Principles of Macroeconomics

Does a change in consumers' tastes lead to a movement along the demand curve or to a shift in the demand curve? Does a change in price lead to a movement along the demand curve or to a shift in the demand curve? Explain your answers.

A change consumers' taste will only shift the demand curve, while a change in the price of the good itself will represent a movement along the demand curve. A curve shifts when there is a change in a relevant variable that is not measured on either axis. Because price is on the vertical axis, a change in price represents a movement along the demand curve.

What is a competitive market? Briefly describe a type of market that is not perfectly competitive.

A competitive market is one in which there are many buyers and many sellers so that each has a negligible impact on the market price. If a seller were to change their price, their buyers are likely to switch sellers. No single seller can impact the market price in a competitive market. Monopolies and oligopolies can create imperfect competitive markets. Along with this, imperfect competitive markets can be caused by only having one seller where this seller sets the price, such as a local television station.

What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downward?

A demand schedule is a table that shows the relationship between the price of a good and the quantity demanded, while a demand curve is a graph of that same information. Because a lower price increases the quantity demanded, the demand curve slopes downward.

Which causes a shortage of a good—a price ceiling or a price floor? Justify your answer with a graph.

A price ceiling prevents the price from being raised to the equilibrium level. Since the price is not high enough, firms will supply less than the quantity demanded, and there will be a shortage.

Define and give an example of a public good. Can the private market provide this good on its own? Explain.

A public good is a good, which is non-excludable (you can't keep people from partaking in the benefits of its existence) and non-rival (my partaking in the good does not interfere with yours). Because of external effects, private decisions about consumption and production can lead to an inefficient allocation of resources, and government intervention can potentially raise economic well-being.

Draw a supply-and-demand diagram with a tax on the sale of a good. Show the deadweight loss. Show the tax revenue..

A tax on a good reduces the consumer surplus (area B+C) and the producer surplus (area D+E). The fall in producer surplus exceeds tax revenue (area B+D), the tax is said to impose a deadweight loss (area C+E). Thus, Tax revenue = area B+D Deadweight loss = area C+E

How does a tax on a good affect the price paid by buyers, the price received by sellers, and the quantity sold?

A tax on a good, raises the price buyers pay, lowers the price sellers receive, and reduces the quantity sold.

Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?

According to this theorem, you and your roommate will bargain over whether your roommate can continue to smoke in the room. If you value clean air more than your roommate values smoking, the bargaining process will lead to your roommate not smoking. But if your roommate values smoking more than you value clean air, the bargaining process will lead to your roommate smoking. The outcome is efficient as long as transaction costs do not prevent an agreement from taking place. The solution may be reached by one of you paying off the other either not to smoke or for the right to smoke.

Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and price in the market for pizza?

As the price of beer increases, demand for pizza decreases since people buy them together. Supply for pizza would remain unchanged, demand decreases, quantity supplied decreases, quantity demanded decreases, and then the price falls. The entire demand curve for pizza has shifted to the left and therefore affected the equilibrium price and quantity of pizza, in the send reducing the quantity of pizza supplied and demanded.

What is cost-benefit analysis of public goods? Why is it important? Why is it hard?

C-B analysis is important because you must compare the total benefits to the costs of building and maintaining. It is hard because there is no price with which to judge the value of say example a highway

In a supply-and-demand diagram, show producer and consumer surplus at the market equilibrium.

Calculation: Consumer surplus: area of green triangle. Producer surplus: area of pink triangle. Total surplus: area of entire shaded triangle.

What happens to the deadweight loss and tax revenue when a tax is increased?

Deadweight loss is the fall in total surplus that results from a market distortion, such as a tax. As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if the tax gets large enough, tax revenue starts to fall.

Why do experts disagree about whether labor taxes have small or large deadweight losses?

Economists disagree about these issues in part because there is no consensus about eh size of the relevant elasticities. Also the general lesson is that a change in tax revenue from a tax change depends on how the tax change affects peoples behavior.

Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.

Equilibrium of a market is where supply and demand have been brought into balance. At this price, the quantity of a good that buyers are willing and able to buy balances with the quantity sellers are willing and able to sell. The activity of many buyers and sellers automatically pushes the market price toward the equilibrium price. Increase in demand and shortage of supply can also move the equilibrium price, but how quickly equilibrium is reached thereafter varies from market to market.

Explain what is meant by a good being "excludable." Explain what is meant by a good being "rival in consumption." Is a slice of pizza excludable? Is it rival in consumption?

Excludable good: People can be prevented from using it. Rival in consumption: gtxone person's use of the good reduces another person's ability to use it. Pizza is a classic example of a pure private good — it is excludable (if you don't pay for the pizza, you don't get a slice) and it is rival (each slice you eat is one fewer I can eat).

List some of the ways that the problems caused by externalities can be solved without government intervention.

Externalities can be solved without government intervention through moral codes and social sanctions (such as littering), charities, merging firms whose externalities affect each other, or by contract.

What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?

