CH 4+5+6 Flashcards
price controls
legal restrictions on how high/low market price may go
price ceiling (definition)
maximum price sellers allowed to charge for good/service
price floor (definition)
mimimum price buyers required to pay for good/service
price ceilings create inefficiency in at lest 4 ways:
- inefficient low quaNtity
- inefficient allocation to consumers
- wasted resources
- inefficiently low quaLity
(and blackmarkets)
inefficient allocation to consumers (price ceiling)
some people who want the good badly+willing to pay high price don’t get it and some who care relatively little+only willing pay low price get it–> someone is better off andthe other worse
wasted resources (price ceiling)
people spend up money, effort and time to cope with shortages caused by price ceiling–> example: wasted time, thus an opportunity cost
inefficiently low quality (price ceiling)
sellerd offer low-quality goods at low price even though buyers rather have higher quality+willing to pay higher price for it–> because price ceiling makes it impossible for supplier to raise price to improve
black markets
market where goods+services bought/sold illegally–> prices charged are illegal by price ceiling (or illegal completely to sell)
3 common results price ceilings
- persistant shortage of the good
- inefficiency arrising from this persistant shortage
- the emergence of illegal, black market activity
2 reasons to why price ceiling:
- they do benefit some people
- government officials don’t understand supply+demand analysis
binding
when it affects the market
4 ways how Price floors causes inefficiency:
- leads to inefficiently low quantity
- leads to inefficient allocation of sales among sellers
- leads to waste of resources
- leads to seller providing an inefficiently high-quality level
(and illegal behaviour)
inefficient allocation of sales among sellers
sellers who willing to sell at lowest price unable to mae sales, while sales go to seller only willing sell at higher price
inefficiently high quality
sellers offer high-quality goods at high price, eventhough buyers would prefer lower quality at lower price
quantity control/quota
upper limit on quantity of a good that can be bought/sold (instead of price limits)
–> other way of government to intervene in market
quota–> licenses=
gives owner right to legally supply a good/service
demand price (quantity controls)
the price at which consumers will demand that quality
supply price (quantity controls)
price at which producers will produce that quality
how does the supply of a good that is legally restricted create a wedge?
the difference between the
demand price and the supply price at the quota limit.
quota rent
the earnings that accrue to the license holder of ownership of the right to sell the good–> it is equal to the market price of the licence
if person doesn’t rent out his license and uses it himself–> can’t ask the same higher price as if he did rent it out–> no now has an opportunity cost of the maount he misses by using it himself–> because otherwise he wouldn’t have to work and still would make money
2 undesirable side effects quantity controls:
- inefficiency due to missed opportunities
- incentives for illegal acctivities
imports
goods+services purchased from other countries
exports
goods+services sold to other countries
world GDP
total value of goods+services produced in world as a whole
globalisation
phenomenon of growing (economic) linkages
hyper globalisation
extremely high leveks of international trade
reshoring
bringing production closer to markets
Ricardian model of International Trade
the analysis of international trade under the assumption that opportunity costs are constant–> makes PPF straight lines
Autarky
refers to situation in which country doesn’t trade with other countries
the ky to mutual gain (international trade):
trade liberates bouth countries from self sufficiency–> because can all focus on producing product with comparative advantage–> total world production rises–> higher standard of living possible in both countries
BUT: no country will pay a relative price for a good that is higher than the opportunity cost would be if they would produce it themselves
what determines the comparative advantage?
