Micro Midterm 2

Labor supply shifters

- Changing wages in other occupations - Changing number of potential workers - Changing benefits of not working - Nonwage benefits - Subsidies - Income taxes

5 Arguments Against Trade

- National security requires that we produce strategically important goods ourselves. (don't want to be reliant on someone who doesn't have our best interests at heart) - Protection can help infant industries develop. - Anti-dumping laws prevent unfair competition. (sometimes a foreign company will temporarily charge extremely low prices—effectively "dumping" their goods on the U.S. market—so that they can drive their U.S. competitors out of business. If successful, this would lead to less competition and higher prices in the long run, which would be bad for American consumers.) - Trade shouldn't be a way to skirt regulations. - Foreign competition may lead to job losses.

Why the market labor supply curve is upward sloping

- New people may be induced to enter the workforce - Existing workers may put in more hours - Some people may switch occupations

What shapes your comparative advantage?

- relatively abundant inputs - specialized skills - benefits of mass production

3 Facts abt Public Goods

1) Just because the government provides it, doesn't mean that it is a public good. 2)Just because something is a public good doesn't mean that the government should fund it. Savvy policymakers apply the cost-benefit principle, making public investments for which social benefits exceed social costs 3)Just because the government should fund a public good, doesn't mean that the government should provide it.

Critiques of Economic Efficiency

1. Distribution matters, and so it's also important to account for equity 2. Willingness to pay reflects ability to pay, not just marginal benefit. 3. The means matter, not just the ends. Economic efficiency is all about outcomes, but some people think that what matters more is the process.

5 Sources of Market Failure

1. Market Power 2. Externalities 3. Information Problems 4. Irrationality 5. Government Regulations

Corrective Taxes and Subsidies

A corrective tax (A tax designed to induce people to take account of the negative externalities they cause.) can induce people to take account of the negative externalities they create. The idea is that even if people ignore the external costs they impose on bystanders, they'll pay attention to a tax. Lawsuits, norms, and social sanctions are like corrective taxes.Subsidies can help people internalize the benefits of their actions to others. Just like corrective taxes, corrective subsidies are designed to induce people to take account of the positive externalities they cause.

economic efficiency

An outcome is more economically efficient if it yields more economic surplus. Increasing economic efficiency rarely makes everyone happy. It does mean, however, that gains in economic surplus to those who are helped are larger than the declines in surplus among those who are harmed.

The problem of market power

Arises when markets don't meet the perfectly competitive ideal of many sellers selling identical products. Instead, most markets are dominated by only a handful of companies.this leads consumers to buy a smaller quantity. The result is that market power leads to underproduction as businesses with market power tend to produce less than the efficient quantity.

Backward-Bending Supply Curve of Labor

As the wage rises, the quantity of labor supplied may eventually decline; substitution effect is overpowered by the income effect

How to solve common resource problems

Assign ownership rights to solve the tragedy of the commons.Ownership rights can help by facilitating successful private bargaining. The new owner of the commons might sell the right to graze to shepherds with limits on their maximum number of sheep.

Voluntary exchange and what it ensures

Buyers and sellers exchange money for goods only if they both want to. Voluntary exchange ensures both buyer and seller enjoy gains from trade.

Labor demand shifters

Changes in demand for your product, Changes in the price of capital, Better management and productivity gains, Nonwage benefits, subsidies, and taxes

Private Bargaining

Get all the interested parties in a room—make sure to include both the bystanders who are affected by an externality and those who cause it—and give them an opportunity to negotiate with each other. Often the solution will involve some kind of side payment. Here's the idea: If someone else's actions harm you, you can pay them to do something else instead. For instance, if your neighbor's loud music prevents you from sleeping, you could offer them $5 to turn it down. Strategic investments and mergers are also a type of private bargaining.

Rational Rule for Employers

Hire additional workers as long as their marginal revenue product is greater than (or equal to) the wage.

Opportunity cost formula

Hours this task takes/hours required to produce alternative output

Coase Theorem

If bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains.

Import vs Export

Import: To buy goods or services from foreign sellers. Export: To sell goods or services to foreign buyers.

Globalization and Income Inequality

International trade is raising income inequality within the United States. Not all workers in a country benefit from international trade, as it raises some wages while lowering others. Globalization reduces the wages of workers in import-competing sectors, and in the United States, these sectors tend to employ a lot of less-educated workers.

How do you decide between a corrective tax and quantity regulation?

Know the marginal external cost: use it as the basis for setting your corrective tax and the market will find the socially optimal quantity Know the socially optimal quantity instead: use that in setting your quota

Negative vs Positive Externalities

Negative: An activity whose side effects harm bystanders Positive: activities whose side effects benefit bystanders

Is price change an externality>

No! Neither potential buyers nor potential sellers are bystanders—they're the decision makers! And price changes aren't a side effect of their actions, but rather the focus of their negotiations.

