Econ ch 8-

midterm 2

what are gains from trade? does everyone gain from trade? how do markets help strangers?

• the benefits that come from reallocating resources, goods, and services to better uses

• yes

• they help strangers exploit the gains from trade that come from specializing according to comparative advantage

what is absolute advantage? What is the comparative advantage? Why is it called the comparative advantage? what does comparative advantage drive?

• the ability to do a task using fewer inputs / (to produce more of a good in less time)

• the ability to do a task at a lower opportunity cost

• because the opportunity cost compares what you can produce if assigned one task with what you would produce if you spent that time on another task 

• international trade

what is the opportunity cost principal? How do you calculate opportunity cost in the comparative advantage ? Can one person have the comparative advantage in the production of both goods?

• the true cost of something is what you must give up to get it

• opportunity cost of task = hours this task takes / hours required to produce alternative task

• no

how to identify who has the comparative advantage?

• 1 - determine how long each task would take each person - the cost of producing each good in hours

• 2 - convert the measure into opportunity cost

• 3 - evaluate who has the comparative advantage at each task by assessing who can produce each good at the lowest opportunity cost

what is specialization ? how does it happen ?

• focusing on one specific task

• when two people trade and each person is focusing on a sole task

what are prices? what does a higher price signal? What are three central roles of prices?

• signals of value

• higher price = more valuable

-sending messages (around the globe)

-price is an incentive

-prices aggregate information

who is price a signal to, how? what do price signal do? what does price represent to sellers and buyers?

• potential buyers (how expensive it is for sellers to produce more of a product) and potential suppliers (how much a buyer values their products)

• help coordinate better outcomes

• Sellers - buyers marginal benefit

• Buyers - sellers marginal cost

who is high price an incentive to, how? What does this incentive stimulate? what does price provide the incentive to do?

• suppliers (incentive to increase production) and potential buyers (incentive to consume less)

• suppliers - stimulates innovation

• incentive for strangers to cooperate

what is a prediction market?  what I an international market? what is the knowledge problem and what solves it ?

• markets whose payoffs are linked to whether an uncertain even occurs

• Market within a company to buy and sell scarce resources 

• When knowledge needed to make a good decision is not available to the decision maker - markets solve this 

what does import mean? what does export mean? What is an international border? What drives international trade?

• buy goods or services from foreign sellers  - buy

• to sell goods or services to foreign buyers - sell

• an arbitrary invisible line 

• comparative advantage 

what are trade costs? when should you export a good? When should yo import a good?

• extra costs incurred as a result of buying or selling internationally, rather than domestically

• export if the price you’ll get in another country is higher than the domestic price

• import if the price you can get it for from another country is sufficiently far below the local price

what are three factors that shape comparative advantage? what is economies of scale? what is the world price?

• relatively of inputs - specialized skills - benefits of mass production

• when a product gets cheaper because a company sells so many of them 

• the price that a traded good sells at in the world market - eau of world market 

what is the domestic demand curve? what is the domestic supply curve ?

• shows the quantity of a good that all domestic consumers added together plan to buy, at each price

• shows the quantity of a good the all domestic suppliers added together plan to sell, at each price

steps taken to evaluate how imports shape domestic markets ? Steps taken to evaluate how exports shape domestic markets?

• what will be the price of a traded good? (traded good = world price)

• at this new price, what quantities will be demanded and supplied by domestic buyers and sellers?

• what quantity will be traded?

• what will bt the price of a traded good?

• at this new price what quantities will be demanded and supplied by domestic buyers and sellers?

• what quantity will be traded

what is the economic surplus of an imported good? who looses and gains surplus due to imports? What is the e gnomic surplus of an exported good? Who looses and gains surplus due to exports?

• the triangle above the world price and below the domestic equilibrium

• domestic producers loose, domestic consumers gain

• the triangle below the world price and above the domestic equilibrium

• domestic producers gain, domestic consumers loose 

What are 4 arguments for limiting national trade?

• National security requires that we produce strategically important goods ourselves

• protection can help infant industries develop

• foreign competition leads to job losses

• Anti-dumping laws prevent unfair competition

why is the national security argument false from an economic standpoint? (international trade)

• its unlikely that Canada will be isolated from alll countries at the same time

• when they don’t open to international trade, the rich get richer 

• the more trade btw countries, the smaller the chance of a conflict happening 

why is the job loss argument false (international trade)?

• the argument only focuses on one side, (imports)

• it also creates jobs with exports & needing to train more ppl mean jobs open up

why is the infant industry argument false (national trade) ?

• if the border didn’t exist, neither would this argument 

why is the Unfair competition argument false (international trade)?

• a lack of rules in exporting countries makes it easier for them to trade the product at a lower price bus the workers r getting treated poorly and underpaid

• if we limit trade with them, the workers will still be treated terribly

what is the welfare/economic surplus equation for international trade?

