Econ 101 Midterm 2 Study Guide

Monopsony Power

A business using its bargaining as a major buyer of labor to pay lower prices, including lower wages (is the only buyer of a good). Monopsony power affects whether minimum wages hurt employment, if it is holding down wages, then minimum wages that push companies to pay higher wages won't necessarily lead to less employment, might ensure workers get a better deal, could eliminate incentive to cut back hiring to keep wages low, boosting employment

what is a buyers' demand curve

A buyers' demand curve is the buyers' marginal private benefits, don't consider external benefits

Corrective Tax

A corrective tax is a tax designed to induce people to take account of the negative externalities they cause, imposing pre-unit tax equal to marginal external cost will effectively lead people to make choices if they're account for marginal external costs of their actions. Corrective tax will shift supply curve up to correspond with marginal social cost curve, and both meet the demand curve at the socially optimal quantity (leads to internalizing externalities)

Signal

A costly action that you take to credibly convey information that would otherwise be hard for someone else, like a potential employer, to verify. Education can serve as a signal of your ability, shows you are a good worker. helps employers figure out which workers are likley to be more productive

Prices as Incentives

A high price is an incentive for suppliers to produce more, creates new profit opportunities. A high price is an incentive for buyers to consume less, raises the opportunity cost of consuming a good, creating an incentive to consume less, decrease the quantity they demand. A price provides an incentive for strangers to cooperate

Import Quotas

A limit on the quantity of a good that can be imported. Have a similar effect to tariffs but don't raise revenue

A Public Good

A nonrival good that is nonexcludable and subject to the free rider problem is a public good. Public goods create positive externalities for people who don't contribute to them since they are nonexcludable, heart of free rider problem is that businesses can't force people to contribute towards public goods they benefits from so equilibrium quantity is below socially optimal

Discrimination Type One: Prejudice

A preconceived bias against a group that's not based on reason or experience. Is referred to as taste based discrimination as it is based on people's preference for hiring one group over another, prejudice is costly since a business is most profitable if it hires most productive people at lowest wage possible, prejudice limits the pool of talent available to you, limited supply of workers, leading to higher wages, less productive. If there's a lot of prejudiced employers in your labor market, a savvy employer can find especially good workers by hiring people that other employers are prejudiced against

Prices as Information

A price aggregates information, the process of buying and selling aggregates information, the price will come to reflect all the information around. Market prices broadcast useful information, there are many financial price that yield valuable business intelligence, because prices aggregate information, they provide business intelligence

Price change vs externalities

A price change is not an externality since once you total up the effects, it generates neither costs nor benefits, it is a redistribution between buyers and sellers, both sides are decision makers

Prices are Signals, Incentives, and Information

A price is a rapid fire signal, sending messages that are heard around the globe, a price is an incentive, inducing people to make better choices, and prices aggregate information, incorporation the judgments that motivate the thousands of buying and selling decisions that push the price up or down, prices help to organize and coordinate and economic activity

A progressive tax

A progressive tax system is one where those with more income tend to pay a higher share of their income in taxes

Rival Goods

A rival good is a good for which your use of it comes at someone else's expense

tragedy of the commons

A tragedy of the commons is the tendency to over consume a common resource, need to limit consumption of common resources. common resources lead to a tragedy of the commons. The tragedy of the commons occurs whenever rival gods are nonexcludable. Assign ownership rights to solve the tragedy of the commons

Possible explanations for gaps between groups

Accounting for differences in human capital and jobs explains some of the gaps. More complex analyses compare wages between groups, correcting for influence of factors related to human capital differences, job characteristics, influence of institutions. Remaining differences may reflect discrimination

When you will Export

American businesses choose to export when they can get a better price than if they just sold them in America, more people are willing to pay more when global

Labor Demand: Thinking Like and Employer

An employer is a buyer, buying the time and effort of the employees you hire. Apply core principles of economics to figure out how many workers to hire, calculate the marginal cost and benefit of another worker, marginal cost is paying wage, benefit is extra revenue

Argument three for Limiting International Trade

Anti-dumping laws prevent unfair competition, trade policy should shield domestic businesses from unfair competition, dumping is charging extremely low prices to drive US competitors out of business, bad for US consumers. Opponents argue it's hard to figure out if foreign businesses are dumping their good to drive out American competitors or if they're efficient producers offering great prices

Marginal private costs

Are the extra costs paid for by the seller from one extra unit (focus of sellers)

Labor Market and workers

As a worker you are on the supply side, selling your labor for the highest wage you can get

Labor market and businesses

Businesses are on the demand side, looking to hire best workers for lowest price possible

Impact of imports on world supply, world demand, and world price

Buyers importing goods causes price to decline to world price, lower price leads to lower quantity supplied by domestic sellers but higher domestic quantity demanded, imports fill gap between quantity demanded and supplied

How comparative advantage leads to more production

By rearranging who does what, you can product more stuff with the same inputs, just reallocate tasks so people do more of those tasks where they hold a comparative advantage. By ensure each task is done at the lowest opportunity cost your product more in same time, this extra output is the gains from trade, trading allows reallocation, more output at lower opportunity cost

