CHAPTER 4 The labor market o It works the same as the market for goods and services with just a different name for price and quantity o Price of labor is called Wage o Quantity of labor is called Employment o Price wage o Quantity employment o Labor Demand 1 Firms demand labor 2 Labor demand curve is downward sloping because as wage decreases firms will want to employ more people 1 Workers supply labor 2 Labor supply curve is upward sloping as wage increases o Labor Supply Changes in Labor Demand people will want to work more o 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 Supply o 1 Increases in labor supply labor supply curve shifts right o 2 Decrease in labor supply labor supply curve shifts left Linking the markets Price floor o There is a close relationship between the demand for products and the demand for resources used to make those products o When the demand for a product changes the demand for he resources used to produce it will change in the same direction o 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 nothing o Price floor establishes a barrier on the market o You cant get into an equilibrium with a price floor o 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 o What happens to the price that buyers pay and consumer surplus by the amount of the tax Raises o What happens to the price that seller receive and produce surplus o What happens to the quantity sold o What happens to government revenue be able to calculate Reduces Reduces Increases o 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 Chapter 5 Understand the Laffer curve and the general relationship between tax rates and tax revenue o 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 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 benefits o 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 legislation o 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 bears the cost A Negative Externalities Producer gains the benefit everyone Producer will produce more than society want too much Role for government tax or regulate negative externalities Ex When you smoke your benefits go up but you could give others second hand smoke so everyone else bears the costs B Positive Externalities producer bears the cost everybody gains the benefit Producer will
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