ECC1000 Chapter Notes - Chapter 3: Comparative Advantage, International Trade, Economic Surplus

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7 Jun 2018

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PRINCIPLES OF MICROECONOMICS (ECC1000) – TOPIC SUMMARIES

TOPIC 2 – HOW MARKETS WORK

CHAPTER 6 – Markets in action

Housing markets and rent ceilings

• A decrease in the supply of housing raises rents

• Higher rents stimulate building, and in the long-run, the quantity of housing increases

and rent falls

• A rent ceiling that is set below the equilibrium rent creates a housing shortage,

wasteful search and a black market

The labour market and the minimum wage

• A decrease in the demand for low-skilled labour lowers the wage rate and reduces

employment

• The lower wage rate encourages peoples with low skill to acquire more skill, which

decreases the supply of low-skilled labour and, in the long-run, raises their wage rate

• A minimum wage set above the equilibrium wage rate creates unemployment and

increases the amount of time people spend searching for a job

• A minimum wage hits low-skilled young people hardest

Taxes

• A tax raises the price but usually by less than the tax

• The shares of a tax paid by buyers and by sellers depend on the elasticity of supply

and demand

• The less elastic the demand and the more elastic the supply, the greater is the price

increase, the smaller is the quantity decrease, and the larger is the share of the tax paid

by buyers

• If demand is perfectly elastic or supply is perfectly inelastic, sellers pay the entire tax.

(If demand is perfectly inelastic or supply is perfectly elastic, buyers pay the entire

tax)

Production quotas

• A production quota limits the quantity that firms are permitted to produce

• A production quota leads to inefficient underproduction, which raises the price

Markets for illegal goods

• Penalties on sellers of an illegal good increase the cost of selling the good and

decrease its supply. Penalties on buyers decrease their willingness to pay and decrease

the demand for the good

• The higher the penalties and the more effective the law enforcement, the smaller the

quantity bought

• A tax that is set at a sufficiently high rate will decrease the quantity of an illegal good

consumed, but there will be a tendency for the tax to be evaded

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Document Summary

If demand is perfectly elastic or supply is perfectly inelastic, sellers pay the entire tax. (if demand is perfectly inelastic or supply is perfectly elastic, buyers pay the entire tax) Production quotas: a production quota limits the quantity that firms are permitted to produce, a production quota leads to inefficient underproduction, which raises the price. Markets for illegal goods: penalties on sellers of an illegal good increase the cost of selling the good and decrease its supply. Markets and the distribution of gains and losses. If, without trade, the domestic price of a good exceeds the world price, a country gains from importing that good. Domestic production and producer surplus decrease, consumption and consumer surplus increase, and total surplus increases. If, without trade, the domestic price of a good is below the world price, a country gains from exporting that good.

Related Questions

1.Assume that there was a 10 per cent increase in the price of all goods in 2010; if the base year is 2009, then the price index in 2010 will be Select one:

a. 1100. b. 200. c. 90. d. 110.

2.The value of your money income, in terms of buying goods and services, is referred to like your money's

a. transaction cost.

b. rigidity factor.

c. staying power.

d. purchasing power.

3. Unemployment that is caused by business recessions is called

a. frictional unemployment.

b. seasonal unemployment.

c. structural unemployment.

d. cyclical unemployment.

4.All of the following are examples of a flow EXCEPT

a. the current unemployment rate.

b. a person who is fired from a job.

c. an individual who voluntarily leaves the labour force.

d. a new entrant into the labour force.

5.Which one of these factors plays a role in determining the extent and duration of frictional unemployment?

a. the ease with which job seekers can obtain information about job openings

b. the degree to which the overall level of business activity fluctuates up and down

c. the extent to which government legislation requires firms to provide health insurance for employees

d. the education and skill levels of labour force participants

6.Since 1950, the labour force participation rate in the United States

a. of men and women both decreased.

b. of men decreased and for women increased.

c. of men increased and women decreased.

d. of men and women both increased.

7.Increases in the duration of unemployment may

a. reflect a general downturn in economic activity that depresses job openings.

b. increase the unemployment rate.

c. All of these.

d. increase the number of discouraged workers.

8. A discouraged worker is someone who

a. is unemployed.

b. has been fired.

c. is not in the labour force.

d. is employed.

9.In the United States, the wage floor legislated by the government below which it is generally illegal to pay workers is known as

a. the going wage.

b. the employment gap.

c. the minimum wage.

d. the wage ceiling.

10. Which of the following is an effect of a minimum wage law that establishes a ceiling wage below the current market-clearing wage?

a. Surplus labour, or unemployment

b. A decrease in the market-clearing wage

c. A decrease in the quantity of labour supplied

d. An increase in the quantity of labour supplied

11. Which group of individuals most likely benefits from rent controls?

a. low-income wage earners who fail to obtain rental housing

b. the unemployed who fail to obtain rental housing

c. single-parent families without savings or other financial assets who fail to obtain rental housing

d. upper-income professionals who rent apartments at the price ceiling rate

blushsardine736

1.) An excise tax on a good typically reduces the net price received by the seller. (TRUE/FALSE)

2.) The burden of an excise tax on gasoline falls entirely on consumers of gasoline. (TRUE/FALSE)

3.) Rent controls are one of the few examples of a price floor in market economies. (TRUE/FALSE)

4.) Imposing a price ceiling below the equilibrium price of a good often leads to_____.

