Econ Midterm #2

Price ceiling

a max price that sellers can legally charge, below the equilibrium, creates a shortage

Price floor

a min price that sellers can legally charge, above the equilibrium, creates a surplus

Mandate

a requirement to buy or sell a min amount of goods

Quota

a limit on the max quantity of goods that can be sold

Taxes

government collects money for each unit bought/sold/produced

Consequences of taxes

increases the price that buyers pay and decreases the price that sellers receive

Tax incidence on sellers

sellers bear a smaller share of the economic burden when supply is elastic

Tax incidence on buyers

buyers bear a smaller share of the economic burden when demand is elastic

Subsidies

Payments made by the government to those who make a specific choice encourage behavior (flu shots, college)

Positive analysis

describes what IS happening, explaining why or predicting what will happen, purely objective analysis

Normative analysis

describes what SHOULD happen, which involves value judgements

Economic efficiency

more economic surplus —> more efficient outcome

Equity

an outcome that yields greater equity is if it results in a “fairer” distribution of economic benefits

Consumer surplus

The difference between the max amount a person is willing to pay and its current market price (marginal benefit - price)

location: below the demand curve and above the price

Producer surplus

the difference between the current market price and the marginal cost of production (price - marginal cost)

location: above the supply curve and below the price

Deadweight loss

economic surplus at efficient quantity - actual economic surplus

The 3 central roles of price

a signal, incentive, and bundle of information

Gains from trade

arise from opportunity costs

Comparative advantage

the person that can produce a product at the lowest opportunity cost

Theory of comparative advantage

Specialization and free trade benefit all trading partners and real wages will increase

Reasons for comparative advantage

Differences in resources, differences in inputs used in production, skills/know-how/technology, and economies of mass production

Imports

lower prices

Exports

raise prices

Tariffs

tax on imports, applies to goods produced by foreign producers, these hurt imports

National defense argument

the government should protect industries from being eliminated due to international specialization ex: strategic metals, wool

Infant Industry argument

protects new industries until they become competitive

Antidumping argument

Other countries’ producers may lower prices below production costs with the intent of driving domestic firms out of the market and then increasing prices

Enforcement of regulations

sometimes companies will produce in countries with more lax regulations

Jobs and Income argument

trade restrictions are to protect US jobs

Retaliation argument

against other country’s unfair practices

Negative Externalities

an activity whose side effects harm bystanders, MSC is higher than MPC

Marginal Private Cost

cost of consumption/production paid by the consumer/firm

Marginal Damage Cost

additional harm done

Positive externality

an activity whose side effects benefit bystanders

Private bargaining and negotiations

assign property rights and let them figure it themselves in a free market

Cap and trade

The gov decides how much total pollution is acceptable and then they’re able to auction off tradeable pollution permits, which give the owner the right to pollute a certain amount

Public goods

nonrival and nonexclusive, ex: public art, police, national defense, clear air

Private goods

rival and exclusive

Club goods

nonrival and exclusive ex: Netflix subscription

Open-access goods

rival but nonexclusive, regulated by government ex: fishing

Free-rider problem

people that enjoy the benefits of public goods without paying for them

Drop-in-the-bucker problem

the good/service is so costly that its supplies don’t depend on payment

Social safety net

cash assistance, goods, and services provided by the government to those in poverty

“In-kind” benefits

not money, includes SNAP, Medicaid, and housing vouchers

Means tested benefits

eligibility is based on income