Chapter 4 - Supply and Demand: Applications and Extensions

Labor Demand

-Firms demand labor -Labor demand curve is downward sloping because as wage decreases, firms will want to employ more people -Workers supply labor -Labor supply curve is upward sloping because as wage increases, people will want to work more.

What does rent control lead to?

1) Black Markets 2) A decline in the supply of future rental housing 3) a decline in the quality of rental housing 4) Non-price methods of rationing 5) inefficient housing match-ups

Impacts of a tax

1) Raises the price that buyers pay 2) Reduces the amount that sellers receive 3) Reduces the quantity sold 4) Increases government revenue 5) Creates deadweight loss

The 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.

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

ATR falls when income rises

Proportional tax

ATR is the same at all income levels

Progressive tax

ATR rises when income rises

How does a tax influence the graph?

Causes the supply curve to shift left by the amount of the tax

Which tax rate is important in personal decision making?

Marginal tax rate (MTR)

The labor market

Price for labor called Wage (W) Quantity of labor called employment (E)

Marginal Tax Rate (MTR)

The additional tax liability a person faces divided by his or her additional taxable income.

tax incidence

The way the burden of a tax is distributed among economic units (consumers, producers, employees, employers, and so on). Does not depend on whom the tax is imposed

Linking the Markets

There is a close relationship between the demand for products and the demand for resources used to make those products

price ceiling

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

Price floor

a legally established minimum price buyers must pay for a good or resource. EX: minimum wage

formula for MTR

change in tax liability divided by change in taxable income

price ceiling below equilibrium price

creates a shortage

Price floors above equilibrium

creates a surplus

Price floors below equilibrium

does nothing

What does tax incidence depend on?

elasticity. The burden of the tax will on those who are relatively inelastic

price ceiling above equilibrium price

has no effect

Raising minimum wage ___

increases excess labor supply (unemployment)

Formula for ATR

tax liability divided by taxable income

Deadweight loss will be lower if ____

taxes are placed on goods that are relatively inelastic

deadweight loss

the loss to society that results from to the loss of gains to trade that do not occur because a tax was imposed

Average Tax Rate (ATR)

the percentage of income paid in taxes