WarlockAlan

Summary

This chapter 14 is the Firms in Competitive markets. This chapter introduces the nature and characteristics of competitive markets.

What it is

• Competitive market is a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.

Characteristics

• average revenue = price
• marginal revenue = price

Profit

• Profit = TR - TC
• Profit = (TR/Q - TC/Q）* Q
• Profit = (P - ATC) * Q

Profit maximization

• marginal cost = marginal revenue
• price = marginal revenue
• produce the quantity when P = MC

Exit

• Exit means firms do not produce goods any more in the long run.
• Firms loss its revenue but do not burden the total cost of production.
• Firms exit if the total revenue is smaller than the total cost.

Shut down

• Shut down means firms do not produce goods any more in the short run.
• Firms loss its revenue but do not burden the variable cost of production.
• Firms shut down if the total revenue is smaller than the variable cost.

Supply curve in a competitive market

• In the short run

• In the long run

Price = minimum ATC in the long run

Definitions

1. Competitive market– a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

2. Marginal revenue– the change in total revenue from an additional unit sold

3. Average revenue– total revenue divided by the quantity sold

4. Sunk cost– a cost that has already been committed and cannot be recovered

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. A competitive firm maximizes profit by choosing the quantity at which_____(Correct answer: B)

a. average total cost is at its minimum

b. marginal cost equals the price

c. average total cost equals the price

d. marginal cost equals average total cost

My wrong answer: D

Summary

Chapter 13 is the Cost of Production. This chapter introduces revenue, cost and profit.

Revenue

• Total revenue is the amount a firm receives for the sale of its output.
• Revenue = quantity * price

Cost

• Explicit cost is input cost that requires an outlay of money by the firm.
• Implicit cost is input cost that does not require an outlay of money by the firm.
• Fixed cost is cost that does not vary with the quantity of output produced.
• Variable costs is cost that varies with the quantity of output produced.

Profit

• Profit = Total revenue - Total cost
• Economic profit is total revenue minus total cost, including both explicit and implicit costs.
• Accounting profit is total revenue minus total explicit cost.
• Total opportunity cost is implicit cost pluses explicit cost.

Production function

• The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Diminishing marginal product

• The property whereby the marginal product of an input declines as the quantity of the input increases.

• Due to it, the production function gets flatter as the number of input increases.

• Due to it, the total-cost curve gets steeper as the quantity of output increases.

• Profit maximization

• Average total cost = marginal cost

Definitions

1. Total revenue– the amount a firm receives for the sale of its output

2. Total cost– the market value of the inputs a firm uses in production

TC = FC + VC

3. Profit– total revenue minus total cost

4. Explicit costs– input costs that require an outlay of money by the firm

5. Implicit costs– input costs that do not require an outlay of money by the firm

6. Economic profit– total revenue minus total cost, including both explicit and implicit costs

7. Accounting profit– total revenue minus total explicit cost

8. Production function– the relationship between the quantity of inputs used to make a good and the quantity of output of that good

9. Marginal product– the increase in output that arises from an additional unit of input

10. Diminishing marginal product– the property whereby the marginal product of an input declines as the quantity of the input increases

11. Fixed cost– costs that do not vary with the quantity of output produced

FC

12. Variable costs– costs that vary with the quantity of output produced

VC

13. Average total cost– total cost divided by the quantity of output

ATC = TC / Q

14. Average fixed cost– fixed cost divided by the quantity of output

AFC = FC / Q

15. Average variable cost– variable cost divided by the quantity of output

AVC = VC / Q

16. Marginal cost– the increase in total cost that arises from an extra unit of production

MC =

17. Efficient scale– the quantity of output that minimizes average total cost

18. Economies of scale– the property whereby long-run average total costs falls as the quantity of output increases

19. Diseconomies of scale– the property whereby long-run average total cost rises as the quantity of output increases

20. Constant returns to scale– the property whereby long-run average total cost stays the same as the quantity of output changes

Review

I did all questions correctly! Excellent!

