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ECO2000-01 exam 2.docx

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Florida State University
ECO 2000
Joab Corey

START FOR EXAM 2 (cumulative)  The Labor Market o Price for labor is called the wage (W) o 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 curve 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.  Linking the Markets o When the demand for a product changes, the demand for the resources used to produce it will change in the same direction o Examples) Demand of cars affects the amount of workers to make and produce these cars.  Price floor: A legally established minimum price buyers must pay for a good or resource o A price floor above equilibrium price creates a surplus o A price floor below equilibrium price does nothing o Can’t go below the floor, not possible. (surplus of supply) o Surplus of labor (aka Unemployment) o Application: Minimum Wage  The minimum wage is an example of a price floor.  Raising minimum wage increases excess labor supply (unemployment).  Application: Minimum Wage  Costs: o Increases unemployment among the most unskilled workers (teens)  Benefits: o Those who keep their jobs get paid more  Price ceiling: A legally established maximum price sellers can charge for a good or resource o A price ceiling below market equilibrium price creates a shortage o A price ceiling above market equilibrium price does nothing o Application: Disaster Markets o Application: Rent Control o Application: Rent controls lead to shortages as well as  A decline in the supply of future rental housing  A decline in quality of rental housing  Non-price methods of rationing  Inefficient housing match-ups o Price Gauging for generators example) Cost Benefit Less people are going to be able to Those who get the items, get them get the generators cheaper Less efficient allocation of resources (maybe people don’t need it as much) o Rent Control example) (lead to shortages as well as)  Decline in the supply of future rental housing  Decline in quality of rental housing  Non-price methods of rationing  Inefficient housing match-ups  Black markets  Black Markets o Should we legalize drugs? o What are the costs and benefits? Costs Benefits More people will do drugs and Less prisoners (more efficient easier to get use of prison resources) Loss in drug enforcement jobs Medicinal purposes Lack of productivity Better quality / safer drugs (regulation) More domestic issues Tax revenue Cost of rehab/health issues Decrease in crime New jobs Less police corruption o Should we legalize prostitution? o What are the costs and benefits? Costs Benefits Easier to come by/ more Safer and less potent people use prostitution services prostitutes (regulated) Less productive society Less crime and violence in the prostitution service Better use of legal resources Less police corruption Tax revenue Legal Illegal STD Rate 0% regulated check Close to 100% HIV Rate 0% regulated check 20-52%  Impact of a Tax o A tax on a product will cause the supply curve to shift left by the amount of the tax. o Raises the price that buyers pay o Reduces the amount sellers receive o Reduces the quantity sold o Increases government revenue o Creates deadweight loss  Deadweight loss: The loss to society that results from the loss of gains to trade that does not occur because a tax was imposed.  Tax Incidence: The way the burden of a tax is distributed among economic units (also known as the tax burden) o It does not depend on whom the tax is imposed.  Tax Incidence o Tax incidence does depend on elasticity:  The burden of the tax will fall on those who are relatively inelastic. o Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic.  The Tax System o Average tax rate (ATR): the percentage of income paid in taxes o ATR = tax liability / taxable income o Example) Question that half the class misses *** pay attention Makes Taxed ATR Type $100 $5 5% Original $200 $20 10% Progressive $200 $5 2.5% Regressing $200 $10 5% Proportional o Determined by the average tax rate (ATR) not the dollar amount! PERCENT! o 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 levels o Marginal tax rate (MTR): The additional tax liability a person faces divided by his or her additional taxable income. o MTR = change in tax liability / change in taxable income Makes Taxes ATR MTR $20,000 $1,000 5% Starting point $30,000 $3,000 10% 20% (to gov’t) $40,000 $10,000 25% 70% (to gov’t) *Note: Marginal tax rates are what is important in personal decision making. It is the amount of tax that isn’t kept by you but is given to the government.  Fairness and Efficiency o Is the progressive tax system economically efficient?  No, tend to not be economically efficient… The higher the taxes they have to pay the less eager they are to work. o Is the progressive tax system fair?  Not sure…  IRS EXAMPLE: o Top 1% = pay 39.9% taxes o Top 5% = 60.1% of taxes o Bottom 50% = 3%  Life: o Joab:  $$$, 0 children  80 hours a week o Joab Sister:  $$$, 3 children  20 hours a week  The Laffer Curve: A curve illustrating the relationship between the tax rate and tax revenue. o Higher tax rates will not always lead to more tax revenue!! o  Subsidies o Subsidy: A payment the government makes to either the buyer or seller when a good or service is purchased or sold. *Note: Subsidies are costly (example. Farm Subsidies) REVIEW 1. Know why supply curve is upward sloping and demand curve is downward sloping 2. Find producer and consumer surplus 3. Know the shifters of demand Generated by CamScanner 4. Know the shifters of supply 5. Know the characteristics of market equilibrium 6. Be able to do single and double shifts of demand and supply curves 7. Know why the labor demand curve is downward sloping and the labor supply is upward sloping 8. Know the effects of price controls 9. Understand the impact of a tax 10. Be able to calculate average tax rate and marginal tax rate 11. Understand the Laffer Curve 12. Understand the impacts of a subsidy SECTION II  Overview o The importance and incentives of private property rights o How competition leads to economic progress o The importance of limiting government regulation o An efficient capital market o Monetary stability and inflation o Why low tax rates are important for economic progress o Discuss more fully the importance of free trade o 200 Countries in 200 Years  #1 The Legal System o The foundation for economic progress is a legal system that protects privately owned property rights and enforces contracts in an evenhanded manner o Private property rights involve: 1. The right t
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