Tax on a good causes the size of market to shrink

tax on a good causes the size of market to shrink because they cause buyers to
consume less and sellers to produce less
 losses to buyers and sellers from a tax exceed the revenue raised by the government
 deadweight loss – the fall in total surplus that results from a market distortion (tax)
o CS + PS + Tax revenue = DWL
o the greater the elasticities of supply and demand, the greater the DWL of a
tax
 taxes cause DWL because they prevent buyers and sellers from realizing some of the
gains of trade
o as a tax gets larger, the DWL get larger because incentives are distorted more
 marginal tax rate – the tax on the last dollar of earnings
 Laffer curve
o Because a tax reduces the size of the market does not mean tax revenue will
continually increase
o It first rises with the size of a tax, but if the tax gets large enough, tax revenue
starts to fall
 Supply-side economics – cut in tax rates intended to encourage people to increase
the quantity of labor they supplied
Chapter 9: International Trade
 Free trade = unrestricted
 Effects of free trade are determined by comparing the domestic price without trade
to the world price
 Pd > Pw – does not have comparative advantage, country imports the good
 Pd < Pw – has the comparative advantage, country exports the good
 High domestic price indicates that the country does not have a comparative
advantage and will import the good
 When country exports, producers are better off and consumers are worse off
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 When country imports, consumers are better off and producers are worse off
 Gains from trade always exceed losses
 World price – the price of a good in the world market
 Tariff – tax on goods produced abroad and sold domestically
 Tariff reduces the quantity of imports and gains from trade, and moves the domestic
market closer to its equilibrium without trade
 Benefits of International Trade
o Increased variety of goods
o Lower costs through economies of sale
o Increased competition
o Enhanced flow of ideas
 Arguments for restricting Trade
o Protecting jobs
o Defending national security
o Helping infant industries
o Preventing unfair competition
o Responding to foreign trade restrictions
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TEST 3
Chapter 13: Firm Behavior and the Organization of Industry
 Economists assume the goal of a firm is to maximize profit
 Total revenue – the amount a firm receives from the sale of its output
o TR= quantity of output X price at which output is sold
 Marginal revenue = change in TR/ change in Q
 Total cost – the market value of the inputs a firm uses in production
o TC= explicit costs + implicit costs
o Explicit costs require a firm to pay out money
o Implicit costs (opportunity costs) do not require cash outlay
 Profit = total revenue – total cost
 Economists include implicit and explicit costs when measuring a firm’s total costs
o Economic profit = TR – TC (EC and IC)
 Accountants only measure explicit costs because they focus on money
o