Cap and Trade

Cap and trade is a quantity regulation implemented by allocated a fixed number of permits, which can then be traded. Cap and trade system is like a corrective tax, production becomes costlier

Cap

Cap is the government regulating the quantity of negative externalities setting a maximum quota. cap will reduce externalities

Labor Supply Shifter Three: Changing benefit of not working

Changing benefits of not working, anything changing the benefits of not working will shift the labor supply curve (ex: government programs)

International Trade Policy

Company's success in international trade depends on navigating government policies foreign governments put in place to help protect their domestic businesses from competition

Comparative advantage and global impact

Comparative advantage can explain some of the most important social changes of the past century, including changing nature of work, families, relationships. Comparative advantage drives international trade, we trade with foreigners for the same reason we trade with locals, gains from trade created by comparative advantage are an incentive for people all around the world to focus on what they're best at, rely on others for other stuff, work done by people with lowest opportunity cost, even if they're overseas.

Specialization

Comparative advantage leads to specialization where people focus on specific tasks, more time on what you're good at. Use comparative advantage to assign workers to tasks, delegate tasks to someone with a lower opportunity cost.

Corrective subsidies

Corrective subsidies are subsidies designed to induce people to take account of the positive externalities they cause, can be incentive to get people to account for marginal external benefits.

Tariffs and economic surplus

Domestic buyers are unhappy because higher price means they pay an extra amount or buy less, consumer surplus falls, domestic suppliers are happy because the higher price means higher profit margins and an increased quantity sold, producer surplus rises, also yields tax revenue. taxing imports reduces total economic surplus of Americans, give consumer money to government

Efficiency wage

Efficiency wage is a higher wage paid to encourage greater worker productivity. A higher wage provides an incentive to keep working hard, employers think that the higher the wage, the more workers will value the job, more productive.

Equilibrium when there's no trade

Evaluate the equilibrium when there's no trade, equilibrium price without international trade is the intersection of the domestic demand supply curves.

Source Three: Exploit the benefits of mass production

Exploit the benefits of mass production, produce a lot so can be more efficient in production, lower opportunity costs due to the benefits of mass production can be another source of comparative advantage, particularly large producers

Impact of Exports on domestic production and consumption

Exports lead to higher prices, more domestic production, and less domestic consumption

Exports and Economic Surplus

Exports raise economic surplus, start by assessing economic surplus when there's no international trade to set a baseline, equilibrium occurs where domestic demand and supply curve cross. More expensive exports raise producer surplus, raises price domestic sellers get so they sell more so producer surplus rises, domestic consumers lose consumer surplus due to foreign competion, price they pay rises to the higher world price causing them to reduce quantity demanded. The benefits exceed the costs, and exports raise total economic surplus, net gain is area below price and in between two curves (look at consequences of imports and exports paragraphs).

External benefit

External benefit is a benefit occurring to bystanders, positive externalities create external benefits

Externality

Externality is a side effect on bystanders whose interests aren't fully taken into account, lead to market failure, producing inefficient outcomes not in society's best interest, arises when there are bystanders who are affected by your choices can't easily shape them. When people make decisions without facing the full consequences of their actions (when externalities are involved) bad outcomes can result

Extrinsic Motivation

Financial incentives are good for appealing to extrinsic motivation. The desire to do something for its external rewards such as higher pay

Argument Five for Limiting International Trade

Foreign competition may lead to job losses, will destroy jobs in businesses that rely on imported inputs, no real relationship between country imports and unemployment rate, temporary adjustment can last a long time.

Marginal Social Cost (curve)

From society's perspective it doesn't really matter if a cost is paid by seller or imposed on bystanders, so marginal cost is the marginal social cost. Marginal social cost is the sum of the marginal private costs paid by the seller and the marginal external costs borne by bystanders. Marginal social cost curve lies above the supply curve, wedge between equal to marginal external cost

Problems with Globalization

Globalization could be exploitative, debate over fair trade vs free trade, higher prices for fair trade could reduce quantity demanded which could lead to less jobs

Common resources

Goods that are rival but nonexcludable are common resources. Have private gains but shared costs, causing a negative externality

Social Safety net

Government funds the social safety net which is the cash assistance, goods, and services provided by the government to better the lives of those at the bottom of the income distribution.

