chapter 6, 7, 8, 9, 11

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formula to find tax burden on consumers

Pc-P*

how to calculate the amount of tax on a graph

Pc-Ps

total revenue formula

Price x Quantity

average total cost=

TC/Q

factors that determine elasticity

1. Availability of Close Substitutes 2. Necessity vs. Luxury 3. Taxes/Subsidies 4. Definition of the Market 5. Time Horizon

sources of comparative advantage

1. differences in factor endowments 2. differences in climate 3. differences in technology

When elasticity is less than 1

inelastic

challenges to trade

inequality, outsourcing, and environmental concerns

when income elasticity of demand is negative

inferior goods

free trade is accomplished through

international free trade agreements

constant return to scale

long-run average total cost is constant as output increases

Elasticity

measures how sensitive quantity demanded is to change in price

income elasticity of demand

measures how sensitive the quantity demanded of a good is to changes in income

cross-price elasticity of demand

measures how sensitive the quantity demanded of good A is to the price of good B

tariff

tax on imports

formula to find tax burden on producers

P*-Ps

when demand is elastic and price decreases, total revenue ___

increases

when demand is inelastic and price increases, total revenue ___

increases

an inelastic demand curve is

steep; small quantity change; necessity

Formula Cross-price Elasticity of Demand

% change in Qa / % change in Pb

formula for income elasticity of demand

% change in Qd / % change in income

Formula of price elasticity of supply

% change in Qs / % change in P

midpoint method formula

(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]

average fixed cost=

FC/Q

average variable cost=

VC/Q

explicit cost

a cost that involves spending money

quota

a limitation on imports

carbon tax

a tax on a good/service according to the amount of CO2 created by production

excise tax

a tax on the production or sale of a good

export market with world price, the line is

above equilibrium

marginal benefit

additional benefit derived from producing 1 or more unit

marginal cost

additional cost incurred by producing 1 more unit

decreasing marginal cost

additional units that cost less

increasing marginal cost

additional units that cost more

constant marginal cost

additional units that cost the same

diminishing returns

as more variable input is added, extra output declines

Diseconomies of Scale (decreasing returns to scale)

as quantity increases, long run average cost increases

economies of scale (increasing returns to scale)

as quantity rises, long run average total cost falls

if MC is below average total cost,

average total cost is falling

if MC is above average total cost,

average total cost is rising

import market with world price, the line is

below equilibrium

A tariff is most likely to _____ prices and _____ domestic consumption of the good or service being protected.

increase;decrease

The dormitories of Eastland College represent part of its

capital

marginal benefit=

change in total benefit/change in quantity

marginal cost=

change in total cost / change in quantity

Countries that engage in trade will tend to specialize in goods in which they have _____ and will _____ those goods

comparative advantage; export

autarky

country does not trade with other countries

wages in the import market with world price ___

decrease

when demand is elastic and price increases, total revenue ___

decreases

when demand is inelastic and price decreases, total revenue ___

decreases

If MB is less than MC

do less

If MB > MC

do more

implicit cost

does not require an outlay of money

when elasticity is greater than 1

elastic

proportional tax (flat tax)

everyone pays the same % of their income to taxes

opportunity cost=

explicit cost + implicit cost

total cost=

fixed cost + variable cost

an elastic demand curve is

flat; large quantity change; luxury

optimal quantity

generates highest possible total profit

a perfectly elastic demand curve is

horizontal; infinite

tariffs are only put on ___

imports

wages in the export market with world price ___

increase

What is the government's tax goal

minimize DWL and change quantity/reduce consumption

why we want trade protection

national security, job creation, and infant industry

cross-price elasticity of complements is

negative

when income elasticity of demand is positive

normal goods

when MC=MB

optimal quantity

progressive tax

people with higher incomes pay a larger fraction of their income than people with lower incomes

regressive tax

people with lower incomes pay a higher fraction of their income than people with higher incomes

cross-price elasticity of substitutes is

positive

variable output

quantity can vary at any time

fixed input

quantity cannot be varied

production function

relationship between quantity of input used and quantity of outputs produced

When tax is put on consumer

shift demand down by the amount of tax

when a tax is put on producers

shift supply up by the amount of the tax

tax incidence/burden

the share of tax cost

Benefits principle

those who benefit should pay the biggest burden of tax

Ability to pay principle

those who can afford to pay more should pay more in taxes

why free trade is good

to minimize DWL that is creates due to trade production

accounting profit

total revenue - explicit costs

economic profit

total revenue - explicit costs - implicit costs

profit=

total revenue - total cost

when elasticity equals 1

unit elastic

a perfectly inelastic demand curve is

vertical; 0


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