the market for inputs used to produce goods and service. represented by a downward sloping demand curve and an upward sloping supply curve.
when the price of a resource increases, it will lead to higher production costs, lower supply and higher prices for the goods and services produced with the resources
lower resource prices reduce costs and expand the supply of consumer goods made with lower-priced resources (shifting the supply curve to the right)
this in turn increases supply and will lead to a lower price in the product market.
government-mandated prices that are generally imposed in the form of maximum or minimum of legal prices
price ceiling (P1)
a legally established maximum price sellers can charge for a good or resources.
*A price ceiling below market equilibrium price creates a shortage
*A price ceiling above market equilibrium price does nothing
a condition in which the amount of a good offered for sale by producers is less than the amount demanded by buyers at the existing price. an increase in price would eliminate the shortage.
QD - QS
*Quantity demanded > Quantity supplied
a legally established minimum price buyers must pay for a good or resource
*A price floor above equilibrium price creates a surplus
*A price floor below equilibrium price does nothing
a condition in which the amount offered for sale by producers is greater than the amount that buyers will purchase at the existing price. A decline in price would eliminate the surplus
QS - QD
*Quantity supplied > Quantity demanded
legislation requiring that workers be paid at least the stated minimum hourly rate of pay
*minimum wage is a price floor
* the minimum wage legislation will lead to high unemployment rates among low-skilled workers because their equilibrium work wage is lower than the minimum wage but it wont affect those who are paid more than the amount declared by the minimum wage price floor
* minimum wage makes hiring workers more expensive so employers are more likely to substitute workers with machines or highly qualified workers over low-skilled workers
a market that operates outside the legal system where either illegal goods are sold or legal goods are sold at illegal prices or terms.
the way the burden of a tax is distributed among economic units (consumers, producers, employees, employers) the actual tax burden does not always fall on those who statutorily assigned to pay the tax
It does not depend on whom the tax is imposed.
Tax incidence does depend on elasticity:
The burden of the tax will fall on those who are relatively inelastic.
Dead-weight loss will be lower if taxes are placed on goods that are relatively inelastic.
the level or quantity of an economic activity that is taxed. Higher tax rates reduce the level of the tax base because they make activity less attractive
the per-unit amount of the tax or percentage rate at which the economy activity is taxed
the loss of gains from trade to buyers and sellers that occur when a tax is imposed
the dead-weight loss imposes a burden on both the buyers and the sellers over and above the actual payment of the tax.
1. Firms demand labor
2. Labor demand curve is downward sloping because as wage decreases, firms will want to employ more people
Changes in labor demanded
1. An increase in labor demand (labor demand shifts right)
2. A decrease in labor demand (labor demand curve shifts left)
1. Workers supply labor
2. Labor supply curve is upward sloping because as wage increases, people will want to work more.
Changes in labor supply
1. Increase in labor supply: (labor supply curve shifts right)
2. Decrease in labor supply: (labor supply curve shifts left)
*when the demand for a product changes, the demand for the resources used to produce it will change in the same direction
rent control leads to shortages as well
2.A decline in the supply of future rental housing
3.A decline in quality of rental housing
4.Non-price methods of rationing
5.Inefficient housing match-ups
impact of a tax
A tax on a product will cause the supply curve to shift left by the amount of the tax.
1.Raises the price that buyers pay
2.Reduces the amount sellers receive
3.Reduces the quantity sold
4.Increases government revenue
5.Creates deadweight loss
average tax rate
Average tax rate (ATR): the percentage of income paid in taxes
ATR = tax liability / taxable income
the tax system
1. Progressive tax: average tax rate rises with income
2. Regressive tax: average tax rate falls with income
3. Proportional tax: average tax rate is the same at all income levels
marginal tax rate
Marginal tax rate (MTR): The additional tax liability a person faces divided by his or her additional taxable income.
MTR = change in tax liability / change in taxable income
*Note: Marginal tax rates are what is important in personal decision making.
The Laffer Curve: A curve illustrating the relationship between the tax rate and tax revenue.
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.
ex. Subsidizing home gyms
*Note: Subsidies are costly
To be economically efficient:
1. All actions generating more benefits then costs should be undertaken
2. No actions generating more costs then benefits should be undertaken
role for government
The government should…
1. Protect individuals and their property rights
2. Provide goods that cannot be easily provided by the market (overcome market failure)