• welfare = consumer surplus + producer surplus + government revenue

what are tariffs? what will a tariff on imports do? who wins and looses from a tariff on imports?

• taxes on imported goods that increase their trade costs

• increase price - decrease quantity demanded by domestic buyers - increase quantity supplied by domestic sellers - decrease imports

• domestic buyers loose (higher prices) - overall welfare looses - domestic suppliers win (higher prices) - government wins (tariff is type of tax)

what is an import quota ? how does it compare to a tariff?

• a limit on the quantity of a good that can be imported

• it does not raise revenue for the government 

what is globalization? how does elasticity relate to deadweight loss?

• the increasing economic, political, and cultural integration of different countries 

• the more elastic demand or supply, the higher the deadweight loss

what is an externality and what does it lead to, why? What is a positive externality what do they do? Negative externality what do they do?

• a side effect on bystanders whose interests aren’t fully taken into account - leads to market failure because it produces inefficient outcomes

• an activity whose side effects benefit bystanders - generate benefit for others

• an activity whose side effects harm bystanders - impose costs on others

what is not an externality? what principal do externalities use?

• a price change

• the cost-benefit principle

what are marginal private costs? what are external costs? what are marginal external costs? what is the marginal social cost?

• the extra cost paid by the seller from producing one extra unit

• the harm/cost that negative externalities impose on bystanders

• extra cost imposed on bystander from producing one extra unit

• marginal social cost = marginal private cost + marginal external cost

what are marginal private benefits? What are external benefits? What is a marginal external benefit? What is the marginal social benefit?

• marginal gains that buyers enjoy from each extra unit they purchase 

• a benefit accruing to bystanders 

• each extra unit purchased of something with positive externalities - the extra external benefit accruing to bystanders from one extra unit

• tall marginal benefits, no matter who gets them (marginal social benefit) = marginal private benefit + marginal external benefit 

what is the socially optimal outcome ? How to determine how much of something we should produce? what is the rational rule for society? how to find socially optimum outcome?

• the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders

• 1st - marginal principal (will society be better off if I produce one more?) - 2nd - cost benefit principal (produce until social benefits exceeds marginal social cost) - 3rd - Opportunity cost principal (or what? - what will happen if I don’t produce this product?)

• produce more of an item as long as its margin; social benefit is at least as large as the marginal social cost 

• where marginal social benefit = marginal social cost

negative externalities lead to what? positive externalities lead to what? marginal external cost changes what curve? marginal external benefit changes what curve?

• overproduction

• underproduction

• supply curve

• demand curve

solutions to the externality problem ? (4)

• private barganing

• corrective taxes and subsidies

• fixed quantity

• laws, rules, and regulations

how do corrective taxes and subsidies work for externalities? What is another word for corrective taxes ?

• a tax is uses to induce people to take account of the negative externalities they cause (make ppl want to do it less cause its more expensive) , corrective subsidies are designed to induce people to take account of the positive externalities they cause (make ppl want to do it more by making the good free or discounting it a fair amount.

• pigouvian tax

how does the cap and trade model eliminate the inefficiency of externalities?

• the government creates a quota (limit to max quantity) and sells permits, the suppliers that create this negative externality can now trade the permits (firms that can regulate cheaply will sell and firms that cannot regulate cheaply will buy) , therefore creating a market for the given negative externality 

how does private bargaining eliminate the inefficiency of externalities? what is the coase theorem ?

• by getting all interested parties in a room, and give the opportunity to negotiate with each other, they will solve the problem. The solution tends to include side payments (if someones actions harm you, pay them to stop) which work because of the coat theorem, strategic investments, and mergers

• if bargaining is costless and property rights are cleanly established and enforced, then externality problems can be solved by private bargains

how do laws rules and regulations eliminate the inefficiency of externalities? 

• if the government creates regulations on noise, speed, and fuel efficiency to illuminate the externality permanently 

what does it mean if the product is non excludable? what about if something is nonrival ? what is a rival good?

• when someone cannot be easily excluded from using something 

• a good for which one person’s use doesn’t subtract from another’s 

• a good for which your use of it comes at someone else’s expense 

what is the free-rider problem and how is it solved? What is the tragedy of the commons and the solution?

• when someone can enjoy the benefits of a good without bearing the costs - creates market inefficiency, so Government uses taxes to pay for public goods

• The tendency to over consume a common resource, when individual users use according to their own self-interest, depleting or spoiling the common resource - the solution is to restrict access by charging fees, requiring a license, tooling roads.

are these excludable and rival? private good, club good, common good, public good?

• private good - rival and excludable

• club good - nonrivial and excludable 

• common good - rival and nonexcludable

• public good - nonrival and non excludable

who is the labour supply curve? what is the wage? Who is the Labour demand?

