Chapter 4: Demand and Supply: Applications and Extensions

Surplus

A condition in which the amount of a good offered for sale by producers is greater than the amount that buyers will purchase at the existing price. A decline in price would eliminate the surplus.

Shortage

A condition in which the amount of a good offered for sale by producers is less than the amount demanded by buyers at the existing price. An increase in price would eliminate the shortage.

Laffer Curve

A curve illustrating the relationship between the tax rate and tax revenues. Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue.

Price Floor

A legally established minimum price buyers must pay for a good or resource

Black Market

A market that operates outside the legal system in which either illegal goods are sold or legal goods are sold at illegal prices or terms

Subsidy

A payment the government makes to either the buyer or the seller, usually on a per-unit basis, when a good or service is purchased or sold.

Regressive Tax

A tax in which the average tax rate falls with income. People with higher incomes will pay a lower percentage of their income taxes

Proportional Tax

A tax in which the average tax rate is the same at all income levels. Everyone pays the same percentage of income in taxes

Progressive Tax

A tax in which the average tax rate rises with income. People with higher incomes will pay a higher percentage of their income in taxes.

The actual burden of a tax is determined primarily by A. the elasticities of demand and supply. B. the number of exchanges that are eliminated from the market as a result of the tax. C. the legal (or statutory) assignment of the tax. D. none of the above.

A. the elasticities of demand and supply.

Excess Burden of Taxation

Another term for deadweight loss. It reflects losses that occur when beneficial activities are foregone because they are taxed.

Minimum Wage

Legislation requiring that workers be paid at threats the stated minimum hourly rate of pay

Average Tax Rate (ATR)

Tax liability devised by taxable income. It is the percentage of income paid in taxes.

Marginal Tax Rate (MTR)

The additional tax liability a person faces divided by his or her additional taxable income. It is the percentage of an extra dollar of income earned that must be paid in taxes. It is the marginal tax rate that is relevant in personal decision-making.

Tax Base

The level or quantity of an economic activity that is taxed. Higher tax rates reduce the level of the tax base because they make the activity less attractive.

Deadweight loss

The loss of gains from trade to buyers and sellers that occurs when a tax is imposed. The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax.

Resource Market

The market for inputs used to produce goods and services

Tax rate

The per-unit amount of th3 tax or the percentage rate at which the economic activity is taxed.

tax incidence

The way the burden of a tax is distributed among economic units (consumers, producers, employees, employers, and so on). The actual tax burden does not always fall on those who are statutorily assigned to pay the tax.

Price ceiling

a legally established maximum price sellers can charge for a good or resource.

If a government-imposed price floor legally sets the price of milk above market equilibrium, which of the following will most likely happen? a. There will be a surplus of milk. b. The quantity of milk supplied will decrease. c. There will be a shortage of milk. d. The quantity of milk demanded will increase.

a. There will be a surplus of milk.

A law establishing a maximum legal price for a good or service is known as a. a price ceiling. b. a price floor. c. a price wall. d. an equilibrium price.

a. a price ceiling

Both price floors and price ceilings lead to a. a reduction in the quantity traded. b. reductions in quality. c. surpluses. d. shortages.

a. a reduction in the quantity traded.

If a $500 tax is placed legally (statutorily) on the buyers of new couches and as a result the price of couches at stores rises by $200, the actual burden of the tax a. is $200 on couch buyers and $300 on sellers. b. falls completely on couch sellers. c. falls completely on couch buyers. d. is $300 on couch buyers and $200 on sellers.

a. is $200 on couch buyers and $300 on sellers.

The average tax rate is defined as a. tax liability divided by taxable income. b. the average number of times a circulating dollar is taxed during a year. c. the change in the tax rate as income increases. d. the change in the tax rate as income decreases.

a. tax liability divided by taxable income.

A new law requiring plumbers to pass strict certification tests that reduce the number of plumbers would a. decrease the wage rate of plumbers. b. increase the wage rate of plumbers. c. increase the employment of plumbers. d. cause no change in the labor market for plumbers.

b. increase the wage rate of plumbers.

