Summary Chapter 5 Economics
- Elasticity rule: if two linear demand curves run through a common point, then at any given
quantity the curve that is flatter is more elastic.
- The fewer substitutes for a good, the less elastic the demand.
- The demand for necessities tends to be less elastic than the demand for luxuries.
- The larger the share of a person’s budget devoted to a good, the more elastic the demand.
- Ed = percentage change in quantity demanded : percentage change in price.
- Ed > 1 = elastic Ed < 1 = inelastic Ed = 1 = unit elastic
-
- If the demand curve is inelastic, then revenues go up when the price goes up.
- If production can increase without much increasing per-unit costs, then supply will be
elastic.
- Supply is more elastic when the industry can be expanded without causing a big increase in
demand for that industry’s input.
-
- Percent change in price from a shift in demand = percent change in demand : (Ed + Es)
- Percent change in price from a shift in supply = percent change in supply : (Ed + Es)
Elasticity of demand measures how responsive the quantity demanded is to a change in price;
more responsive equals more elastic.
Elasticity of supply measures how responsive the quantity supplied is to a change in price.
Summary Chapter 6 Economics
- Commodity taxes are taxes on goods, following truths:
Who ultimately pays the tax does not depend on who writes the check to the
government.
Who ultimately pays the tax does depend on the relative elastics of demand and
supply.
Commodity taxation raises revenue and creates deadweight loss.
- The tax = price paid by buyers – price received by sellers.
- The price buyers pay, the price sellers receive and the quantity traded are identical to what
they were when the tax was placed on the sellers.
- When demand is more elastic than supply, demanders pay less of the tax than sellers.
- When supply is more elastic than demand, suppliers pay les of the tax than buyers.
- When a tax is raised, some consumer and producer surplus is transferred to the
government, but there is also deadweight loss.
- If the demand curve is relatively elastic, then the tax deters a lot of trades, so the lost gains
from trade are large.
- Broad-based taxes tend to create less deadweight loss than more narrowly based taxes.
, - A subsidy is a reverse tax, following facts:
Who gets the subsidy does not depend on who gets the check from the government.
Who benefits from a subsidy does depend on the relative elasticities of demand and
supply.
Subsidies must be paid for by taxpayers and they create inefficient increases in
trade.
- The subsidy = price received by sellers – price paid by buyers.
- The cost to taxpayers is the amount of the subsidy times the number of units subsidized.
- When the elasticity of supply is less than the elasticity of demand, suppliers bear the burden
of the tax but receive the benefit of a subsidy.
Deadweight loss the reduction in total surplus caused by a market distortion or inefficiency.
Summary Chapter 8 Economics
- Price ceilings create five important effects:
1. Shortages
2. Reductions in product quality
3. Wasteful lines and other search costs
4. A loss of gains from trade
5. A misallocation of resources
- When prices are held below the market price, the quantity demanded exceeds the quantity
supplied.
- When prices are held below market levels, sellers reduce quality so that costs also reduce.
- Corruption and bribes are common when price controls are long-lasting.
- The bribe is transferred from buyer to seller, but the time spent waiting in line is simply lost.
- In a market with a price ceiling, demander with the highest willingness to pay have no easy
way to signal their demands nor do suppliers have an incentive to supply their demands.
- Average value = 0,5 x highest value + 0,5 x lowest value
- A rent control below the equilibrium price generates a shortage, in the short-run this is small
since the apartment units are already built.
- In the long run fewer new units are built and old apartments are torn down which causes
the shortage to be greater.
- Rent controls reduce the price of discrimination, which means that demand will increase.
- Price floors create four important effects:
1. Surpluses
2. Lost gains from trade
3. Wasteful increases in quality
4. A misallocation of resources
- The more employers have to pay for low-skilled workers, the fewer low-skilled workers they
will hire.
- An increase in quality that consumers are not willing to pay for is a wasteful increase in
quality.
, Price ceiling a maximum price allowed by law.
Deadweight loss reduction in total surplus cause by a market distortion or inefficiency.
Rent control a price ceiling on rental housing.
Price floor a minimum price allowed by law.
Summary Chapter 9 Economics
- With international trade, domestic consumption is Q d,freetrade units; Qs,freetrade of these units are
produced domestically and the remainder, Q d,freetrade – Qs,freetrade are imported.
- The tariff shifts the world price up by the amount of the tariff.
- A tariff on an imported good will increase domestic production and decrease domestic
consumption.
- The reduction in US production is a benefit of eliminating the tariff because it frees up
resources that can be used to produce other goods and services.
- The tariff reduces consumer surplus and it increases producer surplus.
- We pay for our imports with exports.
- A tariff on our imports means fewer exports and fewer jobs in export industries.
- Increased trade from the US with China will increase the demand for skilled workers, driving
up their wages and it will decrease the demand for unskilled workers driving down their
wages.
- Three arguments against international trade:
1. It’s wrong to trade with countries that use child labor.
2. We need to keep certain industries at home for reasons of national security.
3. We can increase US well-being with strategic trade protectionism.
Protectionism the economic policy of restraining trade through quotas, tariffs, or other
regulations that burden foreign producers but not domestic producers.
Tariff a tax on imports.
Trade quota a restriction on the quantity of goods that can be imported: imports greater than the
quota amount are forbidden or heavily taxed.
Summary Chapter 10 Economics
- A tax on a good with an external cost reduces deadweight loss and raises revenue.
- A subsidy on a good with an external benefit will reduce deadweight loss, thereby increasing
social surplus.
- With a command and control method, the government says what can and can’t be
produced.
- A tax set equal to the level of external cost is equivalent to tradeable allowances, where the
number of allowances is set equal to the efficient quantity.
