Econ 1014 Exam 2 (Parsons)

Commodity taxes

Taxes on goods
EX. Fuel, liquor, cigarettes

Three Important concepts

1. Who ultimately pays the tax does not depend on who writes the check to the government
2. Who ultimately pays the tax does depend on the relative elasticites of demand and supply
3. Commodity taxation raises revenue and creates deadweight loss

Free market

Occurs whenever the buyers willingness to pay exceeds the suppliers willingness to sell

Subsidy

Reverse tax. Instead of taking money away, we give money to them

The subsidy=

price received by sellers - price paid by buyers

Wage Subsidies

are not always bad for social welfare. Wage subsidies is a good way to increase employment of low wage workers

Great Economic Problem

is to arrange our limited resources to satisfy as many of our wants as possible

Deadweight Loss

is the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited. Price ceilings create a DWL

Misallocation of Resources

Price controls distort signals and eliminate incentives

Shortages

Short run supply curve is inelastic

Rent Control

price ceiling on rental housing

Price Floors

Buyers outnumber sellers, so its probably a good idea to support buyers. A minimum price allowed by law. Effects: surpluses, lost gains from trade

Protectionism

Is the economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers

Tariff

Tax on imports

Trade Quota

Is a restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden or heavily taxed

Tariff has two effects

1) It increases domestic production
2) Reduces domestic consumption

External Cost

is a cost paid by people other than the consumer or producer trading in the market

Social Cost

is the cost to everyone: the private cost + the external cost

Externalities

are costs and benefits(external), that fall on bystanders

Social Surplus

consumer surplus + producer surplus + everyone else's surplus

Efficient Equilibrium

is the price and quantity that maximizes social surplus

Efficient quantity

is the quantity that maximizes social surplus

Pigouvuan Taxes

a tax with external costs

External Benefits

a benefit received by people other than the consumers trading in the market

Pigovian subsidy

subsidy on a good with external benefits

Internalizing an externality

means adjusting incentives so that desicion makers take into account all the benefits and cost of their actions, private and social

Transaction costs

are all the costs necessary to reach an agreement

Coase Theorem

says that if transactions costs are low and property rights are well defined, then private bargains will ensure that the market equilibrium is efficient even when there are externalities. In other words, in these cases trading makes sure the right amount of extremity is produced

Command and Control

Q Market> Q efficient

Long Run

is the time after all exit or entry has occurred

Short Run

is the period before exit or entry can occur

TR=

P x Q

Total cost

the cost of producing at any given output

Explicit Cost

is a cost that requires a money outlay

Implicit Cost

is a cost that does not require an outlay of money

Economic profit

TR - TC + IC

Accounting profit

TR - EC

Fixed costs

are costs that do not vary with output

Variable costs

costs that vary with output (TC= FC + VC)

Marginal Revenue

change in the total revenue from selling an additional unit. For a competitive firm, MR= Price (MR=P)

Marginal cost

is the change in total cost from producing an additional unit

Average cost

(of production) is the cost per barrel (AC=TC/q)

Profit=

(P- AC) x Q

Zero profits

(P=AC) At this price the firm is covering all of its costs, including enough to pay labor and capital their ordinary opportunity cost

Increasing cost industry

costs increase with greater industry output and this generates an upward sloping curve

Decreasing cost industry

costs decrease with greater industry output and this generates a downward sloping supply curve

Constant cost Industries: Three Rules

1) produce so that P=MC
2) Enter industries where P>AC
3) Exit industries where P<AC

Invisible Hand Property 1

the minimization of Total Industry Costs of Production (P=MC1=MC2)

Invisible Hand Property 2

The balance of industries

Creative Destruction: Elimination Principle

above normal profits are eliminated by entry and below normal profits are eliminated by exit

Why are AIDS medication so expensive?

Market Power

Market Power

is the power to raise price above MC without fear that other firms will enter the market

Natural Monopoly

is said to exist when a single firm can supply the entire market at a lower cost than two or three market firms
EX: subways, pipelines, cables

Barriers to entry

factors that increase the cost to new firms of entering an industry

Elasticity of Demand

(% change in quantity demanded)/(% change in price)

Percent Change

(New-Old)/(old) x 100%

price of elasticity of demand....

is always NEGATIVE

Price Inelastic=

Absolute value is less than 1

Price elastic=

Absolute value is greater than 1

Unit Price Elastic=

Absolute value of elasticity of demand=1

Perfectly Price Inelastic=

-Abs value E.d.= 0
-never change in Qd
-Vertical line

Perfectly price elastic=

abs. value Ed= Infinity
-Horizontal line

Point slope Ed=

1/(slope demand curve)(P/Q)

Sales Revenue=

(Price per unit)(# of unit sold)