Minimum Wage

Government regulates the labor market by setting a minimum wage, minimum wage laws raise the wage above equilibrium, the will cause a decrease in the quantity of labor demanded and an increase in quantity of labor supplied, creating unemployment. Opponents of higher minimum wages argue it will lead to unemployment, supporters argue that higher minimum wages will offset some of the disparity in bargaining power. Whether the minimum wage has small or large effects on employment depends on the elasticity of labor demand, labor demand is relatively inelastic but becomes more elastic over time. need to see if it is worth trading off somewhat higher wages for some workers for a higher risk of unemployment for others

tax avoidance, tax evasion, and fraud

Higher taxes mean more tax avoidance (doing things to try to reduce the taxes you owe by taking advantage of loopholes), tax evasion (not honestly reporting all your income), and fraud

Human Capital

Human capital is the accumulated knowledge and skills that make a worker more productive, greater human capital raises your productivity, workers with more human capital get paid more. Education raises human capital.

impact of scale effect or substitution effect dominating

If scale effect dominates then labor and capital are complements, so decrease in price of capital leads to a rightward shift. Substitution effect dominating means labor and capital are substitutes so a decrease in price of capital will lead to a leftward shift (dominance depends on the occupation)

Discrimination Type Two: Implicit Bias

Implicit bias, without your conscious knowledge, your snap judgments may reflect implicit associations. Implicit bias is judgments shaped by unconscious attribution of particular qualities to specific groups, can be unaware you even make these judgments, minimize impact of implicit. biases by basing hiring on carefully structured assessments of candidates.

Import

Importing is buying goods or services from foreign sellers

Imports and economic surplus

Imports raise economic surplus, US consumers gain when they import shirts they get lower prices, US producers lose bc foreign competition makes them lower prices or lose customers, need to ensure gains exceed losses. Need to compare increase in consumer surplus that buyers gain with the decrease in producer surplus sellers lose, start by assessing economic surplus when there's no international trade to set a baseline. total consumer surplus is area below domestic demand curve but above the price, producers surplus is the area above the domestic supply curve and below the price. Cheap imports raise consumer surplus, can pay lower price, increase quantity bought. Domestic producers lose producer surplus due to foreign competition, have to sell at lower prices, so sell less because of lower world price. The benefits exceed the costs and imports raise consumer surplus, net gain is area between both above the world price, amplified gains to buyers outweigh minimized losses to sellers.

Income inequality

Income inequality is rising, highest income quintile has increased their share of income, share of other quintiles has declined, income grew for many but fastest for those at the top. Rich are small proportion of population but account for large share of total income. US is more unequal that most developed countries but distribution of income around the world is even more unequal

Intensive Margin

Intensive margin describes the number of hours each worker supplies - measure how intensively existing workers supply their labor

Internal Markets

Internal markets are markets within a company to buy and sell scarce resources, internal help your company allocate scarce resources to better uses

International Trade and Economic Surplus

International trade increases economic surplus but not everyone wins, some gain or lose from lower prices depending on if buyer or seller, import competing business oppose international trade exporters and import dependent businesses support international trade

The Poverty Rate

Is the percentage of people whose family income is below the poverty line, the official has not changed much over time (1 in 7) even though average income increased. Officials poverty rate fails to account for tax credits and benefits provided by government programs to help poor, but is still useful indication of what might happen without government intervention

Managers Using Market Forces

It's better to use market forces to allocate your scarce resources than have all choices made by centralized managers

The Labor Market

Labor Market is like any other market except the units of the price and quantity axes are a bit different, price of an hour of someone's time is their hourly wage, quantities employer buyers are their hours of work. wage determined by intersection of labor supply and demand curves. Wage on Y axis and Quantity of labor (hours) on x axis

Labor demand curve

Labor demand is equal to the marginal revenue product of labor (same curves), labor demand is downward sloping because of diminishing marginal product

Impact of income and substitution effects on Labor supply curve

Labor supply curve depends on the balance of income and substitution effects, if substitution effect is dominant individual labor supply curve is upward sloping, if income effect is dominant individual labor supply curve may be downward sloping, if offset each other, curve is vertical. If income effect becomes more important when your wage is higher, then your individual labor supply curve might change from upward sloping to vertical to downward sloping with wage increase

Labor supply

Labor supply is the time you spend working in the market, the opportunity cost of working is everything you do when you are not working (leisure), labor supply is about choice between labor/leisure, choose how many hours to work by thinking at the margin. Labor supply depends on wage and marginal benefit of leisure, wage rising has two opposite effects

Laws, Rules, and Regulations

Many laws exist to help solve problems caused by negative externalities, company rules also target externalities, rules are a blunt instrument can blunt the forces of competition. Regulations are also a blunt instrument, problems arise with poorly written regulations, they can reduce incentive to innovate and find new ways to reduce externalities

Substitution effect

Many tasks can be done by either workers or machines, when price of machines falls, demand for workers to do tasks that can be substituted for machines decreases

Marginal Private Benefit

Marginal Private Benefit is the extra benefit enjoyed by the buyer from extra unit

Comparative Advantage and Markets

Markets offer the opportunity to specialize according to comparative advantage, help strangers exploit the gains from trade that come from specializing according to comparative advantage. Do more of tasks when opportunity cost is low, rely on others for tasks when opportunity cost is high, gains from trade are just as great in market-based exchange. Comparative advantage explains why there are gains from trade in markets, people do tasks where they have a comparative advantage, following comparative advantage creates gains from trade

How to solve the knowledge Problem

Markets solve knowledge problem, internal markets avoid the knowledge problem since it doesn't rely on a centralized decision maker knowing what's best or rely on personal relationships, instead it relies on smaller groups knowing their own marginal benefit and bidding accordingly