A progressive tax a. is any tax in which the dollar amount of taxes paid increases with income. b. is one that taxes those with higher incomes at a higher rate than those with lower incomes. c. takes a higher percentage of income in the form of taxes from those with lower incomes than from those with higher incomes. d. takes a similar percentage in the form of taxes from those with higher incomes as it does from those with lower incomes.

b. is one that taxes those with higher incomes at a higher rate than those with lower incomes.

When the price of a good is legally set below the equilibrium level, a shortage often results. This shortage a. is the result of a shift in supply. b. occurs because the price ceiling prevents the market mechanism from establishing an equilibrium price. c. is the result of a shift in demand. d. is a temporary failure of the market mechanism.

b. occurs because the price ceiling prevents the market mechanism from establishing an equilibrium price.

Other things constant, as the price of a resource increases, a. the price of the product the resource helps to produce falls. b. the quantity of the resource demanded falls. c. the quantity of the resource supplied falls. d. there is less of an incentive for users of the resource to find substitute resources.

b. the quantity of the resource demanded falls.

According to the Laffer curve, a. when marginal taxes are low, an increase in tax rates will probably cause tax revenues to decline. b. when marginal tax rates are high, a reduction in tax rates may increase tax revenue. c. an increase in tax rates will always cause tax revenues to increase. d. when marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to increase.

b. when marginal tax rates are high, a reduction in tax rates may increase tax revenue.

The imposition of price ceilings on a market often results in a. an increase in investment in the industry. b. a persistent surplus in the market. c. an increase in expenditures in the black market. d. lower prices being offered on the black market.

c. an increase in expenditures in the black market.

An increase in the number of students graduating with a major in psychology would result in a. a decrease in the demand for psychologists that would decrease the wage of psychologists and decrease the number employed. b. an increase in the demand for psychologists that would increase the wage of psychologists and increase the number employed. c. an increase in the supply of psychologists that would decrease the wage of psychologists and increase the number employed. d. a decrease in the supply of psychologists that would increase the wage of psychologists and decrease the number employed.

c. an increase in the supply of psychologists that would decrease the wage of psychologists and increase the number employed.

A market that operates outside the legal system, either by selling illegal goods or by selling goods at illegal prices is referred to in economics as a a. resource market. b. criminal market. c. black market. d. gray market.

c. black market

A deadweight loss results from the imposition of a tax on a good because the tax a. induces the government to increase its expenditures. b. causes a disequilibrium in the market. c. reduces the quantity of exchanges between buyers and sellers. d. imposes a loss on buyers that is greater than the loss to sellers.

c. reduces the quantity of exchanges between buyers and sellers.

A regressive tax a. taxes individuals with higher incomes at a higher rate than individuals with lower incomes. b. takes a similar percentage of income at all income levels. c. takes a higher percentage of the income of those with lower incomes than for those with higher incomes. d. taxes savings at a higher rate than consumption.

c. takes a higher percentage of the income of those with lower incomes than for those with higher incomes.

The marginal tax rate is defined as a. the change in tax liability minus the change in taxable income. b. tax liability multiplied by taxable income. c. the change in tax liability divided by the change in taxable income. d. tax liability divided by taxable income.

c. the change in tax liability divided by the change in taxable income.

A price ceiling set below an equilibrium price tends to cause persistent imbalances in the market because a. Quantity demanded exceeds quantity supplied but price cannot fall to remove the surplus. b. Quantity supplied exceeds quantity demanded but price cannot rise to remove the shortage. c. Quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus. d. Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

d. Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

If drugs such as marijuana and cocaine were legalized, it would be likely that a. there would be less violence occurring in drug transactions. b. their prices would decrease. c. there would be a reduction in tainted or poor quality drugs. d. all of the above.

d. all of the above.

A payment the government makes to either the buyer or seller, usually on a per-unit basis, when a good or service is purchased or sold is called a Select one: a. tax. b. interest rate. c. black market. d. subsidy.

d. subsidy.