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