The market

1.

Define and explain 10 principles of economies

2.

Describe two simple models — the circular flow and the production possibilities frontier. Draw the graphs

3.

Difference between micro and macro economics.Role of economists in making policy

4 .

Absolute advantage and comparative advantage

.

5.

How comparative advantage explains the gains from trade

11.

Describe the role of prices in market economies

12.

The meaning of the elasticity of demand. Determine the elasyicity of Demand

13.Explain the ways of computing the price elasticity of demand

The price elasticity of a good or service is calculated as the percent change in the quantity demanded of a good divided by the percent change in the price for that good. A price elasticity greater than one indicates that the good is elastic, that quantity demanded is highly sensitive to changes in price. For example, a 1-percent change in the price of chicken might cause a 5-percent decrease in sales. A price elasticity less than one tells you that your good is inelastic. In this case, price changes will have a small impact on quantity demanded. If a good/service has a price elasticity of one, also called unitary elasticity, this means that a 5-percent change in price will result in a 5-percent change in quantity demanded.

Price elasticity of demand = Percentage change in quantity demanded./Percentage change in price

14.

Explain the relationship between total revenue and the price elasticity of demand

Figure3

15.

Explain the meaning and types of the elasticityof Supply. Determine the elasticity of Supply

16. Describe the concept of elasticity in three very different markets: the market for wheat, the market for oil, and the market for illegal drugs.

17.

Describe the different types of controls on prices. Give the real world examples of these two kinds of price controls

.

18.

Explain how price ceilings affect market outcomes. Draw the graphs

.

19.

Explain how price floors affect market outcomes. Draw the graphs

.

20. Using supply-demand diagrams, show the difference between a non-binding price ceiling and a binding price ceiling in the wheat market.Who benefits from a binding price ceiling? Who is hurt by a binding price ceiling?

The diagrams should look like panels (a) and (b) of Figure 6-1 in the text.

A binding price floor benefits the sellers of the good or service who are still able to sell their product at the higher price. A binding price floor hurts the buyers of the good or service, and those sellers who are no longer able to sell their product at the higher price because of the surplus created by the price floor.

21.

The meaning of tax. Explain how taxes on buyers affect market outcomes

.

22.

How does elasticity affect the burden of a tax? Justify your answer using supply-demand diagrams

.

23.

Explain how to define and measure consumer surplus

.

24. Explain how to define and measure producer surplus.

Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold

25.

Using a demand-supply diagram, explain and identify the following areas:consumer surplus, producer surplus, total surplus

.

26. The meaning of total surplus in a market, and describe why might it be a good measure of economic well-being. Using a demand-supply diagram, show the areas representing total surplus

See the 25 question.

Total surplus in a market is the total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods.

Total surplus is the sum of consumer surplus and producer surplus. It is measured as the area between the demand curve and the supply curve, from the origin to the quantity sold. It might be a good measure of economic well-being because it measures the total benefit to buyers and sellers from participating in a market.

27.

Name two types of market failure. Explain why each may cause market outcomes to be inefficient

28.

Explain how taxes reduce consumer and producer surplus

.

29.

The meaning and causes of the deadweight loss from a tax

.



Explain the gains and losses of an importing country. Draw the supply-and-demand diagram for an importing country.

International trade in an importing country

12

Price of

textiles

Quantity of textiles

0

Once trade is allowed, the domestic price falls to equal the world price. The supply curve shows the amount produced domestically, and the demand curve shows the amount consumed domestically. Imports equal the difference between the domestic quantity demanded and the domestic quantity supplied at the world price. Buyers are better off (consumer surplus rises from A to A + B + D), and sellers are worse off (producer surplus falls from B + C to C). Total surplus rises by an amount equal to area D, indicating that trade raises the economic well-being of the country as a whole

D

Domestic

Quantity

Supplied

The area D shows the increase in total surplus and represents the gains from trade

Domestic

Quantity

Demanded

C

A

B

Domestic

Supply

Domestic

Demand

Price

before

trade

Price

after

trade

World

Price

Imports

Price of

textiles

Quantity of textiles

0

Once trade is allowed, the domestic price falls to equal the world price. The supply curve shows the amount produced domestically, and the demand curve shows the amount consumed domestically. Imports equal the difference between the domestic quantity demanded and the domestic quantity supplied at the world price. Buyers are better off (consumer surplus rises from A to A + B + D), and sellers are worse off (producer surplus falls from B + C to C). Total surplus rises by an amount equal to area D, indicating that trade raises the economic well-being of the country as a whole

D

Domestic

Quantity

Supplied

The area D shows the increase in total surplus and represents the gains from trade

Domestic

Quantity

Demanded

C

A

B

Domestic

Supply

Domestic

Demand

Price

before

trade

Price

after

trade

World

Price

Imports

Using the graphs explain the gains and losses of an exporting country.

