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ECON 2105 week 5 notes

by: Randi

ECON 2105 week 5 notes ECON 2105

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About this Document

These notes cover tax and unemployment (chapters 5 and 7)
Class Notes
tax, unemployment, structural, cyclical, excisetax, DWL
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This 4 page Class Notes was uploaded by Randi on Sunday September 18, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2016. Since its upload, it has received 5 views. For similar materials see Macroeconomics in Macro Economics at University of Georgia.

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Date Created: 09/18/16
Week  5  Notes     ECON 2105 PROF.  MCWHITE     Chapter  5:  The  Efficiency  of  Markets  and  the  Costs  of  Taxation     • Welfare  economics:   o How  the  allocation  of  resources  affects  economic  well-­‐being     • Equity:   o The  fairness  of  the  distribution  of  benefits  among  the  members  of   society     • Willingness  to  pay   o The  value  the  consumer  is  willing  to  purchase  a  good/service  for     • Willingness  to  sell:   o The  value  that  the  seller  is  willing  to  sell  their  good/service  for     • Total  surplus   o Also  known  as  social  welfare   o Economist  use  this  to  measure  the  benefits  that  markets  create     • Consumer  Surplus:   o The  difference  between  the  willingness  to  pay  for  a  good  and  the  price   that  is  paid  to  get  it     • Producer  surplus:   o The  difference  between  the  willingness  to  sell  a  good  and  the  price   that  the  seller  recieves     • Elasticity:   o Measures  how  much  one  variable  responds  to  changes  in  another   variable   o Is  a  numerical  measure  of  the  responsiveness  of  Quantity  Demanded   or  Quantity  Supplied  to  one  of  its  determinants   o Elastic  good:   § A  good  that  is  price  sensitive     § Absolute  value  of  Elasticity  of  demand  >  1   o Inelastic  good:   § A  good  that  is  not  price  sensitive   § Quantity  demanded  decreases  slower  with  an  increase  in  price   • Example:  cigarettes   § 1>  Absolute  value  of  Elasticity  of  demand  >  0   Week  5  Notes       Factors  of  Elasticity:   1. Number  of  substitutes   • Goods  with  fewer  substitutes  tend  to  be  more  inelastic     • Price  elasticity  is  higher  when  close  substitutes  are  available   2. Time   • Price  elasticity  is  higher  in  the  long  run  than  in  the  short  run   3. Budget  share   • Price  elasticity  is  higher  for  luxuries  than  for  necessities   • People  can  put  off  buying  “wants”  longer  than  “needs”         • Excise  tax:   o Taxes  levied  on  one  particular  good/service   o The  government  favors  excise  taxes  on  goods  that  are  highly  inelastic   § There  is  less  Dead  Weight  Loss  on  inelastic  goods   § Dead  Weight  Loss:   • A  decrease  in  economic  activity  caused  by  market   distortions,  such  as  taxes     • Taxes  chase  out  demand  and  reallocate  resources  from   their  most  productive  use     • Incidence  of  taxation:   o The  burden  of  taxation   o Who  does  the  tax  affect  the  most?  Consumer  or  seller?           Week  5  Notes       Chapter  7:  Unemployment     • A  misconception  is  that  an  economy  should  aim  for  zero  unemployment.     o A  growing  economy  has  some  unemployment     o Some  unemployment  is  natural   o Natural  rate  of  unemployment:   § Typical  rate  of  unemployment  that  occurs  when  the  economy   is  growing  normally         • Labor  force:   o Someone  who  is  already  employed  OR  actively  seeking  work   Employed  +  Unemployed  =  LF     • Labor  force  participation  rate:   § The  portion  (percentage)  of  the  population  that  is  in  the  labor   force   (LABOR  FORCE  /  ELIGIBLE  POPULATION)  X  100       • Discouraged  workers:   o Those  who  are  not  working   o Have  looked  for  a  job  within  the  past  year   o Are  willing  to  work   o Have  not  sought  employment  in  the  past  4  weeks     • Underemployed  workers:   o Workers  who  have  part-­‐time  jobs   o Want  a  full-­‐time  job     • Unemployed  workers:   o Someone  not  working  but  is  actively  looking  for  work   o Types:   § Structural   § Frictional   § Cyclical   Unemployment  Rate:     (UNEMPLOYED  WORKERS/  LABOR  FORCE)  X  100     • Creative  destruction:   o Occurs  when  the  introduction  of  new  products  and  technologies  leads   to  the  end  of  other  industries  and  jobs   Week  5  Notes     o Some  jobs  become  obsolete   o This  causes  Structural  Unemployment:   § Caused  by  changes  in  the  industrial  makeup  of  the  economy   § Tastes  as  well  as  technology  change…  so  do  jobs   § Learning  new  skills  may  take  a  long  time  or  no  time  at  all   § A  natural  disaster  can  also  cause  this   § Structural  and  Frictional  unemployment  will  always  exist  to   some  degree  in  society     • Frictional  Unemployment:   o Caused  by  delays  in  matching  available  jobs  and  workers   o The  time  spent  in  between  jobs  for  people  who  have  a  skill  set  that  the   economy  needs   o Another  type  of  natural  unemployment   o Causes:   § Information:  Lack  of  information  on  what  firms  are  hiring…  it   can  take  time  to  find  a  job   § Government:  Unemployment  insurance  programs  and  other   job  security  programs  don’t  always  incentivize  people  to  find   work     • Cyclical  Unemployment:   o Changes  in  the  economy  will  influence  the  number  of  workers  hired   o Caused  by  recessions   o This  type  generates  the  greatest  concern  among  economists  and   policymakers       • Full  employment  output:   o When  the  unemployment  rate  is  equal  to  its  natural  rate   o There  is  no  cyclical  unemployment      


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