ECON 103 FINAL EXAM REVIEW
ECON 103 FINAL EXAM REVIEW Econ 103
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Date Created: 12/12/15
1 Economics 103 (Principles of Microeconomics) DAY 1 Hundreds of thousands of years ago, the average person lived on $3 a day Starvation was a common killer in history ¼ children died within the first year Women had a 1/3 chance of dying within a year of giving birth o Reason divorce rate has gone up is because women don’t die and marriages last longer Dwellings-14x20 room, dirt floor, built of branches, straw, etc People were short and bent over (diseases, starvation, head lice, no teeth) Prior to the industrial age: the average life expectancy was 28 o If that person lived until 1, they have a 50/50 chance to live they’re 20 If they lived until 20, life expectancy was mid 50s There was alcohol (beer); they couldn’t drink that much water because alcohol was safer to drink ~250-300 years ago, the average person started to make $50 a day (maybe the discovery of agriculture?) The best the that’s ever happened in history Economics is about understanding what happened, how that happened, and why it happened This course is an introduction to why it happened and what caused it Standards of living increased Adam Smith (Scotland 1723-1790) considered one of the greatest thinkers ever, founder of modern economics (1776-The Wealth of Nations) (An inquire into the major causes of the wealth of nations) o He wanted to know why What causes poverty? Nothing. The real question is, what causes wealth? You have to work at being wealthy (not poor) We’re so rich now that poverty in the Western world has become the acceptation, it’s still around, but it is not the norm anymore Poverty was the norm (and it has been the norm all of history), but we are unusual Queen Ann-one of the wealthiest woman (300 years ago), had 18 children, watched all of them die, the only one that survived made it to ~18 We are among the top .000001% of the richest people who have ever lived 2 The difference between our living standards and Bill Gates’ are tiny compared to the difference in the living standards between us and our ancestors The principle kthler-pneumonia (like cancer today) (TB, diarrhea) Prior to the 19 century, 95% of the population got small pox--1 in 7 died (population = less than 1 billion) The human population hit 1 billion in the 14 century and went right back down due to the black plague Now approaching 7.5 billion people Maybe a reason: sex lol When people get richer, they can survive more The more humans on Earth, the more stress on resources Per person wealth, went straight up The reason we are richer today is because there are more people = more resources Everything that we consume, it’s something we didn’t make, and it’s something that any one person knows how to make (unlike our ancestors) The pencil is the knowledge of millions of people around the world It takes millions of people to make a simple pencil A pencil is so insignificant, yet it took millions to make it Each of these things is because of the cooperation of many people In the past, people knew exactly how to produce the things they consumed All these things are true, yet we are so much richer today We are materially wealthier Why didn’t all this happen quicker? Economics helps us answer that question DAY 2 Useful arrangement of resources Resources are used in a certain order to be used in productive ways Economy is not random, nor is it designed Basic Economic Theory Fundamental Building Blocks of Economics Foundation of Microeconomics The 10 Assumptions of Economics 1. Scarcity “In short supply of” 3 We live in a world of scarcity If something is scarce, there is not enough of it to satisfy all human wants at a zero price Almost everything in life that matters in life is scarce “If I get it, and you can’t get it, it means it’s scarce” i.e. food, money, time, oil When something is not scarce, you don’t care how other people use it Air and gravity are not scarce; they are free Most of the things that are valuable to us (or things that matter), are scarce You have to give something up 2. Scarcity Choice Cost Scarcity implies choice, which implies cost One must choose how to use resources that are scarce (i.e. time) When you give up $20, you’re not giving up $20, you’re giving up whatever else you could have bought with the $20 Cost of the choice that you make Cost is a necessary component of choice To choose is to give something up 3. More is Preferred to Less 4. All Social Order Must be Understood by Understanding Individual Behavior We don’t explain things in economics by understanding at the level of an individual Society doesn’t have a mind An individual has a mind 5. Each Adult is Rational in Self-interest Someone is “rational” if he/she I. Acts purposefully (with some goal in mind) II. Seeks to achieve their goals at the lowest possible cost III. Learns o Learn from mistakes IV. Has preferences that are “transitive” o A>B, B>C, A>C o “Intransitive” things are irrational o People with intransitive preferences cannot make decisions Each adult is rational