MACRO ch.5-8

Public Opinion

$61,000

Utility

-Your level of well-being. -Redistribution helps maximize total well-being

Market Failure

-occurs when the forces of supply and demand lead to an inefficient outcome -creates deadwight loss

3 factors shape your comparative advantage:

1.ABUNDANT INPUTS.(§Take advantage of what you have to get what you want. §Abundance can be due to climate, geography, natural resources, and strategic investment.) 2.SPECIALIZED SKILLS.(Unique skills, production methods, or expertise can be an important source of comparative advantage) 3.MASS PRODUCTION.(§Production in large quantities results in lower opportunity cost per unit. Lower opportunity costs from mass production are a source of comparative advantage)

Arguments for limiting international trade

1.National security requires that we produce strategically important goods ourselves. 2.Protection can help infant industries develop. -Protecting a sector that is just getting started -Preparing them to compete globally -3.Anti-dumping laws prevent unfair competition. -4.Trade should not be a way to skirt regulations. -Foreign competition may lead to job losses

Progressive Tax

A tax where those with more income tend to pay a higher share of their income in taxes.

Interdependence principle

Globalization is the increasing economic, political, and cultural integration of different countries. -Globalization increases income inequality

Deadweight loss

How far economic surplus falls below the efficient outcome &Deadweight loss = Economic surplus at efficient quantity - Actual economic surplus &Economic surplus and deadweight loss focus on marginal benefits and marginal costs. §QUANTITIES rather than prices create deadweight loss.

Cost of redistribution

Moving that money is costly.

The Rational Rule for Markets

Produce until marginal benefit equals marginal cost.

Gains from trade

The benefits that come from reallocating resources, goods, and services to better uses.

Utilitarianism

The political philosophy that government should try to maximize total utility in society

Efficient Quantity

The quantity that produces the largest possible economic surplus

Diminishing Marginal Utility

&Each additional dollar yields a smaller boost to your utility — that is, less marginal utility — than the previous dollar

Import

-A good or service bought from a foreign seller §Quantity demanded by buyers increases. §Quantity supplied by sellers decreases. §Consumer surplus increases, and producer surplus decreases. §Economic surplus increases.

Export

-A good or service sold to a foreign buyer -The higher price raises the quantity supplied by domestic sellers and reduces the quantity demanded by domestic buyers. §Producer surplus rises, and consumer surplus declines. §Sellers magnify their gains by selling more, while buyers mitigate their losses by buying less. ECONOMIC SURPLUS RISES

Equity

-An outcome yields greater equity if it results in a fairer distribution of economic benefits. -Policies do not always compensate those who are harmed. -ignored by efficiency

Social Safety Programs

-Medicaid -Earned Income Tax Credit -Supplemental nutrition -supplemental security -Housing Assistance -Welfare

comparative advantage

-The ability to do a task at a lower opportunity cost. -tells you who should perform the task

absolute advantage

-The ability to do a task using fewer inputs. -tells you who is best at a task

Efficient Outcome

-The efficient outcome yields the largest possible economic surplus -hold the potential to make everyone better off. §When economic surpluses rise, it is possible for those who benefit to compensate those who were harmed in such a way that everyone is better off. -MAXIMIZES economic surplus

Economic Efficiency

-The more economic surplus that's generated, the more efficient the outcome -simply assesses whether economic surplus rises

Economic Surplus

-The total benefits minus total costs flowing from a decision -rises if the gains to those who are helped are greater than the declines in surplus among those who are harmed &CS + PS (+tax)

Price plays 3 central roles

-a signal: to potential buyers/ potential sellers/ and helps coordinate better outcomes -an incentive: for suppliers to produce more/for buyers to produce less -a bundle of information.

Internal markets

-allocate scarce resources -internal prediction markets improve forecasts

Poverty

-biggest cause of poverty is a lack of full-time employment. -Those who are black or Hispanic are about twice as likely to be in poverty as those who are white or Asian. -seniors have low poverty rates & child poverty one-fifth of all kids growing up in poverty -Families with only one parent present are significantly more likely to experience poverty, and single mothers are twice as likely as single fathers to be in poverty.

