Microeconomics Unit 2

price ceiling

A legal maximum on the price at which a good can be sold ex. rent control

price floors

A legal minimum on the price at which a good can be sold ex. minimum wage

Efficient allocation of resources maximizes total surplus, the goods are consumed by the buyers who value them most highly and the goods are produced by producers with the lowest cost.

Do markets produce a desirable allocation of resources? Or could the market outcome be improved upon?

Yes, there are added benefits such as increased variety of goods, lower costs through economies of scale, increased competition, enhanced flow of ideas

Do the gains of trade outweigh the losses?

The initial impact is the change is demand, the demand curve shifts downward, reduces the size of the ice cream market, it places a wedge between the buyers and sellers price

How do taxes on buyers affect market outcomes?

The immediate impact of the tax on sellers is the shift of the supply curve shifts up the size of the tax. The demand curve stays the same because the seller is bearing the burden of the tax. Sellers sell less and buyers buy less in the new equilibrium so the tax reduces the size of the ice-cream market.

How do taxes on sellers affect market outcomes?

Consumer surplus shrinks

How does a tax affect consumer surplus?

Producer Surplus shrinks

How does a tax affect producer surplus?

It shrinks because the deadweight loss increases

How does a tax affect total surplus?

At first if you raise the tax it generates more revenue but as you continue to raise it you get less money because it has reduced the size of the market. (Laffer Curve)

How does tax revenue depend on the size of the tax?

Consumer surplus is closely related to the demand curve for a product. The demand schedule is derived from the willingness to pay of the possible buyers. Because the demand curve reflects buyers' willingness to pay, we can also use it to measure consumer surplus. The area below the demand curve and above the price measures the consumer surplus in a market

How is consumer surplus related to the demand curve?

Producer surplus is closely related to the supply curve. The supply schedule is derived from the costs of the painters. The height of the supply curve is related to the sellers' costs. The area below the price and above the supply curve measures the producer surplus in a market

How is producer surplus related to the supply curve?

Yes, because the government also gains money as well as producers

If policymakers restrict imports, do the gains from restricting imports outweigh the losses?

If their is a tariff then the producer surplus increases

If policymakers restrict imports, who benefits?

If their is a tariff consumer surplus is reduced

If policymakers restrict imports, who is harmed?

a. increase

If the government removes a tax on a good, then the quality of the good sold will a. increase b. decrease c. not change d. All of the above

d. all of the above

Inefficiency can be caused in a market by the presence of a. market power b. externalities c. imperfect competitive markets d. all of the above

c. It is inefficient because each person's use of the interstate adds to the congestion

Many U.S interstate highways are crowded with traffic, but tolls are not collected even when the highways are crowded. Which of the following is true about this no-toll policy? a. it is inefficient because interstates are needed to transport goods b. it is inefficient because there is no cost of using the interstate once it is built c. It is inefficient because each person's use of the interstate adds to the congestion d. it is inefficient because tolls would increase government revenues allowing other taxes to be decreased

b. cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.

Price ceilings and price floors that are binding a. are desirable because they make markets more efficient and more fair. b. cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price. c. can have the effect of restoring a market to equilibrium d. are imposed because they can make the poor in the economy better off without causing adverse effects.

b. when policy makers believe that the market price of a good or service is unfair to buyers or sellers.

Price controls are usually enacted a. as a means of raising revenue for public purposes b. when policy makers believe that the market price of a good or service is unfair to buyers or sellers. c. when policymakers tax a good. d. All of the above are correct

b. an increase in rents and an increase in the number of apartment units supplied

Suppose a city facing a shortage of rental apartments eliminates rent controls. Rent control is when a government dictates a maximum rental price. Which of the following is most likely to occur? a. a decrease in rents and a decrease in the number of apartment units supplied b. an increase in rents and an increase in the number of apartment units supplied c. a decrease in demand for apartments and an increase in the number of apartment units supplied d. an increase in demand for apartments and a decrease in the number of apartment units supplied

a. buyers will bear a great burden of the tax than the sellers

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the a. buyers will bear a great burden of the tax than the sellers b. sellers will bear a greater burden of the tax than the buyers c. buyers and sellers are likely to share the burden of the tax equally d. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information

a. is the manner in which the burden of a tax is shared among participants in a market

The tax incidence a. is the manner in which the burden of a tax is shared among participants in a market b. can be shifted to the buyer by imposing the tax on the buyers of a product in a market. c. can be shifted to the seller by imposing the tax on the sellers of a product in a market. d. All of the above are correct.

c. with shortages and waiting lists, they have no incentive to maintain and improve their property.

Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because a. with rent control, the government guarantees landlords a minimum level of profit. b. they become resigned to the fact that many of their apartments are going to be vacant at any given time. c. with shortages and waiting lists, they have no incentive to maintain and improve their property. d. with rent control, it becomes the government's responsibility to maintain rental housing

destroys domestic jobs, no and yes because it offers up more jobs in a different area

What are some common arguments for restricting trade? Do they have merit?

A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.

What determines how much of a good a country will import or export?

The elasticity of a product. A tax burden falls more heavily on the side of the market that is less elastic

What determines the incidence?

Price elasticities of supply and demand. When supply is inelastic then the deadweight loss is small. When supply is elastic then the deadweight is large. When demand is inelastic the deadweight loss is small. When demand is elastic the deadweight loss is larger.

What factors determine the size of this deadweight loss?

the uncompensated impact of one person's actions on the well-being of a bystander

What is an externality?

The fall in total surplus that results from a market distortion, such as a tax.

What is the deadweight loss of a tax?

Command and control policies, market based policies

What public policies aim to solve the problem of externalities?

b. more, and sellers receive less than they did before the tax.

When a tax is placed on the sellers of a product, buyers pay a. more, and sellers receive more than they did before the tax. b. more, and sellers receive less than they did before the tax. c. less, and sellers receive more than they did before the tax. d. less, and sellers receive less than they did before the tax.

c. buyers and sellers share the burden of the tax

Which of the following statements is correct concerning the burden of a tax imposed on take-out food? a. buyers bear the entire burden of the tax b. sellers bear the entire burden of the tax c. buyers and sellers share the burden of the tax d. we have to know whether it is the buyers or the sellers that are required to pay the tax to the government in order to make this determination

In an exporting country domestic producers of textiles are better off because they sell textiles at a higher price. In an importing country domestic consumers are better off because they pay for their products at a lower price

Who benefits from trade?

In an exporting country domestic consumers of trade are worse off because they have to buy product at a higher price. In an importing country domestic producers are worse off because they have to sell their product at a lower price.

Who does trade harm?

fails to maximize the total benefit to society and causes markets to allocate resources inefficiently

Why do externalities make market outcomes inefficient?

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

tax incidence

the manner in which the burden of a tax is shared among participants in a market

c. total surplus is maximized

we can say that the allocation of resources is efficient if a. producer surplus is maximized b. consumer surplus is maximized c. total surplus is maximized d. sellers' costs are minimized