International trade in an exporting country

8

Price of

textiles

Quantity of textiles

0

Once trade is allowed, the domestic price rises to equal the world price. The supply curve shows the quantity of textiles produced domestically, and the demand curve shows the quantity consumed domestically. Exports from Isoland equal the difference between the domestic quantity supplied and the domestic quantity demanded at the world price. Sellers are better off (producer surplus rises from C to B + C + D), and buyers are worse off (consumer surplus falls from A + B to A). Total surplus rises by an amount equal to area D, indicating that trade raises the economic well-being of the country as a whole.

D

Domestic

Quantity

Demanded

The area D shows the increase in total surplus and represents the gains from trade

Domestic

Quantity

Supplied

C

A

B

Domestic

Supply

Domestic

Demand

Price

before

trade

Price

after

trade

World

Price

Exports

Exports

Price of

textiles

Quantity of textiles

0

Once trade is allowed, the domestic price rises to equal the world price. The supply curve shows the quantity of textiles produced domestically, and the demand curve shows the quantity consumed domestically. Exports from Isoland equal the difference between the domestic quantity supplied and the domestic quantity demanded at the world price. Sellers are better off (producer surplus rises from C to B + C + D), and buyers are worse off (consumer surplus falls from A + B to A). Total surplus rises by an amount equal to area D, indicating that trade raises the economic well-being of the country as a whole.

D

Domestic

Quantity

Demanded

The area D shows the increase in total surplus and represents the gains from trade

Domestic

Quantity

Supplied

C

A

B

Domestic

Supply

Domestic

Demand

Price

before

trade

Price

after

trade

World

Price

Exports

Exports

The meaning of tariff. Describe its economic effects.

The effects of a tariff

Tariff - Tax on goods produced abroad and sold domestically

Free trade: Domestic price = world price

Tariff on imports: Raises domestic price above world price (By the amount of the tariff)

The effects of a tariff

Price of textiles

Quantity of textiles

0

A tariff reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade. Total surplus falls by an amount equal to area D + F. These two triangles represent the deadweight loss from the tariff.

B

The area D + F shows the fall in total surplus and represents the deadweight loss of the tariff

G

Imports without tariff

A

C

Imports

with tariff

D

F

E

Domestic

Demand

Domestic

Supply

Price without

tariff

World Price

Price with tariff

Q1S

Q2S

Q2D

Q1D

Tariff

Price of textiles

Quantity of textiles

0

A tariff reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade. Total surplus falls by an amount equal to area D + F. These two triangles represent the deadweight loss from the tariff.

B

The area D + F shows the fall in total surplus and represents the deadweight loss of the tariff

G

Imports without tariff

A

C

Imports

with tariff

D

F

E

Domestic

Demand

Domestic

Supply

Price without

tariff

World Price

Price with tariff

Q1S

Q2S

Q2D

Q1D

Tariff

Define an import quota. Compare its economic effects with those of a tariff.

An import quota- Means of restricting the quantity of imports through import licenses, either of a certain item or from a certain country. See also import restrictions.

Similarities with tariffs

They both result in higher domestic prices, an increase in domestic production of the good and a decrease in imports.

Consumer surplus decreases by the same amount (for a tariff-equivalent quota). Producer surplus increases by the same amount.

Deadweight costs are the same. (If the quota rents are both captured by the importing country and not wasted on rent-seeking activities).

Differences from tariffs

Under an equivalent quota, the distribution of quota rents equivalent to the tariff revenue can vary. It can be given to domestic producers or importers, foreign governments or foreign producers, or auctioned and retained by the government.

In the longer run, a quota will impose larger distortions on an economy than would a tariff. When domestic demand increases, a tariff would allow the price to remain constant at the world price plus the tariff, and imports to increase. A quota will lead to a rising price, a constant level of imports, and larger deadweight costs.

Determine the arguments people use to advocate trade restrictions.

The jobs argument - “Trade with other countries destroys domestic jobs”

(Free trade creates jobs at the same time that it destroys them)

The national-security argument - “The industry is vital for national security”

When there are legitimate concerns over national security

The infant-industry argument

- “New industries need temporary trade restriction to help them get started”

- Difficult to implement in practice

- The “temporary” policy – hard to remove

- Protection is not necessary for an infant industry to grow

The unfair-competition argument

- “Free trade is desirable only if all countries play by the same rules”

- Increase in total surplus for the country

The protection-as-a-bargaining-chip argument - “Trade restrictions can be useful when we bargain with our trading partners”. The threat may not work

Describe what happens to the gains from trade when a tax is imposed.

ANSWER: A tax causes a reduction in the gains from trade by raising the price the buyer pays and reducing the price the seller receives. Hence, it will reduce the total volume of trade. This causes a loss of consumer surplus and producer surplus referred to as deadweight loss. The tax will reduce the gains realized from some trades and will discourage other trades from being made at all.