Prediction Markets

Markets whose payoffs are linked to whether an uncertain event occurs

Positive externalities and underproduction

Markets yield too few positive externalities, goods that create positive externalities are underproduced, not taking account of marginal external benefits their choices generate they do less of it

Labor Demand Shifter Three: Better management and productivity gains

Means that each of your workers can produce more per week, increase in workers' marginal product will increase demand for labor, when each additional work generates more revenue for you, you'll want more workers

Argument one for Limiting International Trade

National Security requires that we produce strategically important goods ourselves (weapons systems, high tech fields, even food), counterargument is that concerns are overstated

Negative externalities and overproduction

Negative externalities lead to overproduction, the equilibrium quantity produced will be higher than is socially optimal, when not taking account of external costs of one's actions, will pursue those actions too often, there is a socially optimal quantity of pollution

Negative Externality

Negative externality is an activity whose side effects harm bystanders. Negative externalities impose costs on others, create problems since people often make decisions without thinking about the full costs their choices impose on others, done more than in best interest.

Fairness

One common belief is that more equal outcomes are fairer, an alternative view of fairness emphasizes equality of opportunity, fairness may also depend on how fair you find the process by which inequalities are generated, some think of fairness in terms of what you deserve, or what you contribute to society, question if fairness is about power/class differences, veil of ignorance The more people believe in luck playing a role in determining income, the more the country tends to redistribute

Exports and Trade costs

Only export a good if the price you'll get for it in another country is far above your local price to offset the trade costs

Imports and Trade Costs

Only import a good if the price you can get it for from another country is below the local price as to offset the associated trade costs

Calculating opportunity cost of each task

Opportunity cost of a task is the output you could produce in your next best alternative task. Opportunity cost of a task = Hours this task takes/hour required to produce alternative output

Positive Externality

Positive Externality is an activity whose side effects benefit bystanders. Positive externalities generate benefits for others, people make decisions without thinking fully about the positive effects of their choices on bystanders, so will do less of these useful activities than in society's best interest

Three Sources of Discrimination

Prejudice, Implicit bias, Statistical discrimination

World Price

Price a traded good sells at in the world market, price consumers pay for imported goods, price the producers get for exporting their goods. When the US is a small player. World supply and world demand determine the world price, the price is determined in the world market by the intersection of world supply and demand

Four solutions to externality problems

Private bargaining Corrective taxes and subsidies that change the price cap and trade programs that change the quantity Regulations Try to get buyers and sellers to act like they take marginal external costs/benefits into account, realign incentives so people take account of their actions on bystanders (internalize externality)

The Rational Rule for Society

Produce more of an item as longs as its marginal social benefit is greater than or equal to the marginal social cost (Marginal Social Benefit = Marginal Social Cost)

Globalization and American workers

Productivity determines average wages, American worker productivity is higher than foreign, so pay more for workers. International trade is raising income inequality within the US, globalization increases the income of highly educated workers, can serve as source of competition for American labor

Argument two for Limiting International Trade

Protection can help infant industries develop, shielding fledgling businesses from international competition can help make new industries, infant industry often fails to grow up, hard to identify which industries are likely to mature well

Three reasons why labor supply curve is upward sloping

Reason One: New people may be induced to enter the workforce, higher wages convince more people to work Reason Two: Existing workers may put in more hours, when wages go up people already working may increase number of hours they work Reason Three: Some people may switch occupations, at higher wage there are more potential workers

Redistribution and well-being

Redistribution can increase total well-being, people with more income are happier than those with less, curve showing well being flattens out as income rises, slope keeps getting smaller. Redistribution of wealth from the high income person to low income will increase the well being of the low income persona lot more than it decreases the well being of the high income person

Three factors that shape your comparative advantage

Relatively abundant inputs, specialized skills, benefits of mass production

The Coase Theorem

Says that when people can bargain costlessly and legal rights are clear and enforced then externality problems can be solved by private bargaining, can restore the socially optimal outcome, is achieved without government intervention, use creative ways to split gains

Side Payments

Side payments can solve externalities, if someone else's actions harm you, you can pay them to do something else instead, with negative externality there is a price you will be willing to pay to make them more considerate. With positive externality, could pay them to make them benefit you

Aspects of Social Insurance

Social safety net programs are not means tested because they are insurance programs to cover everyone, because of failures in private insurance, government steps in with social insurance that everyone can get access to, it pays you when you experience a bad outcome (unemployment, disability, social security), people pay into social insurance programs (workers' paycheck, employers pay). Social security insures against outliving savings, and possibility of making bad decisions about retirement, social security, unemployment/disability, workers comp all partially a function of past earnings, those who have earned more have paid more in

Rich people avoiding taxes

Some investment gains are excluded from income taxes, rich people can find ways to pay lower capital gains tax rates, higher income people get bigger tax breaks, income tax only applies to taxable income, lots of special exemptions (retirement saving, house buying, tuition)

nonexcludable

Special problems arise when a product is non excludable, meaning people cannot easily be excluded from using it, depends on if your using the good harms them

