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Commodity taxes
Taxes on goods EX. Fuel
Three Important concepts
Who ultimately pays the tax does not depend on who writes the check to the government
Who ultimately pays the tax does depend on the relative elasticites of demand and supply
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
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
Protectionism
Is the economic policy of restraining trade through quotas
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
It increases domestic production
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)
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
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
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
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
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
produce so that P=MC
Enter industries where P>AC
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
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)