the height of opportunity cost of that good
pauper labour fallacy
belief that when a country with high wages imports goods produced by workers who are paid low wages, must hurt the standard living of workers in importing country
sweatshop labour fallacy
belief that trade must be bad for workers in poor exporting countries because those workers are paid very low wages by our standards
misconceptions arising from misunderstanding comparative advantage:
- pauper labour fallacy
- sweatshop labour fallacy
sources of comparative advantage
- international differences in CLIMATE
- international differences in FACTOR ENDOWMENTS
- international differences in TECHNOLOGY
factor endowments (explained/definition)
factors of production like labour, capital, land etc–> the mix of different factors differ among countries–> therefore important source of comparative advantage
Heckscher-Ohlin Model
influential model of international trade–> according to this model a country has comparative advantage in a good whose production is intensive that are abundatly available in that country
factor abundance
how large country’ supply of a factor is relative to its supply of other factors
factor intensity
ranking of goods according to which factor is used in relatively greater quantities in production compared to other factors
world price
the price at which a good can be bought/sold abroad
factor price
price employers have to pay for services of afactor of production
exporting industries
produce goods+services that are sold abroad
import-competing industries
produce goods+services that are compete with imported goods
free trade
government doesn’t try to reduce/increase levels of exports that occur naturally as a result supply+demand
–> but many governments use taxes+other restrictions to limit imports
(trade) protection
policies that limit the amount of imports–> usually with the goal to protect domestic producers in import-competing industries from foreign competition
the 2 most common protectionist policies
- tariffs
- import quotas
tariff (definition)
tax levied on sale import good
–> usually intended to discourage imports+protect import-competing domestic producers
–> raises bot price received by domestic producers+domestic customers
import quota (definition)
legal limit on the quantity of a good can be imported
–> usually administred through licenses–> limited amount issued–> license holders hold right to import limited quantity of good each year
3 arguments FOR Trade Protection:
- Nationnal Security Argument
- Job creation argument
- Infant industry argument
international trade agreements
treaties in which country promises to engage in less trade protection against export of other countries in return for promise other countries do the same for own exports
trade wars
countries delibertely try to impose pain on their trading partners, as a way to force them to make policy concessions
Function WTO and the 2 roles it plays:
- Function: oversees international trade agreements+rules on disputes between countries over those agreements
2 rules:
1. provides the framework for massively complex negotiations involved in major internationatl trade agreements
2. resolves disputes between members, typically arise when one country claims other country’s policies violate its previous agreement
2 special circumstances that WTO does allow trade protection:
- when foreign competition is “unfair” under certain technical criteria
- as a temporary measure when sudden surge imports threaten to disrupt domestic industry
2 main reasons for doubt globalisation:
- decline of manufacturing
- offshore outsourcing
outsourcing
company hires other company to perform a task
offshore outsourcing
company hires people/companies in other countries to perform various tasks
–> think callcentres in India
consumer’s willingness to pay
maximum price at which they would buy that good
–> won’t buy if it costs more, but eager to do so if it’s less
–> if price equal to individual’s willingness to pay, they’re indifferent between buying/not buying
individual consumer surplus
net gain to an individual from purchase of a good–> equal to difference between buyers willingness to pay and price paid
total consumer surplus
sum of individual consumer surpluses of all buyers of good in market
seller’s cost
lowest price at which potential seller willing to sell
individual producer surplus
net gain to an individual seller from selling good–> equal to the difference between price received+seller’s cost
total producer surplus
sum of individual suprpluses of all the sellers of a good in a market
macroeconomics
focuses on the behaviour of the economy as a whole
microeconomics
focuses on how decisions are made by individuals+firms and the consequences of those actions
paradox of thrift
when families+businesses worried about possibility of economic hard times, they prepare by cutting their spending–> this redduction in spending depresses the economy as consumers spend less+businesses react by firing people–> result: families+businesses may end up worse than if hadn’t try to act responsibly by cutting their spending
Flipside scenario:
when feeling optimistic about future–> spend more today–> stimulates economy, leading businesses to employ more people, further expanding economy–> increasing behaviour leads to good times for all
policy (definition)
what the government can do to make macroeconomic performance better
self-regulating economy (explaination/definition)
problems like unemployment are resolved without government interference, through the working of the invisible hand
keynesian economics
economic slumps are caused by inadequate spendingl and they can all be helped by government intervention–> through:
- monetary policy
- fiscal policy
monetary policy (definition)
uses changes in quantity of money to alter interest rates+effect overall spending
fiscal policy (definition)
uses changes in government spending+taxes to affect overall spending
recession
period of economic downturn when output+employment are failing
expansion/recovery
period of economic upturn when output+employment are rising–> aka when economy is not in recession it’s in an expansion
business cycle
alternation between recessions+expansions
business-cycle peak
the point at which economy turns of expansion to recession
business-cycle through
point at which economy turns from recession to expansion
long-run economic growth
the sustained upward trend in economy’s output overtime–> reflects one of basic principles: “increases in economy’s potential lead to economic growth overtime”
long-run growth per capita
sustained upward trend in output per person–> is key to higher wages+standard of living
inflation
a rise in overall level of prices
deflation
a fall in overall level of prices
price stability
overall level of prices changes slowly or not at all
open economy (definition)
economy that trades goods+services with other countries
trade deficit
a country has this when value of goods+services bought from foreigners is more than the value of goods+services it sells to them
trade surplus
a country has this when value of goods+services bought from foreign countries is less than value of good+services it sells to them
when is a price celing binding?
when the price ceiling is set on a price that is below the quilibrium price
when is a price floor binding?
when the price floor is set at a price that is above the equilibrium price
lean production
techniques designed to improve manufacturing productivity through increased efficiency → can close gap in productivity with country that had technological advantage
Depression (definition)
prolonged recession