The meaning of externality. Describe the types of externalities.

Definition: An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account.

Classic example of a negative externality: pollution, generated by some productive enterprise, and affecting others who had no choice and were probably not taken nto account.

Example of a positive externality: Purchase a car of a certain model increases demand and thus availability for mechanics who know that kind of car, which improves the situation for others owning that model.

A positive externality is something that benefits society, but in such a way that the producer cannot fully profit from the gains made. A negative externality is something that costs the producer nothing, but is costly to society in general.

Examples of positive externalities are environmental clean-up and research. A cleaner environment certainly benefits society, but does not increase profits for the company responsible for it. Likewise, research and new technological developments create gains on which the company responsible for them cannot fully capitalize.

Negative externalities, unfortunately, are much more common. Pollution is a very common negative externality. A company that pollutes loses no money in doing so, but society must pay heavily to take care of the problem pollution caused.

Describe why externalities can make market outcomes inefficient. Use the graphs to explain.

Self-interested buyers and sellers neglect the external effects of their actions, so the market outcome is not efficient.

Another principle from Chapter 1:

Governments can sometimes improve market outcomes.

Pollution: A Negative Externality

Example of negative externality: Air pollution from a factory.

The firm does not bear the full cost of its production, and so will produce more than the socially efficient quantity.

How govt may improve the market outcome:

Impose a tax on the firm equal to the external cost of the pollution it generates

Other Examples of Negative Externalities

the neighbor’s barking dog

late-night stereo blasting from the dorm room next to yours

noise pollution from construction projects

talking on cell phone while driving makes the roads less safe for others

health risk to others from second-hand smoke

Positive Externalities from Education

A more educated population benefits society:

lower crime rates: educated people have more opportunities, so less likely to rob and steal

better government: educated people make better-informed voters

People do not consider these external benefits when deciding how much education to “purchase”

Result: market eq’m quantity of education too low

How govt may improve the market outcome:

subsidize cost of education

The types of private solutions to externality. Define the Coase theorem.

Types of private solutions:

moral codes and social sanctions, e.g., the “Golden Rule”

charities, e.g., the Sierra Club

contracts between market participants and the affected bystanders

The Coase theorem states that private parties can find efficient solutions to externalities without government intervention. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining

The CoaseTheorem: An Example

Dick owns a dog named Spot. Negative externality: Spot’s barking disturbs Jane, Dick’s neighbor.

The socially efficient outcome maximizes Dick’s + Jane’s well-being. •If Dick values having Spot more than Jane values peace & quiet, the dog should stay.

Coase theorem: The private market will reach the efficient outcome on its own…

The CoaseTheorem: An Example

•CASE 1: Dick has the right to keep Spot. Benefit to Dick of having Spot = $500 Cost to Jane of Spot’s barking = $800

•Socially efficient outcome: Spot goes bye-bye.

•Private outcome: Jane pays Dick $600 to get rid of Spot, both Jane and Dick are better off.

•Private outcome = efficient outcome.

The CoaseTheorem: An Example

•CASE 2: Dick has the right to keep Spot. Benefit to Dick of having Spot = $1000 Cost to Jane of Spot’s barking = $800

•Socially efficient outcome: See Spot stay.

•Private outcome: Jane not willing to pay more than $800, Dick not willing to accept less than $1000, so Spot stays.

•Private outcome = efficient outcome.

The CoaseTheorem: An Example

•CASE 3: Benefit to Dick of having Spot = $500 Cost to Jane of Spot’s barking = $800 But Jane has the legal right to peace & quiet.

•Socially efficient outcome: Dick keeps Spot. •Private outcome: Dick pays Jane $600 to put up with Spot’s barking. •Private outcome = efficient outcome.

The private market achieves the efficient outcome The private market achieves the efficient outcome regardless of the initial distribution of rights.

44. Determine why private solutions to externalities sometimes do not work

Despite the appealing logic of the Coase theorem, private actors on their own often fail to resolve the problems caused by externalities. The Coase theorem applies only when the interested parties have no trouble reaching and enforcing an agreement. In the real world, however, bargaining does not always work, even when a mutually beneficial agreement is possible.

Sometimes the interested parties fail to solve an externality problem because of transaction costs, the costs that parties incur in the process of agreeing to and following through on a bargain. In our example, imagine that Dick and Jane speak different languages so that, to reach an agreement, they will need to hire a translator. If the benefit of solving the barking problem is less than the cost of the translator, Dick and Jane might choose to leave the problem unsolved. In more realistic examples, the transaction costs are the expenses not of translators but of the lawyers required to draft and enforce contracts.

45. 

Identify the various government policies aimed at solving the problem of externalities

46.