Efficient Production

Occurs when we produce a given level of output at the lowest possible cost. This requires allocating production so that each item is produced at the lowest marginal cost. Perfectly competitive markets ensure efficient production so that every good is produced by the supplier who can do so at the lowest possible marginal cost. The goal is to get the desired quantity in a way that MC1=MC2

Nonexcludable good

People cannot easily be excluded from using a good.

Specialization

People focus on specific tasks, spending more of their time on what they're relatively good at, and less of their time doing other stuff. Comparative advantage explains how you benefit from specializing in some tasks and trading with others.

Rational Rule for Society

Produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost. We've discovered something pretty remarkable—a simple way to find the socially optimal outcome. It occurs at the quantity where: Marginal social benefit = marginal social cost

Total external surplus

Producer Surplus + Consumer Surplus - External Cost

Government Support for Public Goods

Public goods create positive externalities for people who don't contribute to them since they can't be excluded from enjoying the good. The heart of the free-rider problem is that businesses can't force people to contribute toward public goods they benefit from. And like positive externalities more generally, that means that the equilibrium quantity will be below the socially optimal quantity. This brings us to our fifth solution for externalities: Government can help pay for public goods.

What is essential to measuring deadweight loss?

Quantities rather than prices are essential to measuring deadweight loss. Once the quantity has been determined, the price only redistributes economic surplus. The buyer's loss is the seller's gain, and the net effect is that total amount of economic surplus, which is shared by buyers and sellers, remains unchanged.

What drives international trade?

Specializing according to comparative advantage can give us both more stuff. Comparative advantage yields a pretty stark piece of advice: Produce what you're good at and buy what you aren't. Applied to international trade, this says to export the stuff you can produce at the lowest opportunity cost, and import the other stuff. In reality, that advice is a bit too stark, because there's one more factor to consider: trade costs.

Absolute Advantage

The ability to do a task using fewer inputs. Tells you who's best at a task, but not who should do the task.

Gains from trade

The benefits that come from reallocating resources, goods, and services to better uses. And that's what markets do: They reallocate stuff—resources, goods, and services—to better uses, generating gains from trade. Gains from trade are an incentive for people all around the world to focus on what they're best at, and rely on others for the other stuff.

consumer surplus

The economic surplus you get from buying something; You gain consumer surplus when you buy something for a cheaper price than the marginal benefit you get from it. Consumer surplus is your marginal benefit minus the price. AKA the area below the demand curve and above the price out to the quantity sold.

Producer Surplus

The economic surplus you get from selling something; = Price seller is paid- marginal cost of providing it. the area below the price and above the supply curve, out to the quantity sold.

Cap and Trade

The government issues each business a number of permits, where each permit gives its holder the right to produce a certain quantity of output. Businesses can trade these permits. This lets the government correct the negative externality by setting a maximum quantity of output, while still allowing market forces to redistribute production toward more efficient producers and away from their inefficient rivals.

Globalization

The increasing economic, political, and cultural integration of different countries.

comparative advantage

The person with the lower opportunity cost of completing a particular task has it. It's comparative because opportunity cost compares what you can produce if assigned one task with what you would produce if you spent that time on another task. And it's an advantage, because a lower opportunity cost means that you give up less to get a task done and so it's more efficient for you to do that task. You should allocate each task to the person with the lowest opportunity cost.

Efficient Quantity

The quantity that produces the largest possible economic surplus.

Other than economic efficiency, what do real-world debates include?

They also focus on equity, which is about assessing whether a policy will yield a fair distribution of economic benefits.

The rational rule for markets

To increase economic surplus, produce more of an item if the marginal benefit of one more is greater than (or equal to) its marginal cost. Thus, the efficient quantity occurs when marginal benefit = marginal cost.

The Rational Rule for Workers

Work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure.

World supply and world demand

World supply describes the total quantity of shirts produced by all manufacturers in the world at each price. Similarly, world demand describes the total quantity of shirts demanded across all shirt buyers in every country, at each price.

The externality problem

Worse outcomes occur when people don't take into account the interests of bystanders.

For which sales do you earn a producer surplus?

You earn producer surplus on all but your last sale.

The World Trade Organization

a forum for global agreements to reduce trade barriers

externality

a side effect on bystanders whose interests aren't fully taken into account. they lead to market failure, producing inefficient outcomes that aren't in society's best interest.

free-rider problem

an externality problem that occurs, when people cannot be easily excluded from using something, in which someone can enjoy the benefits of something without bearing the costs.

government failure

an inefficient allocation of resources caused by government intervention in the economy. Often this arises because politicians and bureaucrats make choices that aren't in the public interest.

