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Midterm #2 Review the only important things from each chapter. I compressed the lectures into this. diagrams included, has some shorthand. includes helpful acronyms

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Olivia Ozlem Mesta

Chapter 7 Demand Willingness to pay (WTP): how much a buyer values a good and is the max they will pay for it • Demand curve looks like staircase, is Qd for each given price (how many ppl's WTPRaising or lowering the quantity of a good would not increase total surplus. (it's at it's highest) -->The goods are being produced by the producers with lowest cost. -->The goods are being consumed by the buyers who value them most highly. • Free market is very efficient, because it meets all three criteria • Laissez faire, government should let market be because they can't improve it • compared to non-market economies, much better (dictator can't know all these numbers) Chapter 8 Tax Revenue = Tax x Quantity sold (rectangle) Deadweight loss = The amount of TS lost due to tax (not the revenue) (little triangle) • amount made by government < drop of TS (due to deadweight loss) • government should tax products which have small DWL Inelastic Supply/Demand • Tax creates small DWL (because line is very steep) Elastic Supply/Demand • Tax creates large DWL (because line is very flat) low taxes • raising: not that bad (raises revenue for gov't) • lowering: not that good high taxes • raising: very bad (lowers revenue for gov't) • lowering: very good Laffer Curve: (parabola opening down) shows the relationship between tax size and revenue Chapter 9 World Price: the price that prevails in the world market Domestic Price: price in the country without trade PdPw then no comparative advantage, you should import (free trade) • CS rises • PS falls • TS rises Price Taker: small economy, it's actions don't affect world price • if free trade is allowed, Pd = Pw (like BaPb since 600k example) Net Gain From Trade: the amount of surplus gained from free trade (little triangle between Supply and Demand curves, above) Since the winners are usually spread very thin, you can't really see the gains that well Since the losers are usually concentrated very acutely, they feel the effects heavily • Tariffs lower imports, allow domestic sellers to raise prices • good for seller's welfare, bad for buyer's welfare • profit for gov't • they create deadweight loss from ◦ over production ◦ under consumption • Import quota lowers imports, allow domestic sellers to raise prices • good for seller's welfare, bad for buyer's welfare • profit for holder of import license (if gov't charges for import license, they make money too) • create deadweight loss Liberalize Trade through: Unilateral: country lowers restrictions on its own Multilateral: country lowers restrictions with other countries doing the same (NAFTA) • may result in “freer” trade, but failure may cause more restrictions Chapter 10 Externality: the uncompensated impact of one person’s actions on the well-being of a bystander. Negative: when it has an adverse effect on others pollution-->causes strain on environment which everyone must pay for market produces larger quantity than is socially acceptable Positive: when it has a beneficial effects on others education-->lower crime, lower unemployment etc.
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