If quantity supplied exceeds quantity demanded, so that there is a surplus, sellers may try to appeal to the personal biases of the buyers. If quantity demanded exceeds quantity supplied (shortage), sellers can ration the good according to their personal biases, or make buyers wait in line. Also Black Markets

Harry's income declines, and as a result, he buys more pumpkin juice. Is pumpkin juice an inferior or a normal good? What happens to Harry's demand curve for pumpkin juice?

In this case, pumpkin juice is an inferior good. A rise in quantity demanded at any given price will shift the demand curve to the right.

Name two types of market failure. Explain why each may cause market outcomes to be inefficient.

Market Power and Externalities. This is when a market can no regulate its resources efficiently.

What is efficiency? Is it the only goal of economic policymakers?

Maximizing the total surplus received by all members of society. The total surplus is Total Surplus = Value of buyers - Cost to sellers.

Give an example of a negative externality and an example of a positive externality.

Positive Externalities: Immunizations, such as a flu shot - provide a positive externality to third parties in that it helps prevent the spread of illness in the general public. -OR- Improving driving habits will provide a decrease in the risk of accidents for everyone on the road as well as eventually reduce insurance premiums of the driver. Negative Externalities: Second-hand cigarette smoke causes health problems in people other than smoker. -OR_ A loud party next door can cause those not involved in the festivities to lose sleep.

Give an example of a price ceiling and an example of a price floor.

Price Ceiling: A legal maximum on the price at which a good can be sold Example: Government requiring Jeeps can be sold for a maximum price at $20,000 when it was originally $30,000 Price Floor: A legal minimum on the price at which a good can be sold Example: Government requiring gum to be sold for a minimum price at $0.50 when it was originally $0.25

Describe the role of prices in market economies.

Prices are great signals that guide economic decisions and bring the market into equilibrium. Prices can signal surplus or shortage and guide economists. Prices different from equilibrium can show a difference in supply and demand and can lead to a change in price until equilibrium is reached.

Suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for this good, the amount buyers are out of pocket (including any tax payments they make), the amount sellers receive (net of any tax payments they make), and the quantity of the good sold?

Removing a tax paid by buyers and replacing it with a tax paid by sellers has no effect on the price that buyers pay, the price that sellers receive, and the quantity of the good sold.

What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution?

Taxes enacted to correct the effects of negative externalities. Economists prefer corrective taxes over regulation as a way to protect the environment from pollution because they can reduce pollution at a lower cost to society. The tax is just as effective as regulation and has the advantage of letting the market the least expensive way to reduce pollution and gives firms incentive to reduce pollution in order to save money.

How do the elasticity's of supply and demand affect the deadweight loss of a tax? Why do they have this effect?

Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus. The elasticity's of supply and demand measure how much market participants respond to market conditions, larger elasticity's imply larger DW losses. Smaller elasticity's imply smaller DW losses.

Explain why economists usually oppose controls on prices.

The burden is shared between the buyers and sellers. Buyers pay more and sellers receive less. The quantity sold decreases.

What determines how the burden of a tax is divided between buyers and sellers? Why?

The burden of a tax is divided between buyers and sellers depending on the elasticity of demand and supply. Elasticity represents the willingness of buyers or sellers to leave the market, which in turns depends on their alternatives. When a good is taxed, the side of the market with fewer good alternatives cannot easily leave the market and thus bears more of the burden of the tax. Tax imposed who bears the most burden who ever has the most inelastic curve.

In what way does the patent system help society solve an externality problem?

The patent system helps society solve the externality problem from technology spillovers. By giving inventors exclusive use of their inventions for a certain period, the inventor can capture much of the economic benefit of the invention. In doing so, the patent system encourages research and technological advance; which benefits society through spillover effects.

Explain how sellers' costs, producer surplus, and the supply curve are related.

The sellers cost is how much they pay to obtain a good. The producer's surplus is the amount they pay minus the cost of providing it. The supply curve measures this amount by looking at the area above the supply curve.

Does a change in producers' technology lead to a movement along the supply curve or to a shift in the supply curve? Does a change in price lead to a movement along the supply curve or to a shift in the supply curve?

The supply curve is very similar to the demand curve in that anything not measured on the axis (technology, input prices, expectations, number of sellers) will result in a shift in the supply curve. At the same time a change in price (on the vertical axis) will results in movement along the supply curve.

What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?

The supply schedule and supply curve are a table and graph respectively that show the relationship between the price of a good and the quantity supplied. The supply curve slopes upward because a higher price means a great quantity supplied.

Explain how buyers' willingness to pay, consumer surplus, and the demand curve are related.

They all measure the buyer's willingness to pay for a good. The Consumer surplus is just willingness minus amount the buyer actually pays. The demand curve helps use measure this relationship by looking at the area below the demand curve and above the price is the sum of the consumer surplus

Define and give an example of a common resource. Without government intervention, will people use this good too much or too little? Why?

Water. Yes they will. When one person uses a common resource, one diminishes other people's enjoyment of it. Because of this externality, common resources tend to be used excessively.

What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Explain.

When the sale of a good is taxed, both consumer surplus and producer surplus decrease. The decrease in consumer surplus and producer surplus exceeds the amount of government revenue raised, so society's total surplus declines. The tax distorts the incentives of both buyers and sellers, so resources are allocated inefficiently.