chapter 6, 7, 8, 9, 11
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
