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micro economics > test 2 > Flashcards

test 2 Flashcards

1
Q

Lorenz curve

A

study graph

  • depicts income inequality
  • horizontally depicts percentage of nations population
  • vertically the cumulative income
  • plots the actual deviations from the Iso-Income Line
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2
Q

Flypaper Theory of Taxation

A

true economic burden of any tax is borne by whoever is legally responsible for the tax

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3
Q

study taxation graphs

A

graphs

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4
Q

Hot potato theory of taxation

A
  • true economic burden of any tax is determined by bargaining power (elasticity)
  • elasticity determines bargaining power (if elasticity between employees and employers equal then they share tax equally.
  • does not matter where the tax is assessed, both will end up paying
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5
Q

how to know how tax affects economy

A

you must know the elasticity of everything the tax is charged to

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6
Q

Minimum wage

A
  • study graphs
  • price floor, has unintended consequenced
  • job loss, often younger less experienced people,
  • increase in price of final good maybe happens
  • DWL (dead weight losses) happen as there is a shortage of labor demand relative to supply
  • also supply of product goes down because employers are priced out of labor,
  • create highly attractive opportunity cost to school, may cause increased dropout, may cause increase in crime in people who lose job
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7
Q

Marginal Revenue Product

A
  • assessment of how profitable it is to employ workers

- negatively or positively affected by age, education, maturity, having a drivers licence

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8
Q

Price Ceiling

A

legally imposed price maximum, it causes problems

  • look at graphs
  • example, gas had a price ceiling and people had to line up in the streets to get gas
  • they raise transaction costs, like queuing (time) costs, enforcement costs,
  • sellers lose because they have to sell less and buyers lose because they get less product and have to pay more in queuing costs.
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9
Q

marginal utility of income

A
  • look at graph
  • you can use the wage you are paid as a measurement of the marginal utility of the time you use.
  • example ( waiting in line for an hour if you are paid 10.00 dollars an hour costs you ten dollars)
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10
Q

price floors /

A

try to raise the income of the sellers,

  • study graph
  • effective price floors fix money price above market equilibrium
  • price floor enforcement creates an ongoing surplus, regulators must either buy and store or destroy the surplus
  • if not then the sellers form queue of sellers trying to pawn off a resource that is in surplus.
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11
Q

Quantity Control or quotas

A

alternative to buying storing or destroying goods under a price floor,

  • can prevent excess supply but only if know the level of consumer demand
  • deadweight costs, cost of regulation, have to buy capital goods,
  • financial gains of farmers equal loss of consumers, but cost of regulation and buying the excess is absolute loss
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12
Q

regulation

A

causes queuing, bribes, other problems

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13
Q

taxes and tolls

A

less problems that regulation, but taxes often don’t get paid solely by who they are imposed on

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14
Q

subsidies

A
  • study graphs

targeted subsidies work way better than regulations, they line up incentives better for both buyers and sellers

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15
Q

more regulations, who has more power?

A

as more and more regulations are passed the power of decision-making transfers from owners to bureaucrats
- private owners on paper but not in action

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16
Q

externalities

A

costs or benefits that accrue to 3rd parties outside of transactions

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17
Q

positive externalities

A

benefits that 3rd party gets without paying or agreeing to the market transaction that occurs
(landscaping your home- neighbors benefit)

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18
Q

negative externalities

A

costs that 3rd party gets without paying/ agreeing

house with chipped paint and long grass- neighbors pay costs

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19
Q

infra- marginal externality

A

an external cost or benefit, the value of which drops to zero before the market equilibrium

  • this market is efficiently covering externalities: negative or positive
  • look at graph
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20
Q

extra-marginal externality ??? go to book to clarify if this is right

A

spill over benefit or cost which has value or cost at and above the market equilibrium price

  • not efficient, if negative can be fixed by a tax, if positive can be fixed with a subsidy
  • look at graph
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21
Q

extra marginal external cost

A

being a cost borne by 3rd parties, which has a positive value at the market equilibrium
- look at graph

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22
Q

free riders

A

those who get benefits without paying

  • not paying full cost of production (placing cost of pollution on people)
  • benefiting from trade without being involved
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23
Q

forced carriers

A

those who must carry burden of free riders, pay the externality costs

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24
Q

external costs in a market

A
  • when there are external costs in a market, that market is overproducing.
  • measuring the external costs is subjective and hard to do (some will hate something, some will mildly dislike, some may even enjoy what others call a cost or negative externality -some people like 2nd hand smoke)
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25
Q

how to fix an external cost? how to encourage producers to produce more for added external benefit?

A

to fix an external cost you tax it.

