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by: Isaac Lemus

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# ECON 203 WEEK 7 Econ 203

Isaac Lemus
USC

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These notes cover anything that was discussed during week 7 of the class! Sorry for the late post, I just got over being sick for the last week.
COURSE
Principles of Microeconomics
PROF.
Giri Rahul
TYPE
Class Notes
PAGES
3
WORDS
KARMA
25 ?

## Popular in ECON

This 3 page Class Notes was uploaded by Isaac Lemus on Tuesday October 18, 2016. The Class Notes belongs to Econ 203 at University of Southern California taught by Giri Rahul in Fall 2016. Since its upload, it has received 4 views. For similar materials see Principles of Microeconomics in ECON at University of Southern California.

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Date Created: 10/18/16
Lecture notes 10/4: Continuation of Chapter 7 ● Now that we’ve looked at supply and demand side of things, it’s time to combine everything! ● Total surplus (total gains from trade in the market) is defined as CS+PS. ○ To make things even easier we know that CS+PS = (WTP-P) + (P-Cost)= WTP-cost (value to buyers-cost to sellers) ● If something is efficient then it’ll maximize the total surplus. This means that the product or service is being consumed by the buyers who value it the most and produced by the suppliers with the lowest production cost. ● The equilibrium price will always be most efficient in a market. ● Let’s take a look at a graph to see the TS of both the producers and the consumers ● ● Like we learned last week, the blue triangle is the consumer surplus (CS=1125) and the red triangle is the producers surplus (PS=900) and together they make the total surplus (TS=900+1125=2025). ● Prices are what allow us to allocate goods to who value it the most and who can maximize the best surpluses. Shifting the price right or left of the equilibrium can have consequences on the surplus. ○ To the right: You start to lose some of the surplus because now people are willing to pay less for the good and the cost of the production goes up ○ To the left: you have unused surplus. Buyers are willing to pay more and the product can be made for cheaper. ● Now let's look at some terminology. Adam Smith defined the invisible hand as the flow and self sufficiency of the market by those involved and the prices they set. ● Laissez faire: the thought that the government should not play a role in the economy because nothing the government imposes can benefit the surplus more than the natural equilibrium price. ● Even if a government or society tries to impose central planning (where goods are allocated by one entity who cares about the well being of the society) would take too much time and effort and would be near impossible to facilitate . Lecture notes 10/6: Chapter 8 (basically an extension of chapter 7) ● Now let's look at how the CS, PS and TS are affected when the government imposes a taxes. ● PreTax PostTax Change CS A+B+E A -(B+E) PS C+D+F D -(C+F) TS A+B+C+D+E+F A+B+C+D -(E+F) GOV 0 B+C B+C ● E and F are the Deadweight loss in the economy, loss in the efficiency because of the tax imposed. ● To create the smallest DWL, it depends on the price elasticity of both supply and demand. When one is very inelastic the DWL is smalL. When one is more elastic, the larger the DWL ● So, with this is mind, how big should government be? The more services a government provides, the more taxes it needs to impose, which means a greater DWL. As of right now, most of governmental taxes comes from income (worker has a marginal tax rate of 40%). So to determine whether DWL is big or small, we need to ask if income is inelastic or elastic. Economists argue for both sides saying that it is inelastic people will always want to work time, regardless of the wage or that it is elastic because people can work overtime, pick up a second job, retire later, etc. ● Regressive tax: tax is the same rate regardless of income ● Progressive tax: tax increases as income increases ● Tradeoff: You don’t want to increase DWL but you don’t want a regressive tax. Okay so everything before was for a fixed tax rate (we just changed the elasticity of the two curves). Now how does DWL respond to the size of tax ● If taxes is doubled, DWL increases 4 fold (2^2) ● If taxes is tripled, DWL increases 9 fold (3^3) ● Take away: Just because the tax increases, That doesn't mean the DWL will increase in the same way. Now how does size of tax rate change government tax revenue ● When tax rates are low, having an increase in tax rates raise actually causes more benefits, but if the tax rates are high than having a tax rate raise would actually be harmful. Look at how the rectangular area (Government revenue) increases from T1 to T2 yet decreases from T2 to T3. ● ● This trained can be defined by the Laffer curve, a simple graph showing the relationship between the tax revenue and the size of the tax. ●

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