Lane
              community College


Econ 200 - Principles of Economics -
Introduction

Phil Martinez


Study Guide for Exam 2

Supply and Demand
Role of the Government
and Taxation


Inequality

Concepts and Definitions:
Definition Income
Definition of wealth
Examples of wealth

Data/History
Know the percent of total income that the top 20% and bottom 20% earn, as reported in Chap. 2
Know how the percent of income of the top 20% and bottom 20% have changed over time as reported on the Inequality webpage.
Know how the percent of household wealth owned by the top 1% and bottom 99% have changed over time as reported on the Inequality webpage.

Application/Interpretation
Why is the wealth gap more important than the income gap?


Chapter 3 - Supply and Demand

Concepts and Definitions:

What are the assumptions of the S & D model?

Maximizing Behavior
Economic Rationality

Law of Demand
Law of Supply
Ceteris paribus

The difference between Demand and quantity demanded.
The difference between Supply and quantity supplied.

The determinants (factors) of demand and their impact.
The determinants (factors) of supply and their impact.

A change in Demand versus a change in quantity demanded.
A change in Supply versus a change in quantity supplied.

Complimentary goods
Substitute goods
Normal goods
Inferior goods

The Income Effect of a price change (the ability to pay, affordability)
The Substitution Effect of a price change (the willingness to pay, relative value)

Graphical and technical issues:

Slopes of the demand curve and supply curve
Direct versus inverse relationship
Positive versus negative relationship
Movement (or sliding ) along a curve versus shifting of the entire curve

Applications and interpretations:

How is Demand represented graphically?
How is quantity demanded represented graphically?

How is Supply represented graphically?
How is quantity supplied represented graphically?

How is the slope interpreted?
Why is the Demand curve sloped downward?
Why is the Supply curve sloped upward?

How to represent and interpret changes in the economy (e.g. prices of inputs, technology, resource availability, the impact of natural forces, expectations, prices of other goods, preferences, income, wealth, etc.) graphically on supply and demand graphs.

 
Ch. 4 – The Role of the Government

Market Failure


The invisible hand of the market   =    the generation of mutual benefits via pursuit of self-interest.


The price (market) mechanism    =  the process by which independent
price adjustments inform consumers and producers regarding the availability (or desirability) and relative value of goods and resources.

What is market failure?

How can a market fail?


What is a public good?

Why are public goods failures of the market?

When does a public good exist?

What is excludability?
When is a good "non-rival"?
What is the role of the government in responding to the market’s failure to provide public goods?


What is an externality?  What is an external cost? What is an external benefit?

Why is the government justified in intervening in markets that produce externalities?

What are the options the government has to respond to externalities?

What is the goal of government intervention in response to external costs and  external benefits?

What is an imperfect market (or price system)?


What is Market Power?

What happens if the economy is dominated by a few corporations that can manipulate prices?

What is the role of government in addressing these areas:
Externalities?
Public Goods?
Market Power?
Inequity?
Instability?


How does a perfectly private market address the problem equity (or inequity)?

Equity and efficiency are both goals of the economy. Can both be achieved?


The Role of Government in the Economy


What are the economic roles of government?

What does "internalizing costs" mean?
What is macro-instability?
What is stabilization policy?
How does government spending as a percent of GDP caompare with other developed nations?
What are direct expenditures and income transfers?
What are progressive, proportional, and regressive taxes?
Know the different kinds of taxes and which level of government levies them: Income, Social Security, Corporate, Excise, Property, Sales, and User charges.
Which of the above taxes are regressive?
Know the single largest expenditure at both the local and state government levels.
Know the two largest sources of Tax Revenue for federal, state, and local governments.

Size of Government (Figure 4.4)


Total Government spending is approximately what percent of total output (GDP)?

Federal Government spending is approximately what percent of total output (GDP)?
State and Local Government spending is approximately what percent of total output (GDP)?

How has government spending as a percent of GDP changed since since WWII? since the 1950s?

Taxation


What is a progressive tax?

What is a regressive tax?
Which Federal taxes are progressive and which are regressive?
Which State taxes are progressive and which are regressive?
Which taxes are Federal taxes? Which are state taxes? Which are local taxes (city, municipal, county)?
Approximately what percent of Federal tax revenue comes from Corporate taxes? Individual Income taxes? Social Security Taxes? Excise taxes? Estate/Gift taxes?

Government Failure


What is government failure?

How can government fail?
Inefficent
Ineffective
Opportunity costs of the program
What are the opportunity costs of government programs?
When should government become involved in the economy?
What is Public Choice Theory? What is Social Choice Theory?

Chapter - 33 Taxation

Know the following terms and know how to calculate them: 
    a progressive tax
    a regressive tax
    a proportional tax
    the marginal tax rate
    the average tax rate
    the nominal tax rate
    the effective tax rate
    the tax elasticity of supply
    horizontal equity
    vertical equity
    tax base
    tax incidence

Know the history of the changes in the marginal tax rates:

    Current marginal tax rates are lowest in 90 years.
    GWBush 2001-10 tax cuts
    Obama proposed tax increase

Know which taxes federal, state, and local governments rely on to raise most of their revenue.

Know which federal, state, and local taxes are progressive and which are regressive.
Is the overall tax structure of the US progressive, regressive or neutral?


 Short Answer Essay Study Questions

1. Write out and Explain the Law of Demand.  

    OR...Write out and Explain the Law of Supply.

2. Explain the difference between Demand and quantity demanded. Be sure to note what causes each to change.

    OR...Explain the difference between Supply and quantity supplied. Be sure to note what causes each to change.

3. Explain why the Supply Line is sloped upward.

    OR...Explain why the Demand Line is sloped downward.

4. Explain the concept of equilibrium.

5. Define external cost. Give an example. What is the appropriate government response to a market    

        generating external  costs? 

 
   OR...Define external benefit. Give an example. What is the appropriate government response to a market generating  external benefits?

6. What happens if the economy is dominated by a few corporations that can manipulate prices?


7. Why is the government justified in intervening in markets that produce externalities?


8. Why are public goods failures of the market?


9. How can the government respond to the market’s failure to provide public goods?


10. How can markets fail?


11.  Why is a progressive tax preferable over a regressive tax?


12. Is the overall tax system of the U.S. (including all federal, state, and local taxes) progressive, regressive or neutral. Explain your answer.


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