• individuals

• the price of labour 

• firms 

what is the marginal product of labour, how do you calculate it? what is the marginal revenue product, how do you calculate it? when do you stop hiring an extra worker/whats the rational rule for employers?

• the extra production that occurs from hiring an extra worker - (change in output)/(change in labour)

• the marginal revenue from hiring an additional worker - (marginal product of labour)(price of the product)

• when the MRP (the value of the worker) is equal to the wage that worker gets/ hire an additional worker as long as their marginal revenue product is greater than or equal to the wage

how does a positive externality change a graph? how does a negative externality change a graph?

• it shifts the demand curve

• it shifts the supply curve

how to calculate marginal profit? what is the labour demand slope? What is the Labour supply slope?

• marginal benefit - marginal cost 

• marginal revenue product 

• willingness to work

what is derived demand?

• demand for an input derives from the demand for the stuff the input produces (demand for haircut increases, price will increase, demand for stylists increases)

what are 4 things that shift the labour demand curve?

• changes in demand for final product

• changes in the price of output/machinery 

• productivity gains

• nonwage benefits 

how do changes in the price of capital shift the labour demand curve with the scale effect and the substitution effect? What does it mean if the scale effect is larger? What does it mean if the substitution effect is larger?

• scale effect: if the price of machinery decreases, total cost will decrease, so they can produce at a larger scale, and hire more workers, so labour demand will increase

• substitution effect: if the price of machinery decreases and workers tasks can now be done with machines, the workers will be replaced with machines, so labour demand decreases

• capital and labour are compliments (you need more of both)

• capital and labour are substitutes (you replace one with the other)

how does better management and productivity effect the labour demand curve?

• an increase in productivity means an increase in marginal product of labour, which will increase labour demand 

how do nonwage benefits, subsidies and taxes effect the labour demand curve? what are examples?

• an increase in nonwage benefits means a decrease in resources that can be allocated to wage, so employe wages fall and labour demand decreases

• health insurance, paid leave, social security

what is labour supply? what is leisure? how to decide how many hours you should work? what is the rational rule for workers?

• the time you spend working in the market 

• any activity that is not paid work

• use the marginal, opportunity cost principle, and the cost benefit principle 

• work one more hour as long as the wage is at least as large as the marginal n=benefit of another hour of leisure

what is the substitution effect in the labour supply curve? what is the income effect in the labour supply curve? 

• measures how people respond to a change in relative price, a higher wage increases the returns to work relative to leisure (opportunity cost), leading you to work more

• measures how peoples choices change when they have more income, a higher wage increases your income, leading you to choose more leisure and hence less work

what are the 4 factors that shift the labour supply curve?

• changes in the wages of other occupations

• changes in the # of potential workers

• changes in the benefits of not working

• non-wage benefits, employe subsidies

how do changes in wage of other occupations shift the labour supply curve ? (assuming a and b have similar job requirements)

• an increase in wage in job B, leads to a decrease in labour supply in job A

• a decrease in wage in job B, leads to an increase in labour supply in job A

how does the change in # of potential workers shift the labour supply curve?

• if there’s a decrease in number of workers due to a change in requirements or an immigration cut, there will be a decrease in labour supply

how do changes in benefits of not working shift the labor supply curve ?

• if unemployment benefits increase, there will be less of an incentive to work, so labour supply will decrease

how do non-wage benefits & employe subsidies shift the labour supply curve?

• if there’s an increase in employ subsidies, there will be motivation to work, so labour supply will increase

what is human capital? what is education to employers?

• the accumulated knowledge and skills that make a person more productive

• a signal of your ability - higher education = more skilled and productive

what is an efficiency wage? What principles does it use?

• employer offers higher pay than the market wage to encourage greater productivity,  the opportunity cost of loosing the job is higher than not having the job, so you won’t slack off as much 

• the marginal principal (should I work one more hour), the opportunity cost principle (alternative is slacking), cost-benefit principle (the cost of slacking is higher than benefit)

what is the superstar theory?

• the top ten get paid exponentially more than anyone else - every buyer wishes to have access to the best - technology makes it possible for most/all buyers to have access at a low cost - this leads to winner-takes-all outcome

what is the compensating differential? what are the attributes(ex)?

• a difference in wages required to offset the desirable or undesirable aspect of a job - jobs will undesirable attributes pay more, and jobs with desirable attributes pay less

• riskiness, unusual schedules, undesirable location

what is an institutional factor? What are institutional regulations and how do they affect labour supply/demand?

• any force that pushes wages above market equilibrium that leads to some unemployment

• government regulations (required licenses - lead to less ppl bcc they are expensive so supply decreases but wage increases, minimum wage - employers forced to pay fewer ppl at a higher price so demand decreases)

• unisons boost the wages of their members by striking and can make businesses more productive by using their bargaining power and providing a voice for their members