Chapter 4 Economics

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Chapter 4: Applications and Extensions for Supply and Demand Resources Markets - Businesses and entrepreneurs demand resources in order to produce goods services to sell'in the market. The Labor Market - Price for labor is called the wage (W) - Quantity of labor is called employment(E) *Note: Works just like the market for goods, only with a different name for price (wage) and quantity (employment) Labor Demand 1. Firms demand labor 2. 'Labor demand cure is downward sloping because as wage decreases, firms will want to employ more people Labor Supply 1. Workers supply labor 2. Labor supply curve is upward sloping because as wage increases, people will want to work more. Changes in Labor Demand 1. Anincrease in labor demand (Labor demand shifts right) 2. Adecrease in labor demand (Labor demand curve shifts left) Linking the Markets There is a close relationship'between the demand for products and the demand for resources used to make those products: Changes in Labor Supply 1. "Increase in labor supply: (Labor supply curve shifts right) 2. Decreasein labor supply: (Labor supply.curve shifts left) Price Floor Price Floor: AERE - Alegally established minimum priceust pay for a good or resource. £ | 20v= b\,\\)'e/r o A price floor above equilibrium price creates a-surpIus,— o A price floor:below equilibrium price do Application: Minimum Wage The minimum wage is an example of a price floor. Raising the minimum wage increases excess labor supply (Unemployment) in labor markets for which it binds. Price Ceiling Price Ceiling: y - Alegally established maximum prican charge for a good or resource. %e\w 24 «} o A price ceiling below the market equilibrium price creates 4 shortage. o A price ceiling:above the market equilibrium price do@ Application: Rent Control Rent controls lead to shortages as well as: 1. lllicit markets. Scanned with CamScanner
Chapter 4: Applications and Extensions for Supply and Demand 2. Adecline in the quantity supplied of future rental housing. 3. Adecline in quality of rental housing. 4. Non-price methods of rationing. 5. 'Inefficient housing mateh-ups: Impact of a Tax - Ataxon a product will cause the supply curve to shift up (left) by the amount of the tax 1. Raises the price that buyers pay. 2. Reduces the amount sellers receive. 3. Reduces the quantity sold. 4. Increases government revenue. 5. Creates deadweight loss. ~ Deadweight loss % - The loss to society that restlts from the loss in surplus from exchanges that do not occur because a tax was imposed. Tax Incidence Tax Incidence: - The way the burden of a tax is distributed among the consumers and the suppliers (also known as the tax burden) - It does not depend on whom the tax is imposed. Tax incidence does depend on elasticity: The burden of the tax will fall on those who are relatively inelastic. Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic. The Tax System Average Tax Rate (ATR): The percentage of income paid in taxes. - ATR = Tax Liability / Taxable Income 3 Possibilities: 1. Progressive Tax: Average tax rate rises with income. 2. Regressive Tax: Average tax rate falls with income. 3. Proportional Tax: Average tax rate is the.same at all income level. Marginal Tax Rate (MTR): - The additional tax liability a person faces divided by their additional taxable income. - MTR = change in tax liability / change in taxable income *Note: Marginal tax rates are what is important in personal decision-making The Laffer Curve The Laffer Curve: A curve illustrating the relationship between the tax rate and tax revenue. Higher tax rates will not always lead to more tax revenue! Review: Effects of a Price Floor Price Floor Below Equilibrium Price o No effect Price Floor Above Equilibrium Price o Surplus (Excess Supply) Scanned with CamScanner
Chapter 4: Applications and Extensions for Supply and Demand ¢ | Quantity Demanded ¢ P Quantity Supplied Review: Effects of a Price Ceiling Price Ceiling Above Equilibrium Price o ' No effect Price Ceiling Below Equilibrium Price o Shortage (Excess Demand) ¢ | Quantity Supplied * 1 Quantity Demanded Review: Effects of a Tax J Quantity P Price Consumers Pay J Price Suppliers Keep 2 Tax Revenue ( Tax Revenue if on the top of the Laffer Curve) J Consumer and Producer Surplus Scanned with CamScanner
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