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Final - Economía I UFM

Price controls

Taxes and subsidies

  • A commodity tax is a tax on goods.

    • Excise tax: a tax that is paid directly by suppliers to the government

    • Sales tax: a tax that is paid directly by consumers to the government.

  • The economic incidence of a tax is independent of its legal incidence.

    • Economic incidence: the division of a tax burden according to who actually pays the tax.

    • Legal incidence: the division of a tax burden according to who is required under the law to pay the tax.

  • Who pays the tax does depend on the relative elasticities of demand and supply.

    • Elastic = escape

  • Commodity taxation raises revenue (for the government) and creates lost gains from trade.

    • There is less quantity exchanged.

  • A subsidy is a "negative tax", where the government gives money to consumers or producers.

    • Not elastic = no entry.

    • Creates inefficient increases in trade.

Tariffs and protectionism

  • Protectionism: the economic policy of restraining trade through tariffs, quotas o other regulations that burden foreign producers but not domestic producers.

    • Tariff: a tax on imports.

    • Quota: restriction on the quantity of goods that can be imported.

  • A tariff has two effects that influence (reduce) welfare:

    • Domestic consumption falls: lost gains from trade.

    • Domestic production increases: wasted resources from higher-cost production.

  • The revenue doesn't affect the net welfare, as it goes to the government.

  • Tariffs increase prices to consumers so domestic consumption falls, which creates a deadweight loss.

    • Tariffs divert production from low-cost (world) producers to high-cost (domestic) producers and this wastes resources.

Profit and loss

  • Wage, rent, and interest are three important forms of earned income in a market economy.

    • A great deal of uncertainty has been removed by this contractual agreement.

  • Profit is the fourth form of earned income in a market economy.

    • It's the residual between revenues and costs.

  • Unlike the wage earned, the entrepreneur seeking profits can never be sure that their efforts will be profitable.

    • The search for profit means accepting greater uncertainty.

  • Monetary expenses do not capture the total costs of production.

    • The forgone wage of an entrepreneur might not appear on a ledger, but it will remain in mind and influence choices.

  • Business decisions are influenced by the presence (or absence) of economic profit.

  • Profits exist, and continue to exist, without being reduced to zero by competition, because of uncertainty.

  • Entrepreneurs try to reorganize activity to gain profit.

    • They also take the responsibility if it is loss.

    • They are the residual claimant.

  • Entrepreneurial activity is the driving force within market processes.

    • It takes three forms: arbitrage, innovation and imitation.

    • It tends to correct for errors in the market process.

  • The key to an efficient market process is open entry and exit.

    • Comparative advantage can and often does change over time.

  • Speculators tend to coordinate market exchanges through time.

    • They even out the flow of commodities into consumption and diminish price fluctuations over time.

Price searching

  • The usual explanation for price-setting is a simple cost-plus-markup theory: business firms calculate their unit costs and add on a percentage markup.

  • Marginal revenue is the additional revenue expected from an action under consideration.

    • The extra revenue from selling one more item.

  • To maximize net revenue, set a price that will enable you to sell all those units, but only those units, for which marginal revenue is expected to be greater than marginal cost.

    • The rest of the units adds more to costs than to revenue, because the price has to be lowered to sell more units.

  • But by setting that price, there will be some customers lost who are willing to buy.

    • Profit can be made if the owner can reduce the price only to those new customers, without reducing it to those who are willing to pay more.

  • Three conditions for successful price discrimination: the seller must be able to

    • distinguish buyers with different elasticities of demand

    • prevent low-price buyers from reselling to high-price buyers

    • control resentment.

  • So how do price searchers find what they’re looking for?

    • estimating the marginal cost and marginal revenue

    • determining the level of output that will enable them to sell all those units of output, and only those units for which marginal revenue is greater than marginal cost

    • setting their price or prices so that they can just manage to sell the output produced.

V❀

Final - Economía I UFM

Price controls

Taxes and subsidies

  • A commodity tax is a tax on goods.

    • Excise tax: a tax that is paid directly by suppliers to the government

    • Sales tax: a tax that is paid directly by consumers to the government.

  • The economic incidence of a tax is independent of its legal incidence.

    • Economic incidence: the division of a tax burden according to who actually pays the tax.

    • Legal incidence: the division of a tax burden according to who is required under the law to pay the tax.

  • Who pays the tax does depend on the relative elasticities of demand and supply.

    • Elastic = escape

  • Commodity taxation raises revenue (for the government) and creates lost gains from trade.

    • There is less quantity exchanged.

  • A subsidy is a "negative tax", where the government gives money to consumers or producers.

    • Not elastic = no entry.

    • Creates inefficient increases in trade.

Tariffs and protectionism

  • Protectionism: the economic policy of restraining trade through tariffs, quotas o other regulations that burden foreign producers but not domestic producers.

    • Tariff: a tax on imports.

    • Quota: restriction on the quantity of goods that can be imported.

  • A tariff has two effects that influence (reduce) welfare:

    • Domestic consumption falls: lost gains from trade.

    • Domestic production increases: wasted resources from higher-cost production.

  • The revenue doesn't affect the net welfare, as it goes to the government.

  • Tariffs increase prices to consumers so domestic consumption falls, which creates a deadweight loss.

    • Tariffs divert production from low-cost (world) producers to high-cost (domestic) producers and this wastes resources.

Profit and loss

  • Wage, rent, and interest are three important forms of earned income in a market economy.

    • A great deal of uncertainty has been removed by this contractual agreement.

  • Profit is the fourth form of earned income in a market economy.

    • It's the residual between revenues and costs.

  • Unlike the wage earned, the entrepreneur seeking profits can never be sure that their efforts will be profitable.

    • The search for profit means accepting greater uncertainty.

  • Monetary expenses do not capture the total costs of production.

    • The forgone wage of an entrepreneur might not appear on a ledger, but it will remain in mind and influence choices.

  • Business decisions are influenced by the presence (or absence) of economic profit.

  • Profits exist, and continue to exist, without being reduced to zero by competition, because of uncertainty.

  • Entrepreneurs try to reorganize activity to gain profit.

    • They also take the responsibility if it is loss.

    • They are the residual claimant.

  • Entrepreneurial activity is the driving force within market processes.

    • It takes three forms: arbitrage, innovation and imitation.

    • It tends to correct for errors in the market process.

  • The key to an efficient market process is open entry and exit.

    • Comparative advantage can and often does change over time.

  • Speculators tend to coordinate market exchanges through time.

    • They even out the flow of commodities into consumption and diminish price fluctuations over time.

Price searching

  • The usual explanation for price-setting is a simple cost-plus-markup theory: business firms calculate their unit costs and add on a percentage markup.

  • Marginal revenue is the additional revenue expected from an action under consideration.

    • The extra revenue from selling one more item.

  • To maximize net revenue, set a price that will enable you to sell all those units, but only those units, for which marginal revenue is expected to be greater than marginal cost.

    • The rest of the units adds more to costs than to revenue, because the price has to be lowered to sell more units.

  • But by setting that price, there will be some customers lost who are willing to buy.

    • Profit can be made if the owner can reduce the price only to those new customers, without reducing it to those who are willing to pay more.

  • Three conditions for successful price discrimination: the seller must be able to

    • distinguish buyers with different elasticities of demand

    • prevent low-price buyers from reselling to high-price buyers

    • control resentment.

  • So how do price searchers find what they’re looking for?

    • estimating the marginal cost and marginal revenue

    • determining the level of output that will enable them to sell all those units of output, and only those units for which marginal revenue is greater than marginal cost

    • setting their price or prices so that they can just manage to sell the output produced.