Positive Analysis

-describes what is happening, explaining why or predicting what will happen. Ask: What is going to happen if we adopt this policy? -It is purely objective analysis — describing and forecasting the effects of the policy. -Example: You can use the supply-and-demand framework to predict the likely consequences of raising the minimum wage. -NEED DATA AND PROOF

Tools for International Trade Policy

1.Tariffs -increase price, decrease domestic quantity demanded yields tax on import -increase dom. quantity supplied -decease imports) 2.Red tape (additional processes) 3.Import quotas -limit on amount imported -Can cause a market failure 4.Exchange rate manipulation -Certain strategies to adjust purchasing powers between 2 different currencies -Can cause value of currency to go down - 5.Free trade -Allowing markets to end up at a free trade agreement

Redistribution costs

1.administrative costs. 2.higher taxes, which reduce the incentive to work. 3.benefit reductions, which reduce the incentive to work. 4.tax avoidance, evasion, and fraud.

Sense of fairness

1.equality of outcomes. 2.equality of opportunity. 3.fair processes. 4.what you deserve. 5.veil of ignorance. 6.power and class differences.

Sources of market failure(causes deadweight loss)

1.market power.(does not give consumer the choice) 2.externalities (decisions affect others who don't want to be affected 3.information problems. 4.irrationality. 5. government regulations

Voluntary Exchange

Buyers and sellers exchange money for goods only if they both want to. §Voluntary exchange ensures both buyer and seller enjoy gains from trade. §Economic surplus is marginal benefit less marginal cost.

A.marginal revenue equals marginal cost.

Economic surplus is maximized when

BOth

Is the U.S. poverty line an absolute or relative standard?

Rationale Rule for Markets

Produce more of a good if its marginal benefit is greater than or equal to the marginal cost

Consumer Surplus

The economic surplus you get from buying something. §Consumer surplus = Marginal benefit - Price §Consumer surplus describes the gain from buying something at a price below the highest price you were willing to pay (your marginal benefit). Consumer surplus is the area below the demand curve and above the price

Producer Surplus

The economic surplus you get from selling something. §Producer surplus = Price - Marginal cost §You gain producer surplus when you sell something at a higher price than the marginal costs you incur. §Producer surplus is the area above the supply curve and below the price.

A monopolist sets a price above its marginal cost of production, reducing the quantity sold below that of a market

Which of the following is an example of market failure?

Wealth

all the assets - including savings, cars, and houses - that you currently have

Internal Markets

are markets within a company to buy and sell scarce resources. §Some companies have figured out how to use lessons from market economies to develop internal markets that help them. §Internal markets can help companies, non-profits, and government agencies allocate scare resources to better uses.

Intergenerational Mobility

is the extent to which the economic status of children is independent of the economic status of their parents

Permanent Income

is your average lifetime income

Absolute Poverty

judges the adequacy of resources relative to an absolute standard of living

Wealth is accumulated over time, and income is earned in one year

macroeconomic equilibrium occurs when the quantity of output that buyers collectively want to purchase is equal to the quantity that suppliers collectively want to produce.

Red Tape

raises trade costs, but it doesn't raise government revenue

Tariff

§A tax on imported products. §Tariffs leads to: -increase the trade cost of a good. -decrease in c.s -smaller increase in p.s §They use supply and demand analysis to see the consequences of a tariff. -raises gov. revenue

Regressive Tax

§A tax where those with less income tend to pay a higher share of their income in taxes. §Taxes on things you buy tend to be regressive. §Taxes on social insurance programs are proportional but tend to be regressive at the top. Overall, the tax system is progressive

Efficient Allocation

§Allocating goods to create the largest economic surplus. §Efficient allocation requires that each good goes to the person who will receive the highest marginal benefit from it. §Markets allocate goods to those with the highest marginal benefits.