in self-interest Does not mean that people are only interested in money and themselves Humans have emotions, not always rational 4 A person is “self-interested” if he/she cares more about himself/herself and loved ones/friends than he cares about strangers 6. Tastes are Subjective No one person can evaluate another person’s state of mind as well as that person can evaluate his/her own There’s no objective right or wrong for evaluating choices regarding how they affect the chooser There are no wrong choices Economists say: “only the individual chooser can evaluate…” 7. People Respond Predictably to Incentives If you change someone’s incentives, people will change their behavior 8. People Make Choices at the Margin Small addition or subtraction i.e. you’ll choose a diamond over a bottle of water, but only because you have access to more water; but if you have the choice between all the water in the world, or all the diamonds, obviously you would choose the water It’s never all or nothing People say they are “safe drivers”, but a true safe driver is someone who sits in the car and doesn’t drive We don’t make “all or nothing” choices, we make “a little bit less, or a little bit more” choices 9. Not All Costs are Measured in Money Not all costs are monetary costs The true cost of being a full-time student is the income you are not earning plus the tuition Economics is not about money, it’s about choices, and resources that come together It’s not about the money; it’s about what you can do with it. Money is only worthy because we live in a society that uses money as a medium of exchange 10. Intentions are Not Results We don’t judge the likely outcome of actions or policies by stated intentions behind the policies or actions Sometimes, intentions lead to results (getting coffee when you want it) Our world is full of unintentional results Following someone’s footsteps makes it easier for other people, the first person didn’t intend to make a footpath and help other people, it just happened 5 Being an economist, you have to look past what is obvious, you have to look at the whole picture, economics trains you to do that Economics is a “Positive Science” It helps you apply your values in a informative way A statement is positive if it’s about objective reality, facts, not opinions Ceteris Paribus--nothing else changes Pencil falling to the ground without any interference example DAY 3 Ceteris Paribus “With other conditions staying the same” A useful theory is not one that gives you all the details, Basic outline of the critical information (examples: names of main roads, distances) All theories in “theory” are unrealistic Fallacies o Composition “That which is true for an individual, is therefore good for the group” What’s true for the individual, is not necessarily true for the group Someone stands up at a concert to get a better view o Ad hominem When someone judges the merits solely by the identity of the person making the argument Based on sex, occupation, race, age o Post hoc, ergo, propter hoc Event B happened after A, therefore, A caused B It may be true, but the assumption is incorrect It may even be despite, instead of because Economics Theory: Production possibilities curve (production possibilities frontier) o Tells us what possibilities can be produced and what cannot be o What it does not tell us is where to start and how much of a good we want versus other goods o Inside the curve: can o Outside the curve: can’t 6 o Producing outside the curve cannot be done o It can move outwards with economic growth Things that were not possible in the past, become possible Economic growth 1. An increase in supply of raw materials 2. An increase in productive human labor 3. Improvement of technology 4. An improvement in a society’s law and social institutions (regulations and laws) 5. Change in the methods of productions (particularly, in the division of labor, or specialization) Specialization 1. No longer wastes time going from task to task 2. More dexterous (skilled at what they do) 3. More likely to make machines that do the work Pin factory example o Adam Smith Why does the PPC ↑ Division of labor (more specialization) o People specialize in different tasks such as: pulling the wire, cutting the wire, sharpening the wire, etc o A pin maker can make an average of 20 pins a day o A pin factory with specialization can make 4800 pins a day Richer society “There ain’t no such thing as a free lunch” TANSTAAFL Does not mean an individual can’t get something for free, it means society cannot Comparative advantage 7 The effectiveness of producing “good A” rather than “good B” in order to trade with someone who has more comparative advantage to produce “good B” rather than “good A” “A country has comparative advantage in producing goods for which it as the lowest opportunity cost” o And lower marginal cost Bananas and fish example Every person in the world can consume more than they can produce. By becoming more skilled at making one good, you become less efficient in producing other goods. This lowers your comparative advantage, but increases someone