Three steps to identify who has a comparative advantage in each task

Step One: Determine how long each task would take each person (in hours) Step Two: Convert it into a measure of opportunity cost, by calculating how much of the alternative good you could have produced in that time Step Three: Evaluate who has a comparative advantage at each task by assessing who can produce each good at the lowest opportunity cost

Three-step plan to analyze externalities

Step One: Predict the equilibrium outcome to forecast what you think will happen. Look at equilibrium on supply and demand curve. Step Two: Assess what externalities are involved. Look at where marginal external cost and benefit are on graph. Step Three: Find the socially optimal outcome that is in society's best interest, and then compare this to the equilibrium forecast from the first step. Use rational rule for society (where marginal social curve and demand curve cross)

Evaluate how imports shape domestic markets (Steps)

Step One: What will be the price of a traded good? For traded goods the price is equal to the world price Step Two: At this new price, what quantities will be demanded and supplied by domestic buyers and sellers? Consult domestic demand and supply curves, locate new price, look until hit the supply curve, looks across from price until hit domestic demand curve. Step Three: What quantity will be traded? International trade makes up the difference between quantity demanded by domestic buyers and quantity supplied by domestic sellers, imports filling gap between domestic quantity demanded and domestic quantity supplied

Three steps to forecast the effects of changing market conditions

Step one: Is the labor supply or labor demand curve shifting? (or both?). labor demand is all about marginal revenue product and labor supply is all about opportunity costs Step Two: Is that shift an increase or a decrease? Inc in labor demand or supply = shift to right, Dec in labor demand or supply = shift to left Step Three: How will wages and the number of jobs change in the new equilibrium? Compare the new equilibrium with the old equilibrium

Evaluate how exports shape domestic markets

Step one: What will be the price of a traded good? For traded goods, the price equal to the world price Step Two: At this new price, what quantities will be demanded and supplied by domestic buyers and sellers? Locate new price on vertical then look across until hit demand curve then look down, then look across price until hit domestic supply curve then look down. Step Three: What quantity will be traded? While domestic supply and demand are unequal, market still in equilibrium bc of exports to foreign buyers making up difference

Source One: Abundant Inputs

Take advantage of what you have, to get what you want, comparative advantage due to relative abundance of necessary inputs compared to trading partners, exporting products made with resources that are scarce, more different your trading partner is from you, larger gains from trade. Specialize in making/exporting products that rely on relatively abundant inputs, input goods with input that are relatively scarce near you. US has a high share of highly educated workers, our comparative advantage, have disadvantage in mass manufacturing.

Tariffs

Tariffs are a tax on imported goods, increasing their trade costs, tariff on imported goods will increase price which will decrease quantity demanded by domestic buyers an increased quantity supplied by domestic sellers causing imports to decline

Effective marginal tax rate

The amount of each extra dollar you earn that you lose to higher taxes and lower government benefits

The Gains From Trade

The benefits that come from reallocating resources, goods, and services to better uses. Markets reallocate stuff, generating gains from trade. Money allows for more complicated trades

Compensating Differential

The differences in wages required to offset the desirable or undesirable aspects of a job, jobs with undesirable attributes pay more, adverse attributes reduce labor supply, leading to higher pay for these jobs, jobs with desirable attributes pay less. Compensating differentials depend on the preference of other workers, will find a good when you've found a job whose positive attributes are more important to you than they are to others

The Domestic Demand Curve

The domestic demand curve is the quantity of goods that domestic buyers plan to buy at each price

Externality Problem

The externality problem is that worse outcomes occur when people do no take into account the interests of bystanders

Trade Costs

The extra costs incurred as a result of buying or selling internationally, rather than domestically, determine whether it's worth buying or selling internationally

The Income Effect

The income effect measures how people's choices change when they have more income. A higher wage increases your income, leading you to choose more leisure and hence less work, leisure is a normal good so rise in income means increase in marginal benefit of leisure, higher wage will lead workers to choose more leisure, meaning working fewer hours, downward sloping labor supply curve.

Globalization

The increasing global integration of economies, cultures, political institutions and ideas is called globalization, trade costs have declined due to globalization. Domestic and foreign labor compete through the goods that are traded between countries

Price as a Signal

The price is a signal to potential suppliers, tells them how much buyers value their products, because it reveals the buyer's marginal benefit, or willingness to pay. The price is a signal to potential buyers, tells them about how expensive it is for sellers to produce more of a product, as it reveals the seller's marginal cost. These signals help coordinate better outcomes, prices make global coordination possible.

Trade Costs and International Trade

Trade costs determine how important international trade is in your sector, determine if international trade is a big factor in your market (low trade vs high trade cost). Trade costs also determine how much is traded, declining trade costs leads to rising global trade. Trade agreements, standardization of shipping, internet, all lowered trade costs, so companies create global supply chains

Argument Four for Limiting International Trade

Trade shouldn't be a way to skirt regulations, trade provides a way to get around social agreements, opponents argue US standards as a rich country not appropriate for poorer nations, restricting trade can create even more poverty

Socially Optimal

Trying to find the socially optimal outcome which is the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders. when there are externalities need to consider bystanders.

