Study Guide Second
Study Guide Second econ 103-004
Popular in Microeconomic Principles
Popular in Economcs
This 8 page Study Guide was uploaded by Wesley Hunt on Friday November 13, 2015. The Study Guide belongs to econ 103-004 at George Mason University taught by Donald Boudreaux in Fall 2015. Since its upload, it has received 90 views. For similar materials see Microeconomic Principles in Economcs at George Mason University.
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Date Created: 11/13/15
Prices are a signal to suppliers to indicate how much to supply Law of One Price More of a trend than a law We observe that at any given time in any particular area, a good or service tends to sell at the same price with minor differences Prices change over time, but why do prices at any given time for the same object sell for roughly the same price? ArbitrageBuy low, sell high Arbitrage narrows price and tends to balance them out We tend to observe only one price for any particular entity Arbitraging in one area causes the price to go up in its original site and down in the new site, ultimately making the prices more even A bushel of wheat is better used for a starving child than a dog who does not need it Arbitrageurs lower the price because they increase the supply in an area Arbitrage moves valuable goods from where they are high price to where they are lowpriced Seeking only their own gain, arbitrageurs can bring out good outcomes ONE MORE THING!!! When this opportunity comes around, then the local fortunes do not merit quite as much as they otherwise would Arbitrage through timespeculation Arbitrageurs are speculators of the future Speculators can be wrong, but they hope they are right Speculators unite people through time; people act today like they care about what happens tomorrow Price ceiling causes shortage because it never lets supply catch up to demand When the price is held at a ceiling, we have a shortage Qd > Qs Shortage would disappear without price controls More affordable for consumers Second effect of a price ceiling: Because a price is stuck, we need to decide how to give it to consumers and to whom to supply the good Queueing for distribution for consumersstandard example for distribution How much demand leads to how little supply? Reduces ammt. consumers get relative to the lack of a price ceiling Ceiling raises the market value of each unit produced Add to price ceiling the cost of getting the product Smaller the quantity; higher the value people wind up spending to increase chances of acquiring good. Final effect of a price ceilingOne way that sellers can respond is by not accounting for the quality of the good General principles of rent control apply to this situation Rent control decides when and how much rent control can be enforced More likely to raise the rent on those moving out than on those currently residing there Rent control helps outside the city because some of them don’t want to pay rent inside the city, driving up the rents there This does not have a good effect if you understand economics INTENTIONS ARE NOT RESULTSPrice control has hidden consequences Prices are not arbitrary, they are indicators of reality Price Floors are the opposite of ceilings, but analysis is very much the same Permanent surplus is given at price floor; sellers have more than people want to buy If you are a seller, you want to actually sell your good This drops market value of goods and ideas sold Still not a good thing, though If the only car were a Mercedes, the car quality would be higher RealWorld Price Floor: The minimum wage! 3.9% of workers in US live off minimum wage Any worker that costs the employer too much is going to lose the job As wages change, profitability changes Employers will mechanize more Downward supply for labor Only SOME workers benefit from price floor Some other workers worse off If there was no minimum wage, there would be more workers hired Those at minimum wage fall to zero, but elasticity is the only indicator Raising the minimum wage will have some cons Ain’t no rest for the Wicked TECHNICALLY, high minimum wage would open up more positions The minimum wage has just as much of a downside; many would lose their jobs Economic studies indicate there is more unemployment on lowskilled workers 2/3rds of studies say minimum wage increases unemployment Minimum wage promotes employment discrimination Larger work pool means more selectivity in the hiring process Lose less money than if there was no minimum wage Not due to evil employer, just the employer can make money by being exclusive The attractiveness of hiring lowskilled workers rises and falls with minimum wage If wage rate goes up, employers less likely to hire new workers Not originally meant to raise lowskilled workers, but press more experienced ones to low money Otis Elevator invented the first mechanical elevator Otis Elevator caught on because they wouldn’t need to hire anyone to operate them Otis was a supporter of the minimum wagebut knew how much more money would be used for workers 2/3rds of studies say minimum wage causes unemployment among workers it is supposed to help Not objectively good or bad; just some cons that come with the pros High minimum wage inflicts some unforeseen harm In both the cases of ceiling of floor, prices should move to equilibrium, but are prevented from doing so Amounts of a good or service is decreased and necessitate mechanisms to determine who gets the disparate supplies Why are there price controls if studies suggest negative effects? Economics of Trade Economics itself was spawned by folks 300200 YA to understand international trade No matter what the alignment or credibility, most economists are in favor of free trade Even Adam Smith mostly wrote of free trade Mercantilism is the villain of all economists Mercantilism still existsit’s the most fundamental way of thinking What is mercantilism? Wealth is fixed in sizenot created, just distributed Money is wealth and wealth is moneyTo Smith, $90B on an island is worthless Trade is a zerosum gainA winner and a loser in trade, not both sides trying to gain The purpose of trade policy is to encourage maximum exports and minimal imports Because mercantilists believed in fixed wealth, it implied a particular view of each country’s relation with its neighbors Started “trade wars””beggar thy neighbor” Exportproduced inhouse and sold abroad Importproduced abroad and sold domestically Mercantilists believed imports should either be tariffed or avoided outright A tariff is a tax placed on goods bought from foreign producers Reduce imports with tariffs People want to buy less of something and more of its substitute with tariffs Make sure internal sellers make more of the product Adam Smith wrote his book mostly as an attack on mercantilismhis greatest hatred Debate on free trade will go on for the rest of time Hamilton vs. Jefferson Protectionism vs. Free Trade Protect domestic producers from foreign competition Free TradeNo protection or government interference with consumer choices Foreign made goods in free trade are treated no differently than homegrown goods Free Trade DOES NOT mean trade is freeWe mean free as in “unrestricted” No special benefits or burdens for certain goods, either Have to put taxes down both ways Countries do not trade; only people acting separately or together can Sale is part of an exchangeremember the First Law of Alchemy again China does not value our money If China does not want anything from the USA, the Chinese won’t gain anything 1000000 yuan for USD? Why? If they get a million yuan, nobody has any use for either currency If we witness one way trade, we can be sure that the onesided party wants an equivalent value in return You don’t want money, just what it can bring You don’t want $1B in Trident Layers; not the money, just what purchasing power you have If you were eccentric and wanted nothingwhy work? You don’t want physical desires! Money is the means to an end Overwhelmingly, the big argument is jobs Does more imports from abroad steal jobs at home? Well, that’s only one side of it It is true to an extent, but the jobs move to something we import We sell lumber to China in exchange for steel; same # of jobs, just different distribution The money circulated through currency exchange comes back on exports US made more lumber and bought Chinese steel with lumber and vice versa Comparative advantage comes back again Produce cars by growing corn in Iowa When there is free trade, each country will specialize in that which they have comparative advantage Sell stuff at highest profit; make the most with what you have Moves jobs from industries with comparative disadvantage towards those with comparative advantage Wages go up in those areas SHIFT in jobs from trade, not a LOSS “Oh, we should vote for free trade to increase jobs”jobs don’t increase either, they just move Concerns are with jobs as well as a trade “deficit” A “trade deficit” is where there are more imports than exports in a certain timeframe A “trade surplus” is when export value is greater than import value Again, not inherently good or bad”balance of trade” is a mercantilist idea Val. Imports == Val. Exports for any given time period, that trade is “balanced” A trade deficit should be called a deficit of a current account Either spend or invest money given The surplus money is sent back as investments in stocks, land, etc.
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