- Elasticity rule: if two linear demand curves run through a common point, then at any given
quantity the curve that is flatter is more elastic.
- The fewer substitutes for a good, the less elastic the demand.
- The demand for necessities tends to be less elastic than the demand for luxuries.
- The larger the share of a person’s budget devoted to a good, the more elastic the demand.
- Ed = percentage change in quantity demanded : percentage change in price.
- Ed > 1 = elastic Ed < 1 = inelastic Ed = 1 = unit elastic
-
- If the demand curve is inelastic, then revenues go up when the price goes up.
- If production can increase without much increasing per-unit costs, then supply will be
elastic.
- Supply is more elastic when the industry can be expanded without causing a big increase in
demand for that industry’s input.
-
- Percent change in price from a shift in demand = percent change in demand : (Ed + Es)
- Percent change in price from a shift in supply = percent change in supply : (Ed + Es)
Elasticity of demand measures how responsive the quantity demanded is to a change in price;
more responsive equals more elastic.
Elasticity of supply measures how responsive the quantity supplied is to a change in price.
Summary Chapter 6 Economics
- Commodity taxes are taxes on goods, following truths:
Who ultimately pays the tax does not depend on who writes the check to the
government.
Who ultimately pays the tax does depend on the relative elastics of demand and
supply.
Commodity taxation raises revenue and creates deadweight loss.
- The tax = price paid by buyers – price received by sellers.
- The price buyers pay, the price sellers receive and the quantity traded are identical to what
they were when the tax was placed on the sellers.
- When demand is more elastic than supply, demanders pay less of the tax than sellers.
- When supply is more elastic than demand, suppliers pay les of the tax than buyers.
- When a tax is raised, some consumer and producer surplus is transferred to the
government, but there is also deadweight loss.
- If the demand curve is relatively elastic, then the tax deters a lot of trades, so the lost gains
from trade are large.
- Broad-based taxes tend to create less deadweight loss than more narrowly based taxes.
, - A subsidy is a reverse tax, following facts:
Who gets the subsidy does not depend on who gets the check from the government.
Who benefits from a subsidy does depend on the relative elasticities of demand and
supply.
Subsidies must be paid for by taxpayers and they create inefficient increases in
trade.
- The subsidy = price received by sellers – price paid by buyers.
- The cost to taxpayers is the amount of the subsidy times the number of units subsidized.
- When the elasticity of supply is less than the elasticity of demand, suppliers bear the burden
of the tax but receive the benefit of a subsidy.
Deadweight loss the reduction in total surplus caused by a market distortion or inefficiency.
Summary Chapter 8 Economics
- Price ceilings create five important effects:
1. Shortages
2. Reductions in product quality
3. Wasteful lines and other search costs
4. A loss of gains from trade
5. A misallocation of resources
- When prices are held below the market price, the quantity demanded exceeds the quantity
supplied.
- When prices are held below market levels, sellers reduce quality so that costs also reduce.
- Corruption and bribes are common when price controls are long-lasting.
- The bribe is transferred from buyer to seller, but the time spent waiting in line is simply lost.
- In a market with a price ceiling, demander with the highest willingness to pay have no easy
way to signal their demands nor do suppliers have an incentive to supply their demands.
- Average value = 0,5 x highest value + 0,5 x lowest value
- A rent control below the equilibrium price generates a shortage, in the short-run this is small
since the apartment units are already built.
- In the long run fewer new units are built and old apartments are torn down which causes
the shortage to be greater.
- Rent controls reduce the price of discrimination, which means that demand will increase.
- Price floors create four important effects:
1. Surpluses
2. Lost gains from trade
3. Wasteful increases in quality
4. A misallocation of resources
- The more employers have to pay for low-skilled workers, the fewer low-skilled workers they
will hire.
- An increase in quality that consumers are not willing to pay for is a wasteful increase in
quality.
, Price ceiling a maximum price allowed by law.
Deadweight loss reduction in total surplus cause by a market distortion or inefficiency.
Rent control a price ceiling on rental housing.
Price floor a minimum price allowed by law.
Summary Chapter 9 Economics
- With international trade, domestic consumption is Q d,freetrade units; Qs,freetrade of these units are
produced domestically and the remainder, Q d,freetrade – Qs,freetrade are imported.
- The tariff shifts the world price up by the amount of the tariff.
- A tariff on an imported good will increase domestic production and decrease domestic
consumption.
- The reduction in US production is a benefit of eliminating the tariff because it frees up
resources that can be used to produce other goods and services.
- The tariff reduces consumer surplus and it increases producer surplus.
- We pay for our imports with exports.
- A tariff on our imports means fewer exports and fewer jobs in export industries.
- Increased trade from the US with China will increase the demand for skilled workers, driving
up their wages and it will decrease the demand for unskilled workers driving down their
wages.
- Three arguments against international trade:
1. It’s wrong to trade with countries that use child labor.
2. We need to keep certain industries at home for reasons of national security.
3. We can increase US well-being with strategic trade protectionism.
Protectionism the economic policy of restraining trade through quotas, tariffs, or other
regulations that burden foreign producers but not domestic producers.
Tariff a tax on imports.
Trade quota a restriction on the quantity of goods that can be imported: imports greater than the
quota amount are forbidden or heavily taxed.
Summary Chapter 10 Economics
- A tax on a good with an external cost reduces deadweight loss and raises revenue.
- A subsidy on a good with an external benefit will reduce deadweight loss, thereby increasing
social surplus.
- With a command and control method, the government says what can and can’t be
produced.
- A tax set equal to the level of external cost is equivalent to tradeable allowances, where the
number of allowances is set equal to the efficient quantity.