US poor vs Global poor

US poor are not members of the global poor, people struggling with poverty in the US and other developed countries are better off than those struggling in the developing world

Unions

Unions are organizations representing workers who band together to ensure that they are able to jointly negotiate with their employers, Unions boost the wages of their members, workers have more bargaining power in unions, shift the labor supply curve upward or to the left. Unions can make businesses more productive, can improve communication between management and workers, can find more efficient ways to do things

The Knowledge Problem

When knowledge needed to make a good decision is not available to the decision maker, the knowledge or information you need to make a good decision may be so broadly dispersed that it's unavailable to any individual decision maker

Free-rider Problem

When people cannot be easily excluded from using something the free rider problem occurs where someone can enjoy the benefits of a good without bearing the costs. With nonrival goods, free riders enjoy positive externalities without hurting others. When goods or services are rival and excludable for those who don't pay there is no free rider problem

Labor Supply Shifter Two: Changing number of potential workers

When population grows so does potential labor supply (birth/death, immigration, age distribution of population, etc)

Scale Effect

When price of capital goods declines, your business can product output more cheaply so you will sell a larger quantity, which may require more workers, increase labor demand

perfectly competitive labor market

When there are lots of businesses looking to hire from a pool of many workers with similar skills, labor market is perfectly competitive, in a competitive labor market, employers pay market wage

The Rational Rule for Workers

Work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure, labor supply is about marginal benefit of leisure

Labor Demand Shifter Two: Changes in the price of capital

Workers and machines produce stuff together as complements and other times as substitutes, lead to increase or decrease in demand (scale effect and substitution effect)

World Demand

World demand describes the total quantity demanded across all buyers in the world at each price

World Supply

World supply describes the total quantity produced by all manufacturers in the world at each price

International Trade and Comparative Advantage

You should specialize in activities where you have comparative advantage, and should rely on trading partners for other stuff, where their opportunity costs are lower, produce more together. Geography is irrelevant when considering comparative advantage, comparative advantage drives international trade, choose to import/export to specialize according to comparative advantage for more stuff, export goods where their opportunity costs are low and important goods where it's high. When comparing price of domestic vs imported, compare opportunity cost of each. Export what you can produce at lowest opportunity cost, import the other stuff

When you will Import

You will choose to import when foreign products are cheaper than their made equivalents

Source two: Develop a specialized skill

Your unique skills, production methods or expertise can be an important source of comparative advantage. Learning by doing, discover new production techniques lower costs if focusing for long time. more you produce, the more efficient you'll become, lead to sell and produce more.

A regressive tax

a tax where those with lower incomes pay a higher share of their income on the tax compared to people with higher incomes (taxes based on what you buy are regressive, since rich spend smaller share of their income. Taxes that fund most social insurance programs are not progressive, mostly proportional taxes where all pay same percentage of income, regressive at top, overall tax system is progressive

Wealth

all the assets - including savings, cars, a home - that you currently have. There is more inequality of wealth than income, bottom three quintiles hold only 2% of all wealth, 90% by top. Wealth is a stock, something measured at one specific time and represents the amount of assets you have at that time, income is a flow, since money flows in over time. Wealth accumulates and is passed from gen to gen.

The Poverty Line

an income level, below which a family is defined to be in poverty

Considering broad range of benefits and costs that come from working

choosing your occupation, figure out right occupation for you, higher the income you will earn, greater the benefit from joining a specific occupation. Consider the benefits (do what you love, ask about benefits, think about the future, follow your comparative advantage, ask about the trajectory). Consider the costs: evaluate the risks, consider the volatility, don't forget the hours

causes of poverty

deeper cause of poverty is lack of full time employment, biggest risk of poverty is losing a job, divorce and changes in the family are also big ones.

Derived Demand

demand for an input derives from the demand for the stuff that input produces

negative externalities and marginal private and external costs(supply curve)

each unit of a good produced with negative externalities has marginal private costs and marginal external costs. when managers ignore marginal external costs the supply curve is the marginal private cost curve

Means tested

eligibility is based on income and sometimes wealth. the safety net is means tested, some don't receive any assistance from programs while others are eligible for several of them

Exchange rate manipulation

exchange rate manipulation changes the price of your goods in foreign markets. Governments can give their companies a leg up by manipulating the exchange rate, make US products more expensive for foreign buyers and make it cheaper to import foreign goods

Club Goods

excludable but nonrival goods are club goods. Businesses try to turn public goods into club goods, want to make them excludable. Businesses often provide club goods but underprovide them, lower quantity than socially optimal.