Describe the different kinds of goods, and give an example of each

47. The importance of free-rider problem. Explain why private markets fail to provide public goods.

free rider is a person who receives the benefit of a good but avoids paying for it. Public goods are not excludable, the free-rider problem prevents the private market from supplying them. The government, however, can potentially remedy the problem. If the government decides that the total benefits exceed the costs, it can provide the public good and pay for it with tax revenue, making everyone better of.

48. 

Explain how our government raises and spends money. Describe the most important sources of tax revenue for our government budget

.

49.

Describe the efficiency costs of taxes

.

50.

Define alternative ways to judge the equity of a tax system. Explain why studying tax incidence is crucial for evaluating tax equity

.

52.

The meaning of costs. Define what items are included in a firm’s costs of production

.

53.

Explain the various measures of cost. Give the meaning of average total cost and marginal cost and explain how they are related

.

54. Describe the relationship between short-run and long-run costs

Many decisions

-fixed in the short run

Variable in the long run

-Firms greater flexibility in the long run

-long run cost curves

*differ from short-run curves

*much flatter than short run cost curves

-short run cost curves

*lie on or above the long run cost curve

Economies of scale

Long run average total cost falls as the quantity of output increases

-increasing specialization

Constant returns to scale

-long run average total cost stays same as the quantity of output changes

Diseconomies of scale

-long run average total cost rises as the quantity of output increases

-increasing coordination problems

55.

Explain how competitive firms decide when to shut down production temporarily and how competitive firms decide whether to exit and enter a market?

56.

Explain why some markets have only one seller. Describe how a monopoly determines the quantity to produce and the price to charge

.

57.

Explain how the monopoly’s decisions affect economic well-being. Describe the various public policies aimed at solving the problem of monopoly

.

58. 

Describe how monopolies make production and pricing decisions. Explain why monopolies try to charge different prices to different customers

.

59. List the factors which are key determinants of the productivity of labor. For each one, describe how each specifically influences labor productivity.

There are three key determinants of productivity:

*Physical capital: When workers work with a larger quantity of equipment and structures, they produce more.

*Human capital: When workers are more educated, they produce more.

*Technological knowledge: When workers have access to more sophisticated technologies, they produce more.

60. Using the theory of wage determination, explain why wages in developing countries are typically quite low.

Wages are determined by the value of workers to firms. In many developing countries, the level of capital is quite small, and so worker productivity is quite low. As such, workers are not able to contribute as much value to a firm as their counterparts in countries that have more capital to complement their labor efforts. Since marginal productivity is low, wages are low.

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Define and measure producer surplus, total surplus in a market. Gains and losses of an exporting country, economic effects. Types of externalities, market outcomes

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К данному материалу относятся разделы:

Define and explain 10 principles of economies

Describe two simple models — the circular flow and the production possibilities frontier. Draw the graphs

Difference between micro and macro economics.Role of economists in making policy

Absolute advantage and comparative advantage

How comparative advantage explains the gains from trade

Describe the role of prices in market economies

The meaning of the elasticity of demand. Determine the elasyicity of Demand

Explain the relationship between total revenue and the price elasticity of demand

Explain the meaning and types of the elasticityof Supply. Determine the elasticity of Supply

Describe the different types of controls on prices. Give the real world examples of these two kinds of price controls

Explain how price ceilings affect market outcomes. Draw the graphs

Explain how price floors affect market outcomes. Draw the graphs

The meaning of tax. Explain how taxes on buyers affect market outcomes

How does elasticity affect the burden of a tax? Justify your answer using supply-demand diagrams

Explain how to define and measure consumer surplus

Using a demand-supply diagram, explain and identify the following areas:consumer surplus, producer surplus, total surplus

Name two types of market failure. Explain why each may cause market outcomes to be inefficient

Explain how taxes reduce consumer and producer surplus

The meaning and causes of the deadweight loss from a tax

Identify the various government policies aimed at solving the problem of externalities

Describe the different kinds of goods, and give an example of each

Explain how our government raises and spends money. Describe the most important sources of tax revenue for our government budget

Describe the efficiency costs of taxes

Define alternative ways to judge the equity of a tax system. Explain why studying tax incidence is crucial for evaluating tax equity

The meaning of costs. Define what items are included in a firm’s costs of production

Explain the various measures of cost. Give the meaning of average total cost and marginal cost and explain how they are related

Explain how competitive firms decide when to shut down production temporarily and how competitive firms decide whether to exit and enter a market?

Explain why some markets have only one seller. Describe how a monopoly determines the quantity to produce and the price to charge

Explain how the monopoly’s decisions affect economic well-being. Describe the various public policies aimed at solving the problem of monopoly

Describe how monopolies make production and pricing decisions. Explain why monopolies try to charge different prices to different customers

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