else’s. David Ricardo-identified “The Principle in Comparative Advantage” Consumption and Capital Goods: Consumption good-goods that we use today Capital good-saving up to get something that’s going to be more useful in the end To get capital good, you must reduce (save) consumption goods DAY 4 Specialization-one way to move the production possibilities curve to move out; promote economic growth Substitution for machinery Innovativeness – the propensity for people to innovate (come up with new ideas) o New ideas of production are created through creativity i.e. machines More human beings make us wealthier Yes, people consume things, but people also produce things There are no natural resources A resource is something we could put into use What are the economics signals that promote this innovation? “Price theory” Set on markets by supply and demand of a product Interactions of suppliers and demanders/consumers Consumers are the ultimate deciders of what is good economically If a supplier is not paying attention to demand, that supplier is no good 8 Demanders (consumers)- do things to get satisfaction (gratification) economists call it “utility”, the more utility a consumer gets, the better off they are, consumers aim to get as much utility as possible o Utility--the total satisfaction received from consuming a good/service o Utility can be seeing other people happier “The Law of Diminishing Marginal Utility” Describes every consumer’s actions All other things equal “ceteris Paribus” the greater a consumer’s access to some good or service, the less is the utility that each unit of that good or service supplies to that consumer Example: extremely thirsty, and you drink water; the satisfaction you get from drinking the water is what economists call “utility”, the first th bottle gives you more utility than the second water, the 8 bottle = negative utility Example: love a certain pair of jeans, you wake up, and you have 100, friends come over and you give all the jeans away but one; the value for each pair rises as each pair of jeans is given away; each unit becomes more valuable; the less utility you get o The less of something you have, the more valuable it is The more the access to something, the less the utility The value of something lessens when something becomes more available Example: if you take more than one newspaper from the vending machines, the margin of utility of the second newspaper is zero Law of Demand: All other things equal, a change in the cost of acquiring some good or service will cause the quantity demanded of that good or service to change in the opposite direction o Quantity demand--the amount of a good that people want to buy at a given price Cost ↑, buy↓ Cost ↓, buy↑ Demand for apples: as the cost falls, the quantity you buy rises, if the price rises, you will seek to acquire fewer apples The law of demand exists because of the law of diminished marginal utility The reason you don’t buy the second pound of apples, it’s because it doesn’t give you as much marginal utility the law of diminished marginal utility o Stores lower prices, so we buy more Quantity demanded and price = inverse relationship 9 As the price of something rises, the “quantity for demand” falls and vice versa Price is not the only thing that affects demand A movement along a given demand curve is called a change in quantity demanded A change in quantity demanded, is caused by a change in one thing only: the price of that quantity Increased demand, causes an outward growth in the PPC Decreased demand, causes an inward growth in the PPC Different from: a change in demand If the demand curve moves, that is a change in demand Demand curves can change: if it moves away from the origin, that represents a higher demand, if it goes to the left = lower demand Causes: 1. Change in price 2. Change in everything else Good = service = product 6 factors that cause demand to change = Determinants (no particular order) Any one or more of these things change, demand either increases or decreases 1. Consumers’ tastes and preferences 2. Consumer’s income a. If your income is 0, then your demand is 0 b. Normal goods--if as consumer income changes, demand for that good changes in the same direction c. Inferior goods--demands for a certain good fall because of a higher income 3. Price of substitute goods a. 2 goods are substitute for each other, if as the price of one changes, the demand for the other changes in the same direction b. Example: Coke vs. Pepsi “substitute goods” i. If the price of Coke rises, the demand for Pepsi rises 4. Price of complementary goods a. 2 goods are complements to each other if, as the price of one changes, the demand for the other changes in the opposite direction b. Example: coffee and coffee cream i. If the price for coffee increases, the one who sells coffee cream is sad ii. If people drink/buy less coffee, the demand for coffee cream decreases as well 10 5. Expectations of the future availability of the good a. If it is expected that the good will become more readily available in the future, the demand for the good today will fall, and