Export

exporting is selling their goods or services to foreign buyers

Extensive Margin

extensive margin describes the number of people in the workforce - measure extent of work

external cost

external cost is a cost imposed on bystanders, which is the harm negative externalities impose on bystanders, ignored by sellers. Negative externalities create external costs

Private Bargaining

get all interested parties together including bystanders and those who cause externality and let them negotiate with each other, creative bargaining will make them better off. can solve externality problems when bargaining costs are low, when bargaining is difficult, externalities remain a problem

Fifth solution for externalities

government can help pay for public goods, solution to underproduction of public goods is for government to purchase public goods for everyone. Just because the government provides it, doesn't meant it is a public good, just because something is a public good does not mean the govt should mean the government should fund it, just because the govt should fund a public good, does not mean the govt should provide it

social insurance

government provided insurance against bad outcomes such as unemployment, illness, disability or outliving your savings are called social insurance. raised through taxes

how to solve problems of nonrival and/or nonexcludable goods

government provision of public goods and assigning ownership rights focus on solving externality problems that arise when something is nonrival and/or nonexcludable. Whenever something is nonexcludable and nonrival a positive externality exists

The Rational Rule for Employers

hire additional worker as long as their marginal revenue product is greater than (or equal to) the wage, will maximize your profits

carrots and sticks

incentives can involve both carrots (rewarding good performance) and sticks (punishing poor performance). Incentives can distort, workers will do more of what you pay for, less of other stuff you may want

Intrinsic Motivation

intrinsic motivation is also important, when people believe in what they are doing, they do it better. The desire to do something for the enjoyment of the activity itself

Marginal Social Benefit (curve)

is the sum of the marginal accruing to the buyer and the marginal external benefit, relevant to society (Marginal private benefit + Marginal external benefit). Marginal social benefit curve lies above demand curve, wedge between is marginal external benefits

Relative poverty

judges poverty relative to the material living standards of your contemporary society, need to see if you have the resources needed to participate in society. says that more people are in poverty.

Absolute poverty

judges the adequacy of resources relative to an absolute standard of living. Is better for global perspective

Labor Supply Shifter One: Changing Wages in Other Occupations

labor supply decreases when wages in competing jobs rise, but labor supply increases when wages in competing jobs fall

Social sanctions and social recognition

lawsuits, norms, and social sanctions are like corrective taxes (consider consequences of actions). Price in helping others and social recognition are like corrective subsidies

pay for better performance

linking the income your workers earn to measures of their performance, ex: commissions, bonuses, promotions. Can use commission, which is a share of the total sales each worker makes, can pay your workers a price rate where you pay workers only for what they actually do, can use bonuses to provide incentives, can offer a defined career path of promoting high performing workers.

Labor Demand Shifter Four: non wage benefits, subsidies, and taxes

many workers receive non wage benefits from their employer, employers make hiring decisions considering all costs, not just wage (ex: health insurance, tax for each worker, government programs providing subsidies), these costs changing will shift labor demand curve, non wage costs rising will lead labor demand to decrease, shifting labor demand to the left, if non wage costs rise, labor demand will shift to the right

Diminishing Marginal Utility

meaning each additional dollar yields a smaller boost to your utility, that is, less marginal utility; than previous dollar (larger when poor)

price elasticity of labor supply

measures workers' responsiveness to wages, individual labor supply is relatively inelastic, labor supply curve is upward sloping, but inelastic

length of poverty and those in poverty

most people who are in poverty spend much of their lives in poverty but most people will spend some time in poverty in their lifetime, children and single moms are most likely to be in poverty, people of color are more likely to experience poverty. Most poverty spells are short, but most poor people are in long term poverty, half of all whose incomes are below US poverty rate are in long term poverty, poverty is recurrent. Black and hispanic people are more likely to be in poverty compared to those who are white or asian, poverty more common among young people compared to old, child poverty is common, single parents experience high poverty rates.

types of goods and externality problems

nonexcludable goods create externality problems, when it is a nonrival good we have a public good which yields positive externalities and are typically underproduced, when it's a rival good we get the tragedy of the commons yields a negative externality, leading to too much selfish behavior

Labor Demand: What Employers Want

productivity plays a central role in determining how much your boss is willing to pay you. Employer's demand for workers is determined by value of what each worker can produce, if you want a high wage, you need potential employers to believe you'll produce a lot fo valuable output. Workers with a college degree will earn more, education makes you more productive

Labor Demand Curve

quantity of hours demanded in market is typically higher when wage is lower (downward sloping labor demand curve)

Red tape

red tape is like a tariff because it raises costs, but doesn't even raise revenue, raises trade costs and raises prices of goods, reduces quantity demanded and raises quantity supplied, no government revenue

Equality Efficiency trade off

redistribution of income may raise total well being but tax and redistribution programs distort incentives, reducing work effort (more equal incomes, lower average incomes), making all income equal would mean no incentive to work so less production. With no safety net programs, taxes would fall, increasing incentive to work hard but there would be extreme inequality

Personnel Economics

says to ensure workers have the right skills for the job, motivate your staff with incentives, shape your corporate culture, offer the right benefits package, and attract and retain better workers

Job-specific skills

skills that are only useful in a job with one particular employer. Investing. in job specific skills helps your workers do a better job for you

General Skills

skills useful to many employers. Investing in general skills might help your workers get better jobs elsewhere, so doesn't make sense for company to offer general skills training

