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Economy-Chapter 6
Test #2 Notecards
41
Economics
Undergraduate 2
10/28/2010

Additional Economics Flashcards

 


 

Cards

Term

A Housing Market with a Rent Ceiling:

 

Price Ceiling(or Price Cap):

Definition
a regulation that makes it illegal to charge a price higher than a specified level
Term

A Housing Market with a Rent Ceiling:

 

Rent Ceiling:

Definition
when a price ceiling is applied to a housing market
Term

A Housing Market with a Rent Ceiling:

 

If the rent ceiling is priced above the equilibrium rent, then:

Definition

it has no effect

 

the market works like there is no ceiling

Term

A Housing Market with a Rent Ceiling:

 

If the rent ceiling is priced below the equilibrium rent, then:

Definition

the quantity of housing demanded exceeds the quantity supplied and there is a shortage of housing. 

 

this causes the market to be not efficient and under produce housing. resulting in a deadweight loss

Term

A Housing Market with a Rent Ceiling:

 

because the legal price cannot eliminate the shortage of housing, ______ and ______ occur.

Definition
  • search activity
  • black markets
Term

A Housing Market with a Rent Ceiling:

 

Search Activity:

Definition

the time spent looking for someone with whom to do business

 

when price is regulated and there is a shortage, search activity increases

Term

A Housing Market with a Rent Ceiling:

 

Black Markets:

Definition

an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed

 

illegal arrangements are made between renters and landlords at rents above the rent ceiling- usually higher than what rent would have been in an unregulated market

Term

A Labor Market with a Minimum Wage:

 

Price Floor:

Definition
a regulation that makes it illegal to trade at a price lower than a specific level
Term

A Labor Market with a Minimum Wage:

 

Minimum Wage:

Definition
when a price floor is applied to labor markets
Term

A Labor Market with a Minimum Wage:

 

A minimum wage set below the equilibrium wage rate:

Definition

has no effect

 

the market works as if there were no minimum wage

Term

A Labor Market with a Minimum Wage:

 

a Minimum wage set above the equilibrium wage rate:

Definition

the quantity of labor supplied exceeds the quantity of labor demanded, causing a surplus of labor

 

end result: Unemployment and Deadweight loss

Term

A Labor Market with a Minimum Wage:

 

A Minimum wage leads to an ______ outcome.

Definition

Inefficient

 

the quantity of labor employed is less than the efficient quantity, causing a deadweight loss

 

there is also increased job search, and higher job search costs by workers add to the loss from the minimum wage

Term

A Labor Market with a Minimum Wage:

 

Inefficiency of Minimum Wage:

Supply of Labor=

Demand for Labor=

Definition

Supply of Labor= marginal social cost of labor to workers

 

Demand for Labor= marginal social benefit from labor

Term

Taxes:

 

Tax Incidence:

Definition
the division of the burden of a tax between the buyer and the seller
Term

Taxes:

 

Tax Incidence:

If the price of the tax ____ then....

Definition
  • rises by the full amount of the tax, the buyers pay the tax
  • rises by a lesser amount of the tax, both the buyers and sellers share the burden of the tax
  • does not rise at all, the sellers pay the tax
Term

Taxes:

 

Tax Incidence:

 

Buyers respond to the price ____ the tax, because....

Definition
With: that is the price they must pay
Term

Taxes:

 

Tax Incidence:

 

Sellers respond to the price ____ the tax, because....

