micro exam #2

Quotas

The government places a limit on how much can be sold. Issue Licenses to buy or sell a particular good.

Demand price

The price that people are willing to pay for goods and services when a particular amount or quantity is available

Supply price

the price at which a company agrees to supply particular goods or services at a particular time.

Consumer surplus

Consumer willingness to pay (maximum price

Individual consumer surplus

maximum price - price paid

Total Consumer Surplus

Summation of a consumer’s individual surpluses

Producer surplus

Producer willingness to sell (minimum price)

Individual Producer Surplus

Sale price – minimum price

Total Producer Surplus

Summation of a producer’s individual surpluses

Total Surplus

Total Consumer Surplus plus Total Producer Surplus

Market failure

Occurs when the market comes to an inefficient allocation

Externalities

A cost or benefit caused by a producer that is not financially incurred or received by that producer.

Public good

Goods and services that are non-excludable and nonrival in consumption. These are generally provided by the government because they are necessary, but not properly priced, or supported by the market.

Examples of public goods

-National defense
-Clean water
-Police force

Calculation for price Elasticity of Demand:

1a: (change in Qd/Inital Qd) x 100
2a: (change in price/Intial price) x 100
Price Elasticity of Demand = (1a/2a)

Elasticity Rules

If elasticity is more than 1 --> price elastic
if elasticity is less than 1 --> price inelastic
If elasticity is equal to 1 --> unit elastic

Price elasticity

Consumer or suppliers reaction a change in price

Price inelastic

consumer does not respond to a change in price. consumer is buying the product for some reason other than price.

Price Elastic

Consumer is reacting vigorously to the price. Price is a major consideration when they are buying the product.

Revenue

Price x quantity

Perfectly elastic demand

Consumers will purchase as much as is available at the market price. Inferior goods have a negative income elasticity of demand.

Costs and benefits of taxation

Taxes generate revenues to the government that are used to pay for public goods and other policy priorities determined by the electorate.

Non excludable

When one person consumes it it doesn't stop someone else from consuming it
Non rival consumption

Non rival consumption

More than one person can consumer it at the same time without affecting one another

Does market mechanism work on goods that\at are excludable/nonrival?

No because they cannot be priced

Social Priorities

Programs that the public supports as they are unhappy with the market outcome.

Social priority ex.

Minimum wage
Rent control
Affordable care act
Tax imposed on consumer = external cost

Deadweight loss

when you charge a tax the price goes up and quantity demanded goes down

Avoidance cost

Those targeted by the tax are motivated to avoid it

Ability to pay principle

If you have more ability you should pay more

Benefits principle

those who benefit more from government expenditure or spending should pay more taxes that those that do not

Marginal tax rate

The percentage of an increase in income that is take by taxes

Tax efficiency vs tax equity

The tradeoff between efficiency and equity is determined through the political process.

Proportional tax

Each taxpayer pays the same tax rate.

Progressive tax

The tax rate paid by the taxpayer increases as their income wealth or other taxable item increases

Regressive tax

The tax rate paid by the taxpayer increases as their income, wealth or other taxable item decreases

tax base

a total amount of assets or income that can be taxed by a taxing authority,

tax structure

Details of how the tax base will be taxed

Income tax

A tax of an individuals or household income

Payroll tax

A tax on the value of goods or services purchased

Sales tax

A tax on the value of good or services purchased

Profits tax

A tax on a business’ profits

Property tax

A tax on the value of a taxpayer's real estate

Wealth tax

A tax on an individual's wealth

External costs

negative externalities

External Benefits

Positive externalities

Marginal private cost

The change in the producer's total cost brought about by the production of an additional unit of a good or service.

Marginal external benefitis the

is the uncompensated (suppliers don’t get paid) that the last transaction confers on those not participating in the transaction.

Direct controls

Bans and Limits
Bans: DDT, leaded gas, high sulfur coal
Limits: Emissions standards

Indirect controls

Incentives: Subsidies to promote preferred behavior.
Penalties: Taxes and penalties to discourage bad behavior

Cap and trade

The government issues vouchers that sum to the total amount of permitted pollution. The holders can then trade the vouchers

Pollution rights markets:

Firms are allowed to buy and sell government issued licenses to create a given amount of pollution.

Utility

A measure of the satisfaction a consumer gets from consuming a good or service.

consumer choice

the range of competing products and services from which a consumer can choose.

consumer preference

subjective individual tastes, likes and dislikes, and predispositions.

Consumption bundle

A collection of goods and services used by an individual consumer.

Marginal analysis

As long as we have resources we can buy goods

Substitution effect

The change in Quantity Demanded of any good X, generated by a change in the Price of X, as the consumer buys more or less of the substitute which is either cheaper (if we increased the price of X) or more expensive (if we reduced the price of X).

Income effect

Change in the Quantity Demanded of any good X, generated by a change in the Price of X, that either increases the consumer’s purchasing power (if we reduced the price) or decreases the consumer’s purchasing power (if we increased the price).

Indifference curves

The farther “out” from the origin, the more utility the bundles on the curve provide.
-convex to origin and never cross

Concept of marginal rate of subtsitution

(Change in Quantity of X / Change in Quantity of Y) =
(Marginal Utility of X / Marginal Utility of Y)
Marginal Rate of Substitution (x for y) = MUx / MUy

Utility consumption bundle

A collection of goods and services used by an individual consumer

Marginal utility curve

Illustrates how marginal utility changes as the quantity consumed of a good or service increases

Optimal consumption bundle

Where the marginal utility per dollar is maximized and dots equal er the last dollar spent

Opportunity costs

The value of the best alternative that was given up when a decision was made. This includes explicit costs and implicit costs.

Explicit Cost

Costs that a valued by an outlay of money

Implicit Costs

Costs that do not require an outlay of money. Measured in the dollar value of benefits foregone

Accounting cost/profit vs economic profit

Economic profit is money earned after taking explicit and implicit costs into account. Accounting profit is the net income for a company or revenue minus expenses.