Market power is basically when one single person or even a small group of people have the ability to control and influence rises in the market. The example that the text book gave of a farmer who owned the only well in the town and had complete control over the price for the residents in the town to have water which is obviously an essential to life. The other type of market failure has to do with externalities. Externalities are anything that cause the dependence of more than Just the value to the buyers and the cost to the sellers.
The example in the text book is that of pollution and how the use of agricultural pesticides not only affects the manufacturers but also the farmers who use them, as ell as the people who breathe the air and drink the water. Both of these examples aid market failure and are often times overlooked by both the consumer and producers in the market. Question #2 According to Oliver Wendell Holmes Jar, “taxes are what we pay for a civilized society. ” (peg 1 59) So why then does there always seem to be heated debates regarding taxes?
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According to the author Manama, “a tax raises the price buyers pay and lowers the price sellers receive. ” (peg 159) He further goes on to discuss that, “in the end, the elasticity of supply and demand determine how the tax burden is strutted between producers and consumers. This distribution is the same regardless of how it is levied. ” (peg 160) Regardless of what is levied it is overall obvious that because of a tax wedge between the seller and the buyer a tax on a good causes the size of the market for that good to shrink.
Taxes are a necessary government issuance to provide roads, police and public education or even to help the needy. Therefore according to the author, “we use the government’s tax revenue to measure the public benefit from the tax. ” (peg 161) In summary, “a tax of a good educes the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. Often resulting in what is called deadweight loss of the tax. (peg 172) Question #3 According to the author deadweight taxes cause, “deadweight losses because they percent buyers and sellers from realizing some of the gains from a trade. ” (peg 163) Macroeconomics Written Assignment 2 By withstand answer is, “the price elasticity of supply and demand, which measure how much the quantity supplied and quantity demanded respond to changes in the price. ” (peg 64) When talking about supply we come to the conclusion that when the supply is inelastic, the deadweight loss of a tax is more small verses when the supply is elastic the deadweight loss of a tax is relatively larger.
When talking about the demand of a product we also come to the conclusion that when the demand is inelastic the deadweight loss of a tax is small and when the demand for a product is elastic the deadweight loss of a tax tends to be larger. “A tax has a deadweight loss because it induces buyers and sellers to change their behavior. The tax raises the price paid by buyers, so they consume less. At the same time, the tax lowers the price received by sellers, so they produce less. ” (peg 166) Because of this result in changes of behavior, the size of the market shrinks to a less desirable market.
We find that the government’s tax revenue is the size of the tax times the amount of the goods sold. “Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if a tax gets large enough, tax revenue starts to fall. ” (peg 172) Question #4 If the domestic price is low, the cost of producing textiles is low as well and suggests further that the Country has a comparative advantage in producing textiles relative to the rest of the world.
If price is higher, then the cost is high, suggesting to me that foreign countries have a comparative advance in producing textiles. Certain conclusions can be made when talking about world price or in others words, “the price of a good that prevails in the world market for that good. ” (peg 179) “When a country allows trade and becomes an exporter of good, domestic producers of the good are better off and domestic consumers of the good are worse off. ” (peg 181) Furthermore, however, “trades raise the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. (peg 181) Question #5 According to author Manama, “A country can take two approaches to achieving free trade. It can take a unilateral approach and remove its trade restrictions on its own. Alternatively, a country can take a multilateral approach and reduce its trade restrictions while other countries do the same. ” (peg 192) A multilateral approach to trade is a general agreement on trade between several countries. For example the North American Free Trade Agreement (NONFAT). This allows for lowered trade barriers among different countries.
A unilateral approach to trade would give us the example of Great Britain in the 19th century and Chile, South Korea and the approach that they have taken on their own in recent years. Many of the world’s countries are a part of an organization called (GAIT), which is a promotion of free trade free from tariffs. It is headed by the (WTFO) and accounts for more than 97 percent of the world trade and helps to administer trade agreements and handle disputes among member countries. According to the author, “the GAP deflator is a measure of the price level calculated as the ratio of normal GAP to real GAP times 100. (peg 213) Normal PDP use current prices to place a value on the economies production of goods and services. Real GAP uses constant base-year prices to place a value on the economies production of goods and services. Because real GAP measures the economies production of goods and services it reflects the economy’s ability to satisfy people’s needs and desires. Question #7 “The (ICP) consumer price index is a measure the overall cost of the goods and revise bought by the typical consumer. (peg 226) A 10 percent increase in the price of chicken would have a greater effect on the (ICP) because it is utilized more than caviar is and is therefore more valuable in measuring the cost of living. Question #8 The first problem affecting the (ICP) is called substitution bias which is when prices change from one year to the next. They do not all change proportionately. Some prices rise more than others. The second problem is the introduction of new goods. When a new good is introduces, consumers have more variety from which to whose, and this in turn reduces the cost of maintaining the same level of economic well-being.
The third problem is called measure quality chance. If the quality of a good deteriorates from one year to the next while its price remains the same, the value of the dollar falls because you are getting a lesser good for the same amount of money. The first difference between these is that the GAP deflator reflects the prices of all goods and services produced domestically. Whereas the ICP reflects the prices of all goods and services bought by consumers. The second difference concerns more with how various prices are weighted to yield a single number for the overall level of prices.
The ICP compares the prices of a fixed basket of goods and services to price of the basket in a base year. Question #9 The first determinants of productivity are called Physical capital provoker or in other words, “workers are more productive if they have the tools with which to work. ” (peg 251) Human Capital per worker is, “the economist’s term for the knowledge and skills that workers acquire through education, training, and experience. (peg 252) Natural resources per worker by term, “inputs into production that are provided by nature, such as land, rivers, and mineral deposits. (peg 252) The last determinant of productivity is called technological knowledge or, “the understanding of the best ways to produce goods and services. ” (peg 252) Question #10 According to Manama, “for society to invest more in capital, it must consume less and save more of its current income. The growth that arises from capital accumulation is not a free lunch: It requires that society sacrifice consumption of 56) If the government encourages saving and investing that in can in the long run raise the economy’s standard of living.
If the government raises the (GAP) or and focuses more on saving rather than consuming then we require fewer resources to make consumer goods. A policymaker might not want to raise the rate of saving because, “while higher saving leads to higher growth for a period of time, growth eventually slows down as capital, productivity, and income rise. ” (peg 269) It goes off the theory of the catch-up effect which is basically saying that poor countries grow more rapidly than countries that start off rich. The