Summary

Chapter 12 is the Design of the Tax System. This chapter introduces different tax systems and the tax system in the US.

US tax system

• The most important taxes for the federal government are personal income taxes and payroll taxes for social insurance.

• The most important taxes for state and local governments are sales taxes and property taxes.

Different tax systems

• Proportional tax is a tax for which high-income and low-income taxpayers pay the same fraction of income.

• Regressive tax is a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.

• Progressive tax is a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Principles of tax

• Equity

1.It should obey the benefits principle (the idea that people should pay taxes based on the benefits they receive from government services).

2.It should obey the ability-to-pay principle (the idea that taxes should be levied on a person according to how well that person can shoulder the burden).

• Efficiency

Definitions

1. Average tax rate– total taxes paid divided by total income

2. Marginal tax rate– the amount by which taxes increase from an additional dollar of income

3. Lump-sum tax rate– a tax that is the same amount for every person

4. Benefits principle– the idea that people should pay taxes based on the benefits they receive from government services

5. Ability-to-pay principle– the idea that taxes should be levied on a person according to how well that person can shoulder the burden

6. Vertical equity– the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

7. Horizontal equity– the idea that taxpayers with similar abilities to pay taxes should pay the same amount

8. Proportional tax– a tax for which high-income and low-income taxpayers pay the same fraction of income

9. Regressive tax– a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

10. Progressive tax– a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. Betty gives piano lessons. She has an opportunity cost of 50 dollars per lesson and charges 60 dollars. She has two students: Archie, who has a willingness to pay of 70 dollars, and Veronica, who has a willingness to pay of 90 dollars. When the government puts a 20 dollars tax on piano lessons and Betty raises her price to 80 dollars, the deadweight loss is_____ and the tax revenue is_____. (Correct answer: C)

a. 10,20

b. 10,40

c. 20.20

d. 20,40

My wrong answer: A

Summary

Chapter 11 is Public Goods and Common Resources. This chapter divides the goods into four categories by using the definition of excludability (he property of a good whereby a person can be prevented from using it) and rivalry in consumption(the property of a good whereby one person’s use diminishes other people’s use).

Private goods

• Rival in consumption
• Excludable
• e.g ice-cream cones, clothing, congested toll roads

Club goods

• Not rival in consumption
• Excludable
• e.g satellite TV, fire protection, uncongested toll roads

Common resources

• Non-excludable
• Rival in consumption
• e.g fish in the ocean, the environment, congested non-toll roads
• The common resources tend to be used excessively.

Public goods

• Non-excludable
• Not rival in consumption
• e.g tornado siren, national defense, uncongested non-toll roads
• People who receive the benefit of a good but avoid paying for it is called free riders.

Definitions

1. Excludability– the property of a good whereby a person can be prevented from using it

2. Public goods– good that are neither excludable nor rival in consumption

3. Free rider– a person who receives the benefit of a good but avoids paying for it

4. Rivalry in consumption– the property of a good whereby one person’s use diminishes other people’s use

5. Common resources– goods that are excludable but not rival in consumption

6. Cost-benefit analysis– a study that compares the costs and benefits to society of providing a public good

7. Private goods– goods that are both excludable and rival in consumption

8. Club goods– goods that are excludable but not rival in consumption

9. Tragedy of the Commons– a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1.Common resources are_____(Correct answer: C)

a. efficiently provided by the market forces

b. underprovided in the absence of government

c. overused in the absence of government

d. a type of natural monopoly

My wrong answer: B

Summary

Chapter 10 is Externalities. This chapter introduces the situation when the producers and consumers are not the only interested parties.

• Externalities include external cost and external benefit.
• Externalities make the equilibrium not the optimum.
• The use of tax or subsidy can make the equilibrium equal to the optimum if the new supply curve(private cost) coincides with the social-cost curve.