A) A greater supply of the good

B) A black market for the good

C) A rightward shift of the supply curve for the good.

D) A leftward shift of the demand curve for the good.

E) All of these

5.) Which of the following is true of price floors and ceilings?

A) Lead to the same price and quantity as in competitive market.

B) Lead to technical efficiency

C) Cause the demand curve to shift left

D) Usually result from government intervention

E) Cause the supply curve to shift right.

6.) Price ceilings often lead to black markets. (TRUE/FALSE)

7.) When minimum wage is above the equilibrium wage what occurs?

A) There will be a shortage of labor

B) There will be no effect on the number of people employed

C) There will be an increase in unemployment rate

D) There will be a decrease in unemployment rate

8.) An excise tax on a good typically reduces the price paid by the consumer (TRUE/FALSE)

9.) If a price ceiling is below the equilibrium price is imposed on a market, it will cause the quantity demanded to rise and the quantity supplied to fall. (TRUE/FALSE)

10.) Price floors often lead to black markets. (TRUE/FALSE)

11.) If an excise tax is imposed on restaurant meals what occurs?

A) Fewer meals will be produced and sold

B) More meals will be produced and sold

C) Market price of the meals will fall

D) Government tax revenue will fall.

mauveyellowjacket715

PLEASE HELP WITH ONLY THE BOLDED QUESTION THANK YOU

Consider the market for new, single-family homes in New Orleans. The general demand function for new housing in New Orleans is estimated to be Qd =15-2P+0.05M+0.10R where Qd is the monthly quantity demanded, P is the price per square foot, M is average monthly income in New Orleans, and R is the average monthly rent for a three-bedroom apartment in New Orleans. Qd is measured in units of 1,000 square feet per month. 1. New housing in New Orleans is a(n) __________________ (normal, inferior) good. How can you tell from the general demand function? 2. New housing and three-bedroom apartments are _________________ (substitutes, comple- ments) in New Orleans. How can you tell from the general demand function? 3. If average monthly income is $1,500 and the monthly rental rate for three-bedroom apart- ments is $700, then the demand function for new housing in New Orleans is Qd = _____________________________________. 4. Graph the demand curve for new housing in New Orleans on the axes provided below. Label the demand curve D0. 5. What happens to demand when the following changes occur? a. b. c. d. e. The price of the commodity rises. Income decreases and the commodity is normal. Income decreases and the commodity is inferior. The price of a complement good increases. The price of a substitute good decreases. The general supply function for new housing in New Orleans is estimated to be Qs =96+2P-10PL -4PK where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month. 6. Does it make sense for PL and PK to have negative coefficients in the general supply func- tion? Explain why or why not. 7. If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is Qs = ______________________. 8. Graph the supply curve for new housing in the graph below. Label supply S0. 9. Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur? a. The price of the commodity increases. b. Government regulators outlaw the use of a technology that enables the good to be produced at a significantly lower cost. c. The prices of inputs used to produce the commodity decrease. d. The price of a commodity that is a substitute in production increases. e. Managers expect the price of the good to fall in the near future. f. As the cost of capital rises, firms in the industry stop purchasing plant and equip- ment, which allows depreciation to diminish the productive capacity in the indus- try. 10. Solve mathematically for equilibrium price and quantity. Show your work: PE = $__________ per square foot. QE = __________ square feet per month (in 1,000s). 11. Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they? 12. In equilibrium found in question 8, compute total consumer, producer, and social surpluses: CS = $____________ PS = $____________ SS = $____________ 13. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new hous- ing in New Orleans is now: Qd = _______________________. Plot this new demand curve in the figure below. Label it D'. 14. Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orle- ans is now: Qs = _______________________. Plot this new supply curve in the figure. Label the new supply curve S'. 15. After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are PE = $__________ per square foot QE = __________ square feet per month (in 1,000s) 16. Determine the effect upon equilibrium price and quantity sold if the following events occur in a particular market: a. The price of a substitute good (in consumption) decreases. b. Consumersâ income increases and the good is inferior. c. Government regulators decide to outlaw a cost-reducing technological process in order to protect the environment. d. The price of a complement good (in production) increases. e. The price of inputs used to produce the good decrease. f. Consumers expect that the price of the good will fall in the near future. g. It is widely publicized that consumption of the good is helpful in prevent- ing cancer. h. The price of a substitute good (in production) decreases. 17. Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two variables is indeterminate. a. Both a and h in problem 15 occur simultaneously. b. Both b and e in problem 15 occur simultaneously. c. Both d and g in problem 15 occur simultaneously. d. Both f and c in problem 15 occur simultaneously.

ECC1000 Chapter Notes - Chapter 3: Comparative Advantage, International Trade, Economic Surplus

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