vice versa i. Availability ↑, demand ↓ b. Example: if you know a dress will go on sale, you wait and buy it when it goes on sale your demand for it falls 6. Number of consumers (people) in the market a. Only applies to “market demand curves” i. A market demand curve is a demand expressed by 2 or more individuals b. The greater the number of consumers, the higher the demand and vice versa Elasticity Another word for “responsiveness” how much one thing changes when you change something else that affects it Elasticity is not the same thing as slope A demand curve does not tell you the intensity (unlike slope) A price cut can have a larger impact in the quantity demand if the elasticity is different Elasticity = “responsive to the touch” Elasticity of demand--a measure of how responsive quantity demanded is to price changes E > 1 “elastic” E < 1 “inelastic” E = % of change of quantity demanded / % change of price DAY 5 Total revenue TR = PQ total revenue = (price)(quantity) Elasticity Just how responsive the demand rises by change of price How much something changes when you change something else that affects it Elastic o If price and total revenue change in the opposite direction, demand is elastic 11 o If it changes a lot with price change Inelastic o If price and total revenue change in the same direction, demand is inelastic o If it does not change with price change D is more elastic than D prime What determines elasticity? 1. The number of available substitutes for the good o The larger the number of available substitutes, the more elastic the demand o The smaller the number of available substitutes, the less elastic the demand 2. The amount of time the consumers have to adjust to a price change o The more time, the more elastic the demand o The less time, the less elastic the demand o If you don’t have time to go get the water from your room, you’re more likely to pay $50 for a bottle of water o The more time, the more substitutes people will have access to 3. The percentage of a buyer’s budget spent on the good o The greater the percentage of your budget that you spend on the good, the more elastic is demand Law of Supply: As price changes, quantity supply changes in the same direction Supply o The relationship between price and the quantity of a good a seller has to sell to a consumer Determinants of supply: A change in the supply curve is caused by a change in quantity supplied If the supply curve moves to the left, the less the quantity supplied If the supply curve moves to the right, the more the quantity supplied A change in quantity supplied is caused by price o The lower the cost of production, the greater the supply 12 What determines cost of production? 1. Price of inputs Price of things necessary to produce and ship a good 2. Improvement of technology Causes price of production to fall to produce more outputs 3. Laws, public policies, and taxes Supply and Demand: Shortage--when a good’s quantity is low and the demand is high Surplus--when there is a excess of production and the demand is low Price is the equilibrium force and once price hits that point, it stays in the point unless supply and/or demand changes Equilibrium Stable Equilibrium--an equilibrium that is knocked out of equilibrium but eventually goes back to its original state Unstable Equilibrium--an equilibrium that is knocked out of equilibrium and never goes back to its original state The Law of One Price: In any given market, the tendency for each unit of that good can be sold at the same price of a different unit of that same good The arbitrage causes the price to rise in one place where a good is available and drops where the good is less available, until both prices are the approximately equal Arbitrage: the purpose of profiting from a good DAY 6 Arbitrage Causes prices to rise where the good is abundant Causes price to fall where the same good is scarce Until the price is the same The apples on different sides of campus example The purpose of profiting from a good Speculation The application of the law of one price over space or time The speculator transfer the wheat for example from one time, to another time that it is scarce Speculators only make money if they are right From times where that good is abundant to a time that it is scarce 13 Temporal arbitrage i.e. when harvest is good for wheat one year and the arbitrage buys the wheat for low to sell for a higher price later in time Whenever things go wrong in an economy, the government blames the speculators. Natural disasters: What changes after a natural disaster that makes the prices rise? o Price gouging o Supply and demand The invisible hand: o During a natural disaster, price skyrockets up o Though, over time, prices fall o How fast that prices fall, depends on the severity of the natural disaster Price Gougers: people who increase prices because of a natural disaster Price Caps: anti-price gougers are legislations that don’t let sellers raise their prices to a ridiculous price run the risk of going into a shortage DAY 7 Price ceilings Rent control--sets the price lower than equilibrium o Causes a