CHAPTER 4• The labor marketo It works the same as the market for goods and services, with just a different name for price and quantityo Price of labor is called Wageo Quantity of labor is called Employmento Price = wageo Quantity= employmento Labor Demand 1. Firms demand labor 2. Labor demand curve is downward sloping because as wage decreases, firms will want to employ more people.o Labor Supply 1. Workers supply labor 2. Labor supply curve is upward sloping as wage increases; people will want to work more.• Changes in Labor Demando 1. An increase in labor demand (labor demand shifts right)o 2. A decrease in labor demand (labor demand curve shifts left)• Changes in Labor Supplyo 1. Increases in labor supply: (labor supply curve shifts right)o 2. Decrease in labor supply: (labor supply curve shifts left)• Linking the marketso There is a close relationship between the demand for products and the demand for resources used to make those productso When the demand for a product changes the demand for he resources used to produce it will change in the same direction• Price flooro Price floor: a legally established minimum price buyers must pay for a good or resource a price floor above equilibrium price creates a surplus A price floor below equilibrium prices does nothingo Price floor establishes a barrier on the marketo You cant get into an equilibrium with a price flooro Ex. Minimum wage Raising minimum wage increases excess labor supply (unemployment)• Be able to analyze the impact of a tax graph, in particular: o Impact of a tax: a tax on a product will cause the supply curve to shift left by the amount of the taxo What happens to the price that buyers pay (and consumer surplus) Raises.o What happens to the price that seller receive (and produce surplus) Reduceso What happens to the quantity sold? Reduceso What happens to government revenue? (be able to calculate) Increaseso How taxes create deadweight loss? (Be able to calculate) Deadweight loss= loss of value that does not occur because of the transactions that do not occur. The loss to society results from the loss of gains to trades that do no occur because a tax was imposed Equation for Deadweight loss= (.5) x (change in price) (change in quantity demanded)• Understand that the burden of the tax does not depend on whom the tax is imposed, but it does depend on elasticity. Whoever is more inelastic will bear the higher burden of the tax.o Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic, mainly because no matter what the price is, people will still have demand for them.o When demand is relatively inelastic, or supply is relatively elastic, buyers will bear the larger share of the tax burden. o When demand is relatively elastic or supply is relatively inelastic, sellers will bear the larger share of the tax burden. • Be able to calculate Average tax Rate (ATR) and Marginal Tax Rate (MTR) and know whether a tax system is progressive, regressive, or proportional.o Average Tax rate (ATR): the percentage of income paid in taxes ATR= tax liability/ tax income If a persons tax liability was 3000 on an income 20000, [3000/20000= .15]. her average tax rate would be 15 percent. The average tax rate is simply the percentage of income that is paid in taxes.o Marginal Tax Rate (MTR)= the additional tax liability a person faces divided by his or her additional taxable income. MTR= Change in tax liability/change in taxable income. Marginal tax rates are what is important in personal decision making. o The Tax System has 3 possibilities: Progressive Tax: average tax rates rises with income• In other words, people with higher income pay a larger percentage of their income in taxes. Regressive tax: average tax rate falls with income• People with high incomes will pay a lower percentage of their income in taxes. Proportional tax: average tax rate is the same at all income levels.• Everyone pays the same percentage of their income in taxes. • Understand the Laffer curve and the general relationship between tax rates and tax revenueo The Laffer Curve: A curve illustrating the relationship between the tax rate and tax revenue. o The general relationship between tax rates and tax revenue is that higher tax rates lead to higher tax revenue. However, higher tax rates will not always lead to more tax revenue. :O• Understand the concept of subsidies.o Subsidy: A payment the government makes to either the buyer or seller when a good or service is purchased or sold.o Subsidies are costly. They tend to be more expensive than the government expects.o Subsidies are often granted in an effort to help buyers afford a good or service, or to increase the profitability of producers in an industry.o The distribution of the benefit from the subsidy between buyers and sellers would be the same, whether it was granted to buyers or sellers.Chapter 5• Understand the idea of economic efficiency: You should only do those things in which the benefits outweigh the costs and avoid doing those things in which the costs outweigh the benefitso To be economically efficient: 1.All actions generating more benefits then costs should be undertaken 2.No actions generating more costs then benefits should be undertaken ex. Should we eliminate pollution? No, bad idea. No one can drive, there are more costs than benefits.• Know the role of government: protect individuals and their property rights and overcome market failure by providing goods and services that cannot easily be provided by the market.o The government should… 1. Protect individuals and their property rights 2. Provide goods that cannot be easily provided by the market (overcome market failure)• Know the four types of market failure:o 1. Lack of competition: without competition, firms can hold back production and raise price. Role for government? • Refrain from activities that reduce competition: licenses, price controls, etc.• Antitrust legislationo Sherman Antitrust Act (1890)o Clayton Act (1914) Economic efficiency is knowing when to move, and when not to move. • Ex. MLB is a monopoly, that way it stays competitive.o 2. Externalities: The effects of an activity that influence the well being of a non-consenting third party A. Negative Externalities: Producer gains the benefit, everyone bears the cost.• Producer will produce more than
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