics: Nonrival in consumption and Nonexcludable Nonrivalry- means that making the good available to one consumer does not reduce it availability to others. Nonexcludable- it is impossible to exclude nonpaying customers from receiving the good. (free riders)Free riders- people who receive benefit from a good without helping pay for costs Poor Information• Information can be scarce, and when making a
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