Exam 2: Ch. 6, 8, 10, & 12

Price ceiling

A legal maximum on the price at which a good can be sold

Rent control laws dictate…

Only a maximum rent that landlords may charge tenants

Price floor

A legal minimum on the price at which a good can be sold

Minimum wage laws dictate…

Only a minimum wage that firms may pay workers.

When a government imposes a binding price ceiling on a market:

A shortage results

Price ceiling above equilibrium is…

Not-binding

Price ceiling below equilibrium is…

Binding

Long run rent control

Buyers and sellers respond more to market conditions as time passes

Price floor below equilibrium Is…

Not-binding

Price floor above equilibrium Is…

Binding

When the government imposes binding price floor on a market:

A surplus results

Tax incident

The study of how the burden of the tax is distributed among the various people in the economy

Refer to figure 6 (ch. 6): When a tax is levied on the sellers of a product, then…

the demand curve will not shift

When a tax is levied on the sellers of ice-cream, then …

Buyers and sellers will share the burden of the tax

A tax on the sellers of ice-cream will ______ the price of ice-cream paid by buyers, _______ the effective price of ice-cream received by sellers, and _______ the equilibrium quantity of ice-cream.

Increase, decrease, decrease

A tax on the buyers of ice-cream encourages:

Buyers to demand a smaller quantity at every price

Federal Insurance Contributions Act (FICA)

A payroll tax on the wages that a firm pays their workers

Consumer surplus

Amount buyers are willing to pay for the good minus the amount they actually pay

Producer surplus

Amount sellers receive for the good minus their cost of producing it

A tax on a good _____ the price that buyers pay and _____ the price that sellers receive.

Raises, lowers

The governments benefits from tax can be measured by…

Tax revenue

When a good is taxed, …

Buyers and sellers of the good are made worse off

When the government imposed a tax, …

The total surplus in a market decreases.

Refer to figure 3 (Ch. 8): To fully understand ow taxes affect economic well-being, …

We must compare the reduced welfare of buyers and sellers to the amount of revenue the government raises

Refer to figure 3 (Ch. 8): Suppose the government imposes a tax of Pb - Ps, what does each area represent?

→ area A: consumer surplus after the tax

→ area F: producer surplus after the tax

→ area C and E: deadweight loss due to the tax

Deadweight loss

The surplus that is lost

If the government is considering levying a tax in one or more markets, the following markets will allow the government o minimize the deadweight loss(es) from the tax when:

Demand is very inelastic relative to supply and supply is very inelastic relative to demand

Refer to figure 5 (Ch. 8): If the labor supply curve is very elastic, …

A tax on labor has a large deadweight loss

Total revenue

The amount a firm receives for the sale of its output

Firm’s cost of production:

→ Includes all the opportunity costs of making its output of good and services

→ A firms opportunity costs of production are equal to its explicit and implicit costs

Explicit costs

Input costs that require an outlay of money by the firm

Implicit costs

Input costs that do not require an outlay of money by the firm

Total costs =

Explicit costs + implicit costs

Economic profit

Total revenue minus total cost, including both explicit and implicit costs

Accounting profit

Total revenue - explicit costs

Diminishing marginal product

The property whereby the marginal product of an input decline as the quantity of the input increases

Refer to figure 2 (Ch. 12): This graph illustrates a typical production function and displays the following: …

The number of workers increases, marginal product decreases.

Fixed costs

Costs that do not vary with the quantity of output

Variable costs

Costs that vary with quantity of output produced

Rising marginal costs

→ reflects diminishing marginal product

→ marginal cost rises as the quantity of the output produced increases

When MC < ATC:

Average total cost is falling

When MC > ATC:

Average total cost is rising

Refer to figure 5 (Ch.12): The minimum points of the Average Variable Cost (AVC) and Average Total Cost (ATC) curves occur…

when the marginal cost (MC) curve intersects those curves

A firm gets to choose…

How many workers to hire in both the short run and the long run

Economies of scale occur when:

Long-run average total cost falls as the quantity of output increases

Why does long-run average total cost at first decrease as output increases?

→ Gains from specialization of inputs

→ A firms that wants to achieve economies of scale could do so by assigning limited tasks to it employees, so they can master those tasks

Externality

The uncompensated impact of one person’s actions on the well-being of a bystander

Negative externalities

Leads markets to produce greater than efficient output levels

Positive externalities

Leads markets to produce smaller than efficient output levels

When negative externalities are present in a market, …

Social costs will be greater than private costs

Social costs =

Private costs + external costs

Refer to figure 2 (Ch.10): There is a social cost curve with (1)__________. Without government intervention, the equilibrium quantity would be (2)____________. The equilibrium quantity is found (3)_________________.

(1) Negative externality (2) Q market (3) where the supply and demand curve intersect

Refer to figure 3 (Ch.10): There is a social value curve with a (1)_____________. The socially optimal quantity of output n the market is (2)________. The social optimum quantity is found (3)_______________.

(1) positive externality (2) Q optimum (3) where the social value curve connects w/ the supply curve

Exam 2 Essay Questions:

(1) Definition of externality

(2) What is a negative externality?

A. Give an example of a negative externality

(3) What is a positive externality?

B. Give an example of a positive externality

(1) The uncompensated impact of one person’s actions on the well-being of a bystander.

(2) If the impact on the bystander is adverse, it is a negative externality.

A. Example: steel factories emit pollution that create health and climate risks

(3) If the impact on a bystander is beneficial, it is a positive externality.

B. Example: A more educated population leads to more informed voters

An example of command-and-control policy:

If the government were to limit the release of air pollution produced by a glue factory to 75 parts per million

Which of the following is not an advantage of corrective taxes?

They subsidize the production of goods w/ positive externalities

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because…

The market-based solution is less costly to society

In some cases, tradable pollution permits may be better than corrective tax because…

The government can set a maximum level of pollution using permits

Coase theorem

Private parties can solve the problem of externalities if the cost of bargaining is small