The problem of private information

arises when you're worried that the folks you're doing business with know something you don't. there's not enough information to guide buyers/sellers of a good.

The problem of externalities

arises whenever the choices that buyers and sellers make have side effects on others. Externalities aren't always negative. Some activities have side effects that help other people

Marginal Revenue Product of Labor (MRPL)

change in revenue that results from employing an additional unit of labor.

Exchange rate manipulation

changes the price of your goods in foreign markets

Economic Surplus

consumer surplus + producer surplus which equals (marginal benefit - marginal cost). Economic surplus is the area between the demand and supply curves.

efficiency criterion

favors the outcome that yields the most economic surplus

Red tape/Import quotas

like a tariff because it raises costs, but it doesn't raise revenue

substitution effect

measures how people respond to a change in relative prices. When your wage goes up, the opportunity cost of an hour of leisure goes up.

income effect

measures how people's choices change when they have more income) says higher income makes leisure more attractive

Does price change impact total economic surplus?

no

Club Goods

non-rival and excludable. Businesses try to turn public goods into club goods.

Public goods

nonrival and nonexcludable

Freerider problem w/ nonrival vs rival goods

nonrival: free riders enjoy positive externalities without hurting others. rival: it's easy to exclude those who don't pay, there's no free-rider problem.

efficient allocation

occurs when goods are allocated to create the largest economic surplus from them, which requires that each good goes to the person who gets the highest marginal benefit from it (at least as measured by how much they are willing to pay).

Market failure

occurs when the forces of supply and demand lead to an inefficient outcome. Market failures are common, and their frequency and severity should temper your enthusiasm for market forces.

nonrival good

one person's enjoyment or use of it doesn't subtract from another person's enjoyment or use

Solutions to externality problems

private bargaining, corrective taxes and subsidies that change the price, cap-and-trade programs that change the quantity, and regulations. All of these solutions share the same basic goal: To get buyers and sellers to act as if they're taking marginal external costs and benefits into account.

Private vs Society Interest

private interest - all about the costs and benefits that you personally incur. society's interest - includes all costs and benefits, whether they accrue to you or to others.

Private Goods

rival and excludable

Common reasources

rival and non-excludable

The problem of irrationality

sometimes people make decisions that aren't in their best interests. If buyers don't systematically follow the Rational Rule for Buyers, their demand decisions may no longer reflect their marginal benefits, and so an efficient allocation is unlikely. And if suppliers don't systematically follow the Rational Rule for Sellers, their supply decisions may not be driven by their marginal costs, and so efficient production is unlikely

tariffs

taxes on imported goods that increase trade costs

Marginal Product of labor

the change in output that results from employing an added unit of labor

deadweight loss

the difference between the largest possible economic surplus (which occurs at the efficient quantity), and the actual level of economic surplus. Looks like an arrowhead pointed at the efficient quantity.

Trade Costs

the extra costs—aside from the price—incurred as a result of buying or selling your goods internationally rather than domestically. determine whether it's worth buying or selling internationally.

marginal external costs

the extra external costs imposed on bystanders from one extra unit.

socially optimal outcome

the outcome that's most efficient for society as a whole, taking account of all the costs and all the benefits, whether they accrue to buyers, sellers, or bystanders

What do imports lead to?

the price declines to the world price, less domestic production, and more domestic consumption. Imports fill the gap between the quantity demanded and the quantity supplied and raise economic surplus. American consumers gain when they import their shirts, because they get lower prices. But American producers lose, because foreign competition forces them to lower their prices or lose customers. The gains to buyers from allowing imports exceed the losses to sellers

What do exports lead to?

the price raises to the world price, more domestic production, and less domestic consumption. Exports fill the gap between the quantity supplied and the quantity demanded. More expensive exports raise producer surplus. Domestic consumers lose consumer surplus due to foreign competition. The benefits exceed the costs, and exports raise total economic surplus.

World price

the price that a traded good sells at in the world market. determined by world demand and supply

marginal social benefit

the sum of the marginal benefit accruing to the buyer and the marginal external benefit

marginal social cost

the sum of the marginal private costs paid by the seller and the marginal external costs borne by bystanders

The tragedy of the commons

the tendency of a rival and non-excludable resource to become depleted because people act from self-interest for short-term gain

The problem posed by government regulations

they can impede market forces. sometimes government regulations create their own distortions, pushing the market away from the efficient quantity.

efficient outcome

when an allocation of resources maximizes total economic surplus