shortage o Reduces the amount of rent units that otherwise would be available for rent o When rent fell, the number of people renting out part of their house dramatically declined o Quality of renting units goes down o If the quality is bad, and people threaten to move out, chances are, you’ll have someone else that’s going to want the apartment because of the shortage o Shortage of renting units o When price is at equilibrium, everyone who wants renting units, can have renting units o If the house is nice, the price is going to be the same, so the landlord has no motivation to make it nicer o People found ways around rent control Example: paying for the key o Rent control is good for people who own renting units outside of NYC 14 o There are abandoned buildings in NYC Abandoned in the 60s No one is willing to put in the money and rebuild for renting In the 60s, landlords abandoned buildings because it was more profitable to leave it Burn the buildings to get insurance money Price floor A price set above equilibrium where the government prevents lawful exchanges that price below the minimum that it specifies The price is allowed to rise; the government doesn’t want the price to fall It becomes a lawful for buyers and seller to exchange goods at any price per unit below the floor Consequence: surplus Minimum wage--hurts the people it’s suppose to help o Causes a surplus for low demand workers o Surplus of workers = unemployment o Affects the lower class (very low) o Above equilibrium o It causes a surplus of low skill workers o It only affects low skill workers o Increased nepotism--hiring family members/friends o Increases when the minimum wage rises o When minimum wage increases, teenage unemployed rises o Fair Labor Standards Act Minimum wage, maximum 44 hours/week, $1.5 times for overtime o Minimum wage story (south/north) (black/white) o The rates of black unemployment were lower than white teenagers o The minimum wage was ignored (1948) o Minimum wage causes unemployment Especially teen unemployment o Elevator example: the old elevators were only profitable when there is a minimum wage o Almost all billboards are now electronic, before they were paper (few workers now) 15 o The minimum wage helps you because you are getting skills--this allows you to move away from the minimum wage International trade Takes place near international boarders All trades are among people Mercantilism o They believe that government policy should do all that it can to encourage exports and discourage imports o “Beggar thy neighbor”- you want to turn your “neighbor” poor, if you got richer, someone else is getting poorer (because there is a certain amount of wealth) o Wealth is money o The purpose of trade is to accumulate money o There is fixed amount of wealth in the world o Exports are good; imports are bad (selling things to foreigners is good; buying things from foreigners is bad) Adam Smith hated mercantilists The main concern is jobs o If America is buying more cars from Japan, it’s buying less cars from Detroit, which means there is going to be less jobs in Detroit which makes people worried about unemployment o Diminishes employment in the United States China sells America “stuff” to get dollars, so they can buy “stuff” from America Economic competition: o When you work, you’re hurting someone else who does the same thing as you o When you buy a Japanese car, you’re hurting the American car companies Free Trade: Exists if foreign produced products can be sold in the domestic economy under the same taxes and regulations that apply to domestic goods The home government does not discriminate against foreign goods Treats imports the same as exports 16 The government is blind to the nationality of goods and services Free trade is wanted by economists Protectionism: The opposite of free trade (the policy of mercantilism) Policy designed to protect domestic producers from foreign competitors Also called: protection DAY 8 Free trade doesn’t create nor reduce jobs, it doesn’t reduce jobs, it shifts jobs The concern most people have with free trade is that it causes less jobs in the domestic market The purpose of protectionism is to protect inefficient industries Trade shifts jobs from industries that we’re less good at, to industries that were more good at (more efficient/less efficient) (comparative advantage/disadvantage) It’s easy to see jobs that are lost (when Americans buy Japanese or German cars) The way they protect domestic producers (stop Americans from buying foreign made goods) o Tariff-special tax that is put on foreign made goods o It is bad for the economy If we stop buying things from China, they won’t have dollars to buy American goods o But they can save the dollars It doesn’t affect the overall … of jobs When the U.S. spends $1 million buying goods from China, the $1 million worth of demand comes back to the U.S. Trade deficit There are 2 account that are used in international economics o Current account--measure the dollar value of imports and exports for each country When we buy wine from France, or someone from France buys an iPhone, that