  • the tax will lower production by making production or consumption (based on where the tax is initially placed) and will thereby reduce the supply)
  • the tax will be shared by producer and consumers, based on the comparative elasticity of supply and demand (whoever has least elasticity will shoulder (more inelastic) will pay more of the tax in the end)
  • once the production price goes up until price makes product less profitable to supply it will reflect more accurately the full cost of that product = efficiency
26
Q

public good

A

a good that is inclusive in supply and cooperative in consumption - like radio, national defence, sun shine, air (usually),

27
Q

inclusive in supply

A

once you supply it to one person you supply it to everyone

- nat defence security/ radio/ lighthouse

28
Q

cooperative consumption

A

consumption by one doesn’t affect consumption of another

29
Q

case for corrective taxation

A

basically, taxes work for fixing externalities, but politicians don’t work “ that’s a silly idea” -GW Bush

30
Q

median voter theorem

A

political competition moves the platform towards the more moderate middle of the spectrum, its the invisible hand of politics, this is the equilibrium price except for politics ,
- basically this says that just because a good that is inclusive in supply does not mean that you will get that good, this is because you get public goods based on which platform is elected to power and which public goods they promised to get enough votes to get into power- this has to do with the subjectivity of analyzing the benefit or cost of externalities - some like 2nd hand smoke and some hate it

31
Q

the invisible hand of politics

A

guided by the invisible hand of competition to provide for the greatest amount of utility in public good by greatest amount of population,
- leads to more goods that are closer to being a public good that are for the most part cooperative in consumption
- must act toward benefit of society if you want to get elected or reelected
- doesn’t always work or happen ( example we never got a tax on pollution or gas to avoid negative externalities)
this is because sometimes median voters or politicians are not well informed and sometimes politicians weasel their way out of doing something
- well informed voters are a public good because they bring about more public goods

32
Q

effects of working conditions on labor supply, wages, and final costs to producers

A

the labor supply will increase, this will bid down the wages paid, thus in the long run employers may save money by paying less in wages (not always the case and not infinitely)

33
Q

hidden costs

A

economic sacrifices based on private knowledge, knowledge that is not easily factored into any price or wage (investing in workplace safety)

34
Q

what is the initial and final effect of a tax on employees

(income tax)

A

show on a graph and explain chap 8 section 2

  • employers will not change pay at first
  • the actual wage received by employees is smaller due to tax, so leisure seems more valuable and the supply of labor will drop (this means huge deadweight losses and lack of efficiency in market)
  • the corollary of excess demand (because employers need labor) they will offer greater wage to get more labor
  • so effectivly both employer and employee pay for the tax
35
Q

what is the initial and final effect of a tax on employers

labor sales tax

A

show on a graph and explain chap 8 section 3
- initially the tax will mean that the employers will have to pay more per hour of labor, thus they will reduce demand for employees or hours of labor - this causes corollary of excess supply -to great a supply of labor
and deadweight losses inefficiency in the market
_ to try and remedy this the according to the corollary of excess supply the wage of the laborers will fall to minimize the effect of the tax on employers and since there is an excess supply of laborers who want a job they will take the decrease in pay.

36
Q

rationing by waiting

A

adding the cost of queuing times to the total cost ( calculated by the amount you could make doing something other than waiting)

37
Q

the law or regulatory contagion

A

when one regulation causes problems so more regulations are imposed to solve those regulations and on and on

38
Q

tax wedge

A

The difference between before-tax and after-tax wages. The tax wedge measures how much the government receives as a result of taxing the labor force.

39
Q

regulation wedge

A

the gap between market supply and demand at a price ceiling or floor

40
Q

merit good

A

good that provides for some objectively valuable need regardless of willingness to pay,
examples include food stamps and education - they are often controversial

41
Q

What is the equation for the expected profits of subsided accounting? (this is how to calculate the per-unit tax in amount of the externality)

A

Expected Profit= PQ - cQ + subsQ for subsidies

Expected Profit= PQ - cQ - taxQ for taxes

42
Q

What is tabula rasa?

A

“blank slate”

43
Q

what is the term for when…
while searching for more information, the marginal value of knowledge acquired will start high and gradually decreaseas more knowledge is acquired. This works for a rational person, particularly if the knowledge is factorial.

A

Diminishing Marginal Utility

44
Q

The expected costs of alternative uses of time, among other reseources, devoted to obtaining more knowledge

A

Search cost

45
Q

A person who searches up to the point where marginal cost=marginal benefit

A

a rationally ignorant person

46
Q

common knowledge

A

facts that are universally known

47
Q

knowledge known to a few people—most knowledge is this type

A

private knowledge

48
Q

knowledge that is split up unevenly between all people

A

asymmetric information

49
Q

when people have incentives to reveal economic inflation

A

incentive compatibility

50
Q

the revelation of private information that matters to a market exchange

A

signalling

51
Q

commodities whose use values are hard to comprehend and assess in advance

A

experience goods

52
Q

goods that can be understood or researched in advance

A

search goods

53
Q

goods where it is unclear if it is good even after being consumed

A

credence good

54
Q

when people mistakenly reject correct information

A

Type I error

55
Q

when people mistakenly accept bad info

A

type II error

56
Q

plans whereby each individual plan contains relevant data from all other plans

A

knowledge compatible plans

57
Q

what happens when cantral planners coordinate more economic plans than anyone can possible hope to understand (i.e. communism)

A

Planners Curse

58
Q

what is the invisible hand of politics?

A

politicians proved the most benefit to the most people (to win elections).
Rigorous competition helps this work

59
Q

What are ways to look at government involvement in the economy?

A

Normative values, Lorenz curves, and redistributing wealth through taxes and subsidies and other regulations.

60
Q

What determines how tax burdens are distributed between employers and employees?

A

elasticity of either…if they have equal elasticities, then they likely share the tax burden equally

61
Q

corrective tax

A

taxes that we should put on natural resources, etc. Politicians should implement them, but misinformed ones dont understand why it would help.

micro economics (2 decks)

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