• Corrective tax and pollution permits are used for decreasing negative externality.
• Pollution permits mean the firms can buy the rights to pollute more from other firms.
• Pollution permits could be better because different kinds of firms have the different cost to avoid polluting.
• Regulation can be another way to limit the negative externality. If the negative externality is much greater than the private benefits, the regulation would be better.

Coase theorem is the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.

• Private parties may not solve the problem of negative externality if the process of bargain has the cost.

Definitions

1. Externality– the uncompensated impact of one person’s actions on the well-being of a bystander

2. Internalizing the externality– altering incentives so that people take into account the external effects of their actions

3. Corrective taxes– a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

4. Coase theorem– the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

5. Transaction costs– the costs that parties incur during the process of agreeing to and following through on a bargain

Review

I did all questions correctly! Excellent!

Backgrounds

We had three case studies on July 21st. In each 30-minute case study session, group members needed to read the whole case and chose three representatives who answer three questions respectively. The cases were in English and representatives were allowed to answer the question in Chinese.

What I did

I was a representative to answer the second question during one case study. That case introduced how Starbuck be famous all around the world. The question I needed to answer is to explain how you could see Kevin (the Starbuck CEO) is brave enough to burden the risk and how he realized Starbuck would be in trouble in 2007.

Although representatives could also speak Chinese to answer questions, I still answered the questions in English in order to strengthen my poor English-speaking skill. Except using information about introducing the situation of Starbuck from the main body, I also noticed the information (a diagram) in appendix. The diagram showed that the revenue of Starbuck increased while its net profit decreased from 2006 to 2007, which helped me to explain how the Starbuck could be in trouble.

My feelings

Thanks to my previous experience of giving a presentation, I was not so frightened of it. However, I was poor in speaking English so I thought I didn’t perform well at that time. Anyway, my friends were so kind that they encouraged me and said I was good enough. I felt lucky and impressed to meet these friends.

The ending

We finally finished the Emerging Leader Summit. Here is a photo to record this journey.

Some great contributors who were approved by the FBLA China got the certificate. I was one part of them.

Backgrounds

We had seven workshops on July 20th. During the workshop, the FBLA China National and Provincial leaders shared knowledge and experience related to the leadership with us. The seven workshops had these topics:

• Communication
• Creative Thinking
• Critical Thinking
• Organization
• Teamwork
• Decision Making
• Problematic solving

I recorded some important bullet points.

Communication

There are three basic models of communication:

1. The linear model (messages from senders to receivers)
2. The interaction model (receivers give feedback)
3. The transaction model (receivers help boost further comprehension)

Organization

We played a game during the workshop. We needed to find who had the median age among us without using the digital devices or notes. At that time, we queued

Introduction of the leadership
We did a questionnaire to analyze our characteristics. After finishing it, I found I have such leadership traits:

1. Emotional self-awareness
2. Independence
3. Assertiveness
4. Openness
5. Unselfishness

My feelings

I have realized my own leadership traits during the workshop. I think I will use them in the future. Besides, the FBLA China asked emerging leaders to swap seats in each session. I had met many kind friends who had creative ideas. We shared our ideas with each other and even made contact on the social medias. I had a wonderful experience at that time.

Backgrounds

Students who used to take part in FBLA contests could submit two essays to be FBLA emerging leaders. Each emerging leader, including me, needed to attend a meeting (we call it ELA) and performed well in order to be approved by the FBLA official. This year, the ELA took place from July 19th to July 21th.

The meeting on July 19th

This meeting includes two parts, one is the analysis of FBLA contests in the next year and the other is an icebreaking game.

The analysis of FBLA contests

In the next year, FBLA China decides to hold contests with these 15 topics:

• Entrepreneurship
• International Business
• Marketing
• Business Management
• Banking/Financial System
• Hospitality/Event
• Sports/Entertainment Management
• Business Plan
• Business Financial Plan
• Business Ethics
• Sales Presentation
• Social Media Strategies
• Introduction to Business Presentation
• Data Analysis
• Economics

FBLA China judges its contests with these five aspects: Knowledge familiarity, Easiness to win, Academic support, Event attractiveness, Skillset simplicity. The official gives each topic its points in each aspect in order(out of five).

