Study Guide for Final Exam

Study Guide for Final Exam - Chapter 4 The Labor market: It...

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Chapter 4 The Labor market: It works the same as the market for goods and services, with just a different name for price and quantity. o Labor demand is downward sloping because as wage decreases, firms will want to employ more people. o Labor supply is upward sloping because as wage increases, people will want to work more. Linking the markets= when the demand for a product changes, the demand for the resources used to produce it will change in the same direction. Price Floors= a legally established minimum price that buyers must pay for a good or resource. o Above the equilibrium causes a problem of surplus. o Below equilibrium causes nothing. Price Ceilings= a legally established maximum price that sellers can charge for a good or resource. o Below the equilibrium causes a problem of shortage. o Above the equilibrium causes nothing. Impact of a tax= a tax on a product will cause the supply curve to shift left by the amount of the tax. o Raises the price that buyers pay o Reduces the amount sellers receive o Reduces the quantity sold o Increases government revenue o Creates deadweight loss The burden of the tax does not depend on whom the tax is imposed, but it does depend on elasticity. o Whoever is relatively more inelastic will bear the higher burden of the tax. o Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic. Average Tax Rate (ATR)= tax liability / taxable income Marginal Tax Rate (MTR)= change in tax liability / change in taxable income Progressive Tax= ATR rises with income Regressive= ATR falls with income Proportional= ATR is the same at all income levels The Laffer curve= a curve illustrating the relationship between the tax rate and tax revenue. o Higher tax rates will NOT always lead to more tax revenue. Subsidy= a payment the government makes to either the buyer or seller when a good or service is purchased or sold. Chapter 5 Economic Efficiency: Do things in which the benefits outweigh the costs and Don’t do things in which the costs outweigh the benefits. 1
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Role of government: protect individuals and their property rights and overcome market failure by providing goods and services that cannot easily be provided by the market. The Four Types of Market Failure: 1. Lack of competition: without competition, firms can hold back production and raise price. 2. Externalities: Effects of an activity that influence the well being of a non-consenting third party o Negative externalities= producer gains the benefit, everyone else bears cost. o Positive externalities= producer bears cost, everyone else gains the benefit. 3. Public goods: those goods that have the following two characteristics (which can lead to free-riding): o Non-rival in consumption= making the good available to ONE does not reduce availability to OTHERS. o
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This note was uploaded on 03/25/2012 for the course ECO 2023 taught by Professor Mccaleb during the Fall '08 term at FSU.

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Study Guide for Final Exam - Chapter 4 The Labor market: It...

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