ECON 2106 1st EditionExam # 2 Study GuideCh.6: Supply, Demand, & Government Policies- Price Ceiling: a legal maximum on the price at which a good can be soldo In favor of consumerso Rent control Higher demand, shortage of apartments Creates lower rents but also lower-quality housing- Price Floor: a legal minimum on the price at which a good can be soldo In favor of producerso Minimum Wage If the minimum wage is above the equilibrium level, the quantity of labor supplied is greater than the quantity of labor demanded- Highly skilled & experienced workers are not affected by the minimum wage because their equilibrium wage is well above the minimum- Minimum wage has greatest impact on teenagers- Binding or Not Bindingo Price control is NOT binding… If market mechanism can move the economy to reach the equilibrium If price control has no effects (does not change market equilibrium)o Price control is binding… When market equilibrium is unreachable with price floor or ceiling- AKA no equilibrium Price control has an effect on equilibrium- Binding price ceiling = shortage- Binding price floor = surplus- Tax Incidence: the manner in which the burden of a tax is shared among participants in a market- Taxes discourage economic activity o When a good is taxed, the quantity of the good sold is smaller in the new equilibrium- Buyers and sellers share the burden of taxeso Taxes levied on sellers and buyers are equivalent; the wedge between thebuyer’s price and the seller’s price is the sameo Figuring out how much the tax is divided between sellers and buyers depends on the elasticity of the demand & supply market A tax burden falls more heavily on the side of the market that is less elastico Most labor economists believe that the supply of labor is much less elastic than demand which means workers, not firms, bear most of the burden through payroll taxCh.7: Consumers, Producers, & the Efficiency of Markets- Welfare Economics: the study of how the allocation of resources affects economic well-beingo The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers- Consumer Surplus- Willingness to Pay: the maximum amount that a buyer will pay for a good- Consumer Surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for ito $100 - $80 = $20o Willing amount – actual amount = consumer surpluso Measures the benefit buyers receive from participating in a market- Total consumer surplus in market = all individual consumer surplus’- At any quantity, the price given by the demand curve shows the willingness to pay of the marginal buyer (the buyer who would leave first if the price were any higher)- The area below the demand curve and above the price measures the consumer surplus in a marketo Total area below demand curve & above price = sum of all consumer surplus’- Producer Surplus- Cost: the value of everything a seller must give up to produce a goodo Can be considered as an opportunity cost- Producer Surplus: the amount a seller is paid for a good minus the seller’s cost ofproviding ito $100 - $60 = $40o Paid – value/cost = Producer Surpluso Measures benefit received by sellers participating in a market- The area below the price and above the supply curve measures the producer surplus in a market- Market Efficiency- Total surplus = consumer surplus + producer surpluso AKA… Total surplus = Value to buyers – cost to sellers- Efficiency: the property of a resource allocation of maximizing the total surplus received by all members- Equality: the property of distributing economic prosperity uniformly among the members of a society- Market Outcome Observations1. Free markets allocate the supply of goods to the buyers who value them most highly2. Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost3. Free markets produce the quantity of goods that maximizes the sum of consumer surplus and producer surplus- The equilibrium outcome is an efficient allocation of resourcesCh.8: Application: The Costs of Taxation- When a tax is levied on sellers, the supply curve shifts upward by that amount; when tax is levied on buyers, the demand curve shifts downward by the size of that tax- Benefits of taxes:o Consumers = consumer surpluso Producers = producer surpluso Government = T x Q (tax size × quantity of good sold)- We use government’s tax revenue to measure the public benefit from the taxo This benefit accrues to those on whom the revenue is spent- Government’s tax revenue is represented by the rectangle between the supply and demand curve- The losses to buyers and sellers from a tax exceed the revenue raised by the government- Deadweight Loss: the fall in total surplus that results from a market distortion, such as a taxo Taxes distort incentives, which cause markets to allocate resources inefficiently o Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade- The Determinants of the Deadweight Losso Whether the deadweight loss is large or small is determined by the price elasticities of supply & demand  Supply curve elastic = larger deadweight loss Supply curve inelastic = smaller deadweight loss Demand curve elastic = larger deadweight loss Demand curve inelastic = smaller deadweight loss- AKA the greater the elasticities of supply and demand, the greater deadweight loss of a tax- Deadweight loss increases exponentially as tax size increaseso If tax doubles then deadweight loss increases by factors of 4 - Eventually tax revenue will go back down because the market size will eventually decrease- Supply-side economics: the views of Laffer & Reagano The cut in tax rates was intended to encourage people to increase the quantity of labor they supplied thus, making the market size largerCh.13: The Costs of Production- Industrial Organization: the study of how firms’ decisions about prices and quantities depend on the market conditions they face- Total Revenue: the amount a firm receives for the sale of its output (quantity sold × selling price)- Total Cost: the market value of the inputs a firm uses in production- Profit: total revenue minus total cost- Explicit Costs: input costs that require an outlay of money by the firmo Labor & supplies- Implicit Costs: input costs that