Micro Exam 3 Study Guide Calhoun Chapter 4 Supply and Demand The Link Between Resource and Product Markets 1 question o Resource Markets The market for inputs used to produce goods and services o The production process generally involves The purchase of resources Transformation of resources into products Sale of goods and services in the product market o When the prices of a resource changes the prices of goods and services produced with that resource would change in the same direction o When the demand for a product changes the demand for the resources used to produce it will change in the same direction The Economics of Price Controls 4 questions o Price Controls Government mandated prices that are generally imposed in the form of maximum or minimum legal prices o Price ceiling a legally established maximum price sellers can charge for a good or resource A ceiling only matters if it is below the equilibrium price The demanders who pay the lower price benefit and the suppliers and demanders who get shut out are the losers of the situation o Shortage A condition in which the amount of a good offered for sale by producers is less than the amount demanded by buyers at the existing price Increase in price would eliminate the shortage o In the real world there are two ways that sellers can raise prices constant They can raise their money price holding quality The can hold the money price constant while reducing the quality of the good o Scarcity is always inescapable o Shortages on the other hand are a result of prices being set below their equilibrium values which is avoidable if prices are allowed to rise o Rent controls are a price ceiling intended to protect residents from rising housing prices but rent controls that continue can lead to Shortages and black markets to develop The future supply of rental houses to decline The quality of rental housing to deteriorate Non price methods of rationing to become more important Inefficient use of housing space to result o Price floor A legally established minimum price buyers must pay for a good or resource Only matters if it is above the equilibrium price Suppliers who receive the higher price benefit o Surplus A condition in which the amount of a good offered for sale by producers is greater than the amount that buyers will purchase at the existing price A decline in price would eliminate the surplus o Minimum wage Legislation requiring that workers be paid at least the stated minimum hourly rate of pay Economic analysis indicates that minimum wage legislation will lead to high unemployment rates among low skilled workers The Impact of a Tax 5 questions on Taxes o Tax incidence The way the burden of a tax is distributed among economic units consumers producers employees employers etc The actual burden does not always fall on those who are statutorily assigned to pay the tax o Excise tax a per unit tax revenue is collected on every unit Ex Gas alcohol cigarettes o Tax base The level of quantity of an economic activity that is taxed Higher tax rates reduce the level of the tax base because they make the activity less attractive o Tax rate The per unit amount of the tax or the percentage rate at which the economic activity is taxed o Deadweight loss The loss of gains from trade to buyers and sellers that occurs when a tax is imposed The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax o Excess burden of taxation Another term for deadweight loss It reflects losses that occur when beneficial activities are forgone because they are taxed o Economic analysis indicates that the actual burden of a 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 buyers or the seller 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 including resource suppliers will bear the larger share of the tax burden Tax Rates Tax Revenues And the Laffer Curve o Average tax rate ATR tax liability divided by the taxable income It is the percentage of income paid in taxes o Progressive tax A tax in which the average tax rate rises with income People with higher incomes will pay a higher percentage of their income in taxes o Proportional tax A tax in which the average tax rate is the same at all income levels Everyone pays the same percentage of income in taxes o Regressive tax A tax in which the average tax rate falls with income People with higher incomes will pay a lower percentage of their income in taxes o Marginal tax rate MTR The additional tax liability a person faces divided by his or her additional taxable income It is the percentage of an extra dollar of income earned that must be paid in taxes It is the marginal tax rate that is relevant in personal decision making o Laffer Curve A curve illustrating the relationship between the tax rate and tax revenues Tax revenues will be low at both very high and very low tax rates When tax rates are quite high lowering them can increase tax revenue o When tax rates are already high a rate reduction may increase tax revenues Correspondingly increasing high tax rates may lead to less tax revenue The Impact of Subsidy 2 questions o Subsidy A payment the government makes to either the buyers or seller usually on a per unit basis when a good or service is purchased or sold o The division of the benefit from a subsidy is determined by the relative elasticities of demand and supply rather than to whom the subsidy is actually paid Chapter 5 Difficult Cases for the Market Public Goods 2 questions o Public goods Goods for which rivalry among consumers is absent and exclusion of nonpaying customers is difficult o Nonrival in consumption public goods making the good available to one consumer does not reduce its availability to others Providing it to someone makes it available to others o Nonexcludable public goods it is impossible to exclude nonpaying customers from receiving the good o Free riders A person who receives the benefit of a good without paying for it Because it is often virtually impossible to restrict the consumption of public goods to Externalities 5 questions those who pay these goods are subject to free rider problems o Because of the difficulties involved in establishing a one to one link between payment and receipt of such goods
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