Poverty Line

§An income level below which a family is defined to be in poverty. -$25,700

Critiques of Economic Efficiency

§Critique 1: Distribution matters, so it's also important to account for equity. §Critique 2: Willingness to pay reflects ability to pay, not just marginal benefit. §Critique 3: The means matter, not just the ends.

Government Failure

§Government failure occurs when government policies lead to worse outcomes. §Government failure limits the extent to which we should rely on government. -creates deadweight loss

Social Insurance

§Government-provided insurance against bad outcomes such as unemployment, illness, disability, or outliving your savings. §People pay into social insurance programs. §Benefits are based on your past earnings.

International Trade

§International trade increases economic surplus, but not everyone gains. §Import-competing businesses often oppose international trade. §Exporters and import-dependent businesses often support international trade.

No redistribution

§Lower taxes would create big incentives to work, invest, start new businesses. §Total production would rise. §The size of the pie would grow, but those who are sick, elderly, or low-income would be destitute.

Market Efficiency

§Markets providing efficient answers to three central questions: 1.Who makes what? 2.Who gets what? 3.How much gets bought and sold? §The Rational Rule for Markets: Marginal benefit = Marginal cost

Prediction Markets

§Markets whose payoffs are linked to whether an uncertain event occurs. §The process of buying and selling aggregates information. Market prices broadcast useful information.

Efficient production

§Producing a given quantity of output at the lowest possible cost. §Efficient production requires allocating production so that each item is produced at the lowest marginal cost. §Markets distribute production across firms in a way that minimizes cost.

Benefit of Redistribution

§Redistribution moves money to those who benefit more from it.

Income Taxes

§Taxes collected on all income, regardless of its source. §Some investment gains are excluded from income taxes.

Marginal Utility

§The additional utility you get from one more dollar.

Poverty rate

§The percentage of people whose family income is below the poverty line. -12.3%

Measures of Inequality

§There is much more inequality of wealth than of income. §Permanent income may be a better measure of living standards. §There is less inequality of spending than of income. §Inequality of income, wealth, and spending measure outcomes; intergenerational mobility measures inequality of opportunity.

Trade

§Trade is about cooperation, not competition. §People trade, countries don't. §Trade is not just about business. Consumers matter, too. §Trade is an opportunity. §Trade is a threat. Trade causes short-term disruptions

Quota

§is a limit on the quantity of a good that can be imported. §It has a market effect similar to a tariff but does not raise government revenues.

Income

§is the money you receive in a period of time, such as a year.

Relative Poverty

§judges poverty relative to the material living standards of your contemporary society.

knowledge problem

§occurs when the knowledge needed to make a good decision is not available to the decision maker. §The knowledge problem means that managers can't get the information they need. §Internal markets solve this problem because they do not rely on a centralized decision maker knowing what is best and allocating scare resources.

Normative Analysis

§prescribes what should happen, which involves value judgments. §Ask: Which is the better outcome, and what policy should the government adopt? §It requires making a judgment. §Example: Should the minimum wage be raised or not? -OPTIONS & NOT BASED ON DATA

Social Security Safety Net

§programs to ensure a minimum material standard of living for those in poverty. §The safety net includes cash assistance, tax breaks, and in-kind benefits. §In-kind benefits include SNAP and housing vouchers. In order to ensure that benefits reach only the truly needy, social safety net programs are means-tested(Eligibility is based on income and sometimes wealth)

Trade Costs

§the extra costs incurred as a result of buying or selling internationally rather than domestically. §They include shipping and taxes. §Trade costs are included when applying the opportunity cost principle.

When buyers import goods

§the price declines to the world price. §the lower price reduces the quantity supplied by domestic sellers and increases the quantity demanded by domestic buyers. imports fill the gap between supply and demand

comparative adv and trade

•The cost-benefit principle reminds us to look at the price of a good or service. •In a competitive market, the price is equal to the marginal cost of production (marginal principle). Thus, when comparing prices of goods and services (whether imported or exported), you are comparing the marginal costs. •Marginal cost includes opportunity cost, so the cost comparison includes a comparison of opportunity costs, which is what the notion of comparative says that you should be doing.