Economics Notes

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1 hour test
10 multiple choice
short answers and problems
-open book
-access to computer
*****Access to answers from problem sets on internet
Review Session Sunday Oct 14 at 5-630 pm in sturm

Taxation
1 – to create revenue to pay for government expenditures.
-public goods and/or public service
characteristics:
private goods – individual
public goods – joint (collective)

private good is non excludable in consumption
2 – redistribute income/ wealth
3 – affect behavior goods that have social implications

tax revenue = price x quantity
= tax price x tax quantity
= tax rate x tax base

Tax base > income, sales, property, capital gains/loses

What is a good tax system?
1 – distribution of tax burden should be fair > tax equity 2 – tax system should improve the smallest excess burden and should minimize distortions to economic behavior > tax efficiency 3 – administration should be easy and administrative costs should be as low as possible 4 – tax system should be easy to understand and relatively easy to comply with and it should be applied in a non-arbitrary way 5 – tax system should generate required revenues

tax evasion – not paying your taxes
tax avoidance – using existing tax rules (code) to be able to minimize your tax burden. -use existing law to your advantage, the best you can

Tax Equity – two principles:
1 – Benefit Principle – impose taxes in a way that reflects the benefit from using a public good or service. A toll set to pay for the benefits received from public good/service. Cannot use it for redistribution 2 – Ability to pay principle – impose taxes by determining a base. Charge taxes based on ppls ability to pay their part of the base > horizontal and vertical equity

horizontal equity – treat equals equally. If you have the same income (base), same level of taxes vertical equity – treat unequal’s unequally. If you have a greater ability of a base then you pay greater amounts of taxes

Market Behavior
-Household Behavior is governed by the law of demand
-If the price of a good rises then the quantity demanded decreases. inverse relation where: Qd = f℗ Why? > 2 Effects
1 - substitution> If price rises, consumer substitutes the good 2- income effect > consumer can now by more of all goods, and the good that dropped in price

***Movements along a demand curve are caused by one factor: a change in "own" price and is called a change in quantity demanded

Shifts in position of demand curve are caused by determinants of demand and are called a change in demand - increase in demand, line shifts outward, to the right
- decrease in demand, line shifts inward, to the left, towards origin

International Trade Models
Basic Questions:
1 - Patterns of trade - what countries choose to produce what goods
- exports - goods produced in your country and shipped out
-imports - goods produced in foreign country
2-Can we identify any… Gains From Trade
3- Are there In-Country Effects of engaging in trade - on the distribution of goods services and/or wealth

Propositions on Trade
Countries that engage in trade will ...
1-Improve social welfare/wellbeing
2-Efficient form of production - increase in consumption possibilities

Classical Economists:
Adam Smith (british) - wrote, "Wealth of Nations" - talks about specialization
-absolute advantage -in prod. of goods.
ex - USA can produce 6 textiles in the time PRC can produce 5 textiles

David Ricardo - wrote, "The Principles of Political Economy and Taxation
- comparative advantage - specialization - only produce what you are best at producing. take advantage of the specialization of both parties

***These books form the foundation for how people think of trade today. exchange, mutually beneficial exchange, and how this can extend across boarders

Productivity - a ratio of output/input
-a measure of Absolute Advantage

Assumptions:
2 countries - USA and PRC
2 goods -...
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