Definition
Without: that is the price they must receive
Term

Taxes:

 

Statutory Incidence of a Tax:

Definition

indicates who is legally responsible for the tax (the producer or the consumer)

 

it is not an economic tax

Term

Taxes:

 

Economic Incidence of a Tax:

Definition

the change in the distribution of private real income induced by a tax

 

ie: the amount the suppliers actually pay and the amount the consumers actually pay

Term

Taxes:

 

Tax imposed on the Seller:

Definition

Supply decreases 

 

the curve S+tax on sellers is used to show the new supply curve

Term

Taxes:

 

Tax imposed on Buyers:

Definition

Demand decreases 

 

the curve D-tax on buyers is used to show the new demand curve

Term

Tax:

 

Tax Wedge:

Definition
the tax-induced difference between the price paid by consumers and the price received by producers
Term

Taxes:

 

The division of the tax between buyers and sellers depends on:

 

two extreme cases of this are:

Definition

the elasticities of demand and supply

 

  • perfectly inelastic demand
  • perfectly elastic demand
Term

Taxes:

 

the more inelastic the demand:

Definition
the larger is the buyer's share of the tax
Term

Taxes:

 

Elasticity of demand:

Perfectly inelastic demand:

Definition

buyers pay the entire tax

 

the demand curve is vertical

 

Term

Taxes:

 

elasticity of demand:

perfectly elastic demand:

Definition

sellers pay the entire tax

 

the demand curve is horizontal

Term

Taxes:

 

Elasticity of supply:

two extreme cases:

Definition
  • perfectly inelastic supply
  • perfectly elastic supply
Term

Taxes:

 

the more elastic the supply:

Definition
the larger is the buyers share of the tax
Term

Taxes:

 

elasticity of supply:

perfectly inelastic supply:

 

Definition

sellers pay the entire tax

 

the supply curve is verical

Term

Taxes:

 

elasticity of suppy:

Perfectly elastic supply:

 

Definition

buyers pay the entire tax

 

the supply curve is horizontal

Term

Taxes:

 

Taxes and Efficiency:

Definition

taxes drive a wedge between what buyers pay and sellers receive

 

also put a wedge between marginal cost and marginal benefit creating inefficiency

 

quantity produced is less than the efficient quantity, this decreased quantity creates deadweight loss

Term

Taxes:

 

Two conflicting principles of fairness that apply to a tax system:

Definition
  • the benefits principle
  • the ability-to-pay principle
Term

Taxes:

 

the Benefits principle:

Definition

the proposition that people should pay taxes equal to the benefits they receive from the services provided by the government

 

 

Term

Taxes:

 

the Ability-to-Pay principle:

Definition
the proposition that people should pay taxes according to how easily they can bear the burden on the tax
Term

Production Subsidies and Quota:

 

intervention in markets takes two main forms:

Definition
  • production quota
  • subsidies
Term

Production Subsidies and Quota:

 

Production Quota:

Definition

an upper limit to the quantity of a good that may be produced during a specified period

 

only have an impact if they are set below the equilibrium level of output in a market

 

results in a decrease in quantity supplied, a rise in price, a decrease in marginal cost, inefficiency from underproduction, and an incentive to cheat and overproduce

Term

Production Subsidies and Quota:

 

Subsidies:

Definition

a payment made by the government to a producer

 

it increases the supply, it lower the price paid by buyers and raises the price received by sellers

 

deadweight loss is created

Term

Market for Illegal Goods:

 

 

Definition
prohibiting transactions in a good or service raises the cost of such trading between buyers and sellers
Term

Market for Illegal Goods:

 

Penalties on Sellers:

Definition

supply of the drug decreases to new supply curve S+CBL

 

New equilibrium created,

 

the price rises and the quantity decreases

Term

Market for Illegal Goods:

 

Penalties on Buyers:

Definition

demand for the drug decreases to new demand curve, D-CBL

 

new equilibrium created

 

market price falls and the quantity decreases

 

the opportunity cost of buying this illegal good increases above the original equilibrium price because the buyer pays the market price PLUS the cost of breaking the law

Term

Market for Illegal Goods:

 

Penalties on both Buyers and Sellers:

Definition

with both the buyers and sellers penalized for trading in the illegal drug, both the demand for the drug and the supply of the drug decrease

 

new equilibrium created: above it is what buyer pays, below it is what seller receives

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