In kind transfers vs cash benefits

some programs provide income, others provide specific goods, called in kind transfers. Government provides in kind benefits rather than cash benefits since giving goods rather than cash prevents making bad choices, taxpayers care more about reducing homelessness/hunger than what will make recipint happiest, providing ones only poor will value makes it more likely only those who truly need assistance will get it, some in kind benefits are a complement to work

Marginal external benefit

something with positive externalities has a marginal external benefit which is the extra benefit enjoyed by bystanders from the extra unit

Discrimination Type Three: Statistical Discrimination

statistical discrimination is using observations about the average characteristics of a group to make inferences about an individual, can help recruit certain wanted workforce but can lead to failing to hire best candidates for that certain attribute. Employers defend practice saying they're just using available info to try to recruit best workers, opponents argue recruiter need to put more effort into identifying best workers, providing more info about the capabilities of each applicant might give them less reason to rely on stereotypes

redistribution reducing incentive to work

taxes and means tested programs reduce the incentive to work, higher income taxes reduce the rewards from working, might choose less work when then leaves less money available to be redistributed (safety net means when you work, part of opp cost is potential you might lose cash or kin kind benefits, safety net presence may make you more likely to turn down a job). Means-tested benefits are taken away as people earn more, pay more taxes and lose more benefits

income taxes

taxes collected on all income, regardless of its source. All goods and services, social insurance, and safety net programs funded by the government are paid for by taxpayers, federal income taxes are progressive, earned and unearned income, higher the income, higher the tax rate.

Absolute Advantage

the ability of one person to do a task using fewer inputs than others. Tells you who's best at a task, but not who should do the task.

Comparative Advantage

the ability to do a task at a lower opportunity cost, is comparative because opportunity cost compares what you can produce if assigned one task with another task, advantage because lower opportunity cost means give up less to get a task done, so it's more efficient. Group producers more when each person focused on task they have a comparative advantage for. Everyone has a comparative advantage, you have a comparative advantage in the task you're least bad at, even if you don't have an absolute advantage, everyone has different opportunity costs.

Marginal utility

the additional utility you get from one more dollar

The domestic supply curve

the domestic supply curve is quantity of goods domestic producers plan to sell at each price.

Intergenerational mobility

the extent to which the economic status of children is independent of the economic status of their parents, half of economic advantage/disadvantage enjoyed by parents will be transmitted to you, US has less than other countries, also diff in diff US regions.

Marginal external costs

the extra external costs imposed on bystanders from one extra unit

Marginal product of labor

the extra output you produce from hiring an extra worker

Utilitarianism

the idea of maximizing total well being comes from utilitarianism which is the political philosophy that government should try to maximize total utility in society, redistribution increases total utility because taxing wealthy reduces their utility by only a little compared to utility gain of poor

the marginal revenue product

the marginal revenue product measures the marginal revenue from hiring an additional worker. The marginal revenue product is equal to the marginal product of labor multiplied by the price of that product (extra output due to hiring one more worker multiplied by price output is sold for)

Income

the money you receive in a period of time, like a year. Is distributed unequally

Labor Supply Curve

the quantity of hours supplied in the market typically rises with the wage (upward sloping labor supply curve)

The substitution effect

the substitution effect measures how people respond to a change in relative prices. Higher wage increases the returns to work relative to leisure, leading you to work more, when wage goes up, opportunity cost of leisure goes up, higher wages are incentive to substitute more work for less leisure, leads to an upward sloping individual labor supply curve

Spending inequality

there is less inequality in spending than in income, top quintile spends 4 times as much as bottom. Inequality in current and permanent income, consumption, and wealth are all examples of inequality in outcomes, people want there to be equality of opportunity

why redistributing money is difficult

there's no easy way to redistribute money from rich to poor, some money gets lost along the way. Administrative costs subtract from what you can redistribute

Trade

trade is when permits are traded, trade will lead production to be concentrated with more efficient businesses

Labor Market Discrimination

treating people differently based on characteristics such as their gender, race, ethnicity, sexual orientation, religion, disability, social class, or other factors. Discrimination affects wages, anti-discrimination laws forbid this but it still persists. May lead some occupations to be underpaid

nonrival

when a good is nonrival, one person's use doesn't subtract from another's

determining what benefits to offer

when workers feel they are treated well they are more likely to treat your business well by working hard, fairness also matters, and so does being valued. It is important to offer the right set of benefits, workers prefer extra wages to extra benefits, some benefits aren't taxed(fringe benefits), employers have purchasing power, complements can help (stuff that goes with productive work), substitutes can hurt

Labor Demand Shifter One: Changes in demand for your product

workers are an input of production, labor follows derived demand. When demand increases marginal revenue produce of workers is higher, so labor demand will increase, shifting the curve to the right

Labor supply shifter four: Non wage benefits, subsidies, and income taxes

workers consider after tax total compensation, non wage benefits/subsidies increase the benefit of working another hour, income taxes reduce benefit of working

Permanent Income

your average lifetime income. may be a better measure of living standards, less inequality in it than annual income because some of the income inequality reflects temp up and downs. Earn more as you age so some inequality reflects differences between age, because ppl can borrow and save, annual income isn't as good a predictor of what you can afford to consume

Utility

your level of well-being