is all recorded If the value of imports is greater than the value of exports, the current account is in deficit Has been in deficit since 1977 o Capital account--records investments 17 If China doesn’t spend the money we spend on Chinese goods, they are investing it, so that money is recorded in the Capital account. That’s why people think trade deficit is bad: because it is not recorded in the current account They send it back as investments, not a demand for goods It still creates jobs If it’s not recorded in one, it’s recorded in the other Economic opportunity Invest = save When foreigners invest, they are recorded 14 4 different categories that are recorded in the Capital account: Different ways that people can invest: 1. Buying ownership in businesses (stocks) in a foreign country 2. Purchases of real estate 3. Accumulation of debt (lending foreigners money) 4. Holding of cash o If you add up these 2 accounts, they always equal zero One cancels the other If a country has a $700K deficit, then it has a $700K surplus You have a trade deficit with the supermarket you shop at It means that foreigners have a trust in American dollars, because they are willing to invest their dollars A rising U.S. trade deficit means that foreigners think the U.S. is a good place to invest In the 1930s, America had a trade surplus because the economy was awful Foreigners took their investments out When a current account is in deficit, it is a source and sign of economic strength It means more investments coming in A rise in the trade deficit signifies a strong and promising economy A fall in the trade deficit signifies a weak and disappointing economy Trade always balances out You can protect jobs in one industry, only by destroying jobs in another industry Real-cash-balance effect-the purchasing power of money taken out of circulation (i.e. burning money), is transformed into higher purchasing powers When someone burns money, they destroy the money, they destroyed the good or service they could have bought 18 o That gives other people a higher chance of getting that good or service o Prices in the economy fall a little bit o So other people’s purchasing power increases o So prices are adjusted to the money still left in circulation o The pool dime example There was a difference, just not enough to notice it The dime is the $400K he burnt More than 2 countries o As a whole, it will have the same amount of imports as exports Worker productivity o Wages are lower somewhere, than somewhere else, it doesn’t necessarily mean people would move work to the place with a lower wage Nothing special about economic transactions that occur across… When the polio vaccine was invented, even though it was a great thing, jobs were destroyed, but jobs were still created DAY 9 Economies grow not because people consume things, but because people produce things Economy does not have the political borders o Money does not really leave the economy when spent in a different country, it comes back Free market work really well Public goods--two things distinguishing it from private goods 1. Non-rivalrous consumption a. If one person consumes a good, another person consume that same good without fear of diminishing the other’s joy in consuming of that good b. Ex: A sporting event-if someone leaves, it won’t make a difference for you; you’ll still watch the game c. Ex: When your neighbor is watching the same show as you-it doesn’t do anything to you or make it any worse for you 2. Non-excludable consumption a. Once it is provided for one person, it is impossible to prevent other people from enjoying the good b. Ex: pollution abatement, temperature in the room, national defense c. That’s why we have forced taxation--because no one will voluntarily pay, so the government won’t have enough money 19 The Free Rider Problem: the voluntary choice of paying for a public good that everyone can enjoy. But usually, people don’t pay because they think someone else will; this results in the good being extremely unfunded Tragedy of the Commons: o Boston commons example (cows eating too much grass) o No one had any incentives to keep the grass growing o It was rivalrous consumption o When a public good is overused, there is no incentive to maintain it; because of this, the public good “dies” Private goods You’ll be “excluded” if you don’t pay for a pair of shoes i.e. chickens are privately owned; that’s why they’re not going extinct like elephants and tigers o The owners have profit motives Externalities--a physical consequence that one person imposes on another person without having to pay for it Negative externalities--a third party is being harmed and receiving no compensation for that harm The pig farm example Positive externalities Internalize--when the third party gets some sort of compensation i.e. paying the neighbor for the bad odors from the pig farm Consumers say that we need to internalize the externalities So the third party is no longer uncompensated Public Choice - or, Politics Without Romance (or, How government really works) Private good are excludible James (Jim) M. Buchanan (1919-2013)--professor at GMU who won a Nobel Prize * Gordon Tullock (1922- ) Kenneth Arrow--Harvard professor who won the Nobel Prize in 1972, he set out to prove that majority-rule democracy showed the will of the people, but he discovered the opposite Does majority-rule voting reveal the will of the people? o … No Pair-wise voting o If there are more than 2 options, you take 2 options and cote them against each other, then the winner will go against other options 20 o The outcome of the vote depends not on the preference, but on the order of the vote (or the way that the vote is conducted) Arrow’s Impossibility Theorem o “It is impossible to develop a voting system that gets around this problem” o It is impossible that is free of arbitrariness o The agenda setter--the person who determines how the voting is set The order the vote is taken Depending on what he starts with, he can adjust the outcome to his personal preference Speaker of the House o Condorcet Winner The exception A winner who wins regardless of how the election is taken Extremely rare In this case the agenda setter has no power However, the agenda setter has the power to cut off or introduce new option, which will destroy the Condorcet winner o Another weakness of democratic voting--it records the order of our voting, not the intensity of our preferences Economy does not have political borders: Money does not leave the economy when spent in a different country; it comes back Public Choice--analyzing politics with economic reasoning House majority whip/house minority whip--one of the role of the whips are to make sure that the members vote the way they say they would (keeps people from changing their mind) DAY 10 The significance of irrelevant alternatives Because every voter knows deep down that his/her vote will not swing or determine the outcome voters remain rationally ignorant Voters are rationally ignorant 21 Know about the things that affect their private lives more than the political things they need to know to vote Special Interest Group Effect (S.I.G. Effect) Exists when the costs of a government program are distributed differently form the benefits of the program The Bundling Effect Each candidate is a bundle Chose the candidate because of some of the qualities, and in spite of some of the qualities DAY 11 Equation of Exchange MV=PQ M=money supply V=velocity (the number of times a unit of money is spent-usually per year) (doesn’t change very much) P=price level Q=quantity (Line on V and Q because they stay “pretty” constant) (Line over =; 3 equal lines means it is identical to) MV=PQ ($10)(4)=($8)(5) ($20)(4)=($16)(5) - If V and Q are constant, then the average price of things only depend on M Inflation is a sustained rise in the price level Inflation is when the average price of the things you buy rises Real--prices adjusted for inflation Nominal--means “name”; prices that are listed; the amount t of money you give up; can reflect inflation When things become more abundant, the value drops 22 What causes inflation? Increases in the money supply The money supply in the economy were raising at a faster rate (1975) With inflation, money goes to some people first, but over time, it goes through the economy, and then it everything adjust to the new money supply DAY 12 Reasons for Taxes: 1. Raise revenue 2. Behavior modification (to affect people’s behaviors) i.e. cigarettes Personal income tax--the main way to pay for public goods Income tax--16 amendment 3 kinds of income tax system: 1. Flat (proportional) tax--the rate of taxation remains the same as income rises/falls 2. Progressive tax--the rate of taxation rises as the level of income rises 3. Regressive tax--the rate of taxation rises as income falls Tax brackets i.e. from 0-$10K, $10K-$100K, $100K-$500K, etc (pic) Pay 10% from only that one bracket $100K = $9K tax If it goes over $100K, after the 10% on $100K, THEN you pay 25% There is a difference between tax rates and tax revenue 23 Ways to avoid taxes: Tax evasion--illegal Tax avoidance--legal The higher the tax rate, the higher your incentives to protect your income from being taxed Laffer Curve The government has a specific amount of money that they need to operate There are 2 tax revenues possible They usually chooses the lower tax rate, because the economy will produce more It is possible to have tax rates fall, and tax revenues rise Gordon Tolluck Birth control = more unwanted pregnancy (explained by the Laffer CUrve) The dagger pointing to heart while driving example = less accidents Safe to climb mountains, but more people are dying -_- Excise tax Sales tax Per unit excise tax If the seller has to pay $1 tax, they’ll just charge $1 more for the buyers, they don’t think it makes a difference, but buyers are less likely to buy Before tax: sellers clear $2, after: $1.40 because they have to pay $1 per lbs Rectangle: not a loss from the economy standpoint = the amount of tax revenue? 24 Triangle: dead weight loss = the amount of money that was made before tax? 19 Don’t know if the tax isn’t worth it or not
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