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Mason - ECON 103 - Study Guide - Midterm

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Mason - ECON 103 - Study Guide - Midterm

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background image ECON103-002 Chapter 4 Prices aren’t necessarily just for outputs Inputs (resources, factors of production, etc.) cost prices such as 
wages for example
Resource markets are important! If you want less of something, you raise its price Excess demand / shortage occurs when a price ceiling is set because 
it lowers the price which increases the demand but lowers the 
quantity supplied.
A price ceiling — A legally established maximum price sellers can 
charge for a good or resource.
Black markets — A market that operates outside the legal system in 
which either illegal goods are sold or legal goods are sold at illegal 
prices or terms.
Nonprice methods of rationing will become more important Rent control results sometimes in discrimination – I only want blonde 
tenants for example
Price ceiling –  on the test! Price floor - A legally established minimum price buyers must pay for
a good or resource.
Excess supply / surplus occurs when a price floor is set Tax incidence / Burden of a tax — The way the burden of a tax is 
distributed among economic units (consumers, producers, employees, 
employers, and so on). The actual tax burden does not always fall on 
those who are statutorily assigned to pay the tax. – important and 
on  the test! Tax incidence / Burden of a tax — Who actually ends up carrying the 
burden of the tax. (
gasoline example: if $1 tax is imposed on every  gallon of gasoline, Exxon or shell for example will raise the price of  the gallon from $3 to $3.60 so they only have to $0.40 taxes) When you increase taxes, it’s like there’s an increase in the cost of 
production
So a VERTICAL SHIFT happens in the SUPPLY curve by the amount of
the tax 
Tax Base – unit tax (excise tax) Tax Rate — $3.00 per gallon  (in this example) Tax Base — The level or quantity of an economic activity that is 
taxed. Higher tax rates reduce the level of the tax base because they 
make the activity less attractive.
Tax Rate — The per-unit amount of the tax or the percentage rate at 
which the economic activity is taxed.
background image The Deadweight Loss Caused by Taxes/The excess burden –  on  the test! The Deadweight Loss occurs due to the number of units not bought 
because of the higher prices
Supply curve shifts up exactly the amount of the tax imposed. Consumer surplus + the producer surplus = deadweight loss On the test you’ll have to figure out: How much the tax is, how it’s 
split, how much is the gov’t revenue. 
The burden of the tax always falls more on the inelastic side of the 
market 
EXHIBIT 5 and 6 are important from the textbook –  on the test! The deadweight loss in usually not very big when a good has an 
inelastic demand 
(people are going to buy it anyway) Whether seller pays more taxes or the consumer, it doesn’t matter 
because the outcome is still the same
Types of tax ATR – Average Tax Rate MTR – Marginal Tax rate    Study MTR and ATR  Progressive taxes – A tax in which the average tax rate rises with 
income. People with higher incomes will pay a higher percentage of 
their income in taxes.
Regressive taxes – one in which the poor pay proportionally more 
(excise) / when a low incomer pays the same amount of taxes on 
something as the high incomer 
[ someone who gets $100,000 and  pays $2,000 (2%) where someone who gets $20,000 still pays the  same $2,000 (10%) ] Proportional taxes – all pay equal (everyone pays 6% on groceries 
for ex)
EXHIBIT 8 from the textbook is important subsidy – payment the government makes to either the buyer or 
seller, usually on a per-unit basis, when a good or a service is 
purchased or sold / reverse of tax

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School: George Mason University
Department: Economics
Course: Microeconomic Principles
Professor: Bennett
Term: Fall 2016
Tags: demand, supply, applications, extensions, market, role_of_gov't, and political_actions
Name: ECON 103
Description: Study Guide for the second exam (out of four) covering chapters 4, 5, and 6
Uploaded: 10/17/2016
5 Pages 51 Views 40 Unlocks
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