Entrepreneurship (3,2,5,4,3)

• It is a traditional topic which has the longest history.

International Business (3,1,5,4,3)

• It includes a lot of macroeconomic knowledges.

Marketing (4,1,5,5,3)

• It is hard to win in this topic.

Business Management (3,3,3,2,4)

Banking/Financial System (1,4,5,3,4)

• It is hard for Chinese students because this topic related to knowledge about the US banking system.

Hospitality/Event (1,5,3,4,5)

• A new topic.
• It includes many jargons.

Sports/Entertainment Management (2,4,3,4,4)

• A new topic.
• It includes knowledge about journalism..

Business Plan (2,2,4,5,2)

• It is similar to the topic Entrepreneurship.
• A report topic.

Business Financial Plan (1,2,4,4,2)

• A report topic.
• It focuses on accounting. e.g debit

Business Ethics (3,2,3,4,4)

• It includes the business law. e.g Antitrust law

Sales Presentation (3,4,3,4,4)

• Not difficult.

Social Media Strategies (3,3,3,4,4)

• It is similar to the topic marketing.
• Students didn’t perform well in the past.

Introduction to Business Presentation (3,4,3,3,5)

• Not difficult.
• Only students in Grade 9/10 could take part in it.

Data Analysis

• A new topic.
• Do presentation in this contest.

Economics (5,3,5,4,3)

• Each candidate in other topics needs to do the economic test.

Icebreaking activity

We traded with each other in a virtual aluminium future good market. In this market, each team (10 members) had 1500 dollars originally and the initial price of per unit aluminium was 100 dollars. In each turn, the FBLA official told us information related to the aluminium. And we needed to trade with others by evaluating the price of aluminium future good.

I have learned a lot during the activity. First, I used a lot of economic knowledge to analyze the price of aluminium in the future. Besides, when other members in our team had different ideas, we communicated with each other to justify ideas. I learned how to do the teamwork effectively. I was impressed by the third turn in this game because the information (the change of oil industries) in this turn was not related to aluminium. I realized that we should know how to distinguish useful information from useless information.

Summary

Chapter 9 is Application: International Trade. This chapter compares total surplus before and after trade. It also introduces tariff and the change of total surplus after tariff.

Total surplus before and after trade

• Both exporting and importing countries can gain more total surplus.
• For exporting countries, the domestic consumer surplus decreases and producer surplus increases. But the gain is greater than loss.
• For importing countries, the domestic producer surplus decreases and consumer surplus increases. But the gain is greater than loss.

Tariff and deadweight loss

• Tariff is a tax on import.
• Tariff has no effect for a exporting country.
• D and F in this diagram represent the deadweight loss from the tariff.

Definitions

1. World price– the price of a good that prevails in the world market for that good

2. Tariff– a tax on goods produced abroad and sold domestically

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1.The nation of Openia allows free trade and exports steel. If steel exports were prohibited, the price of steel in Openia would be_____, benefiting steel_____(Correct answer: B)

a. higher; consumers

b. lower; consumers

c. higher; producers

d. lower; producers

My wrong answer: C

2.When a nation opens itself to trade in a good and becomes an importer,_____(Correct answer: A)

a. producer surplus decreases, but consumer surplus and total surplus both increase

b. producer surplus decreases, consumer surplus increases, and so the impact on total surplus is ambiguous

c. producer surplus and total surplus increase, but consumer surplus decreases

d. producer surplus, consumer surplus, and total surplus all increase

My wrong answer: C

Summary

Chapter 8 is Application: The Cost of Taxation. This chapter introduces the deadweight loss(welfare loss) and the relationship between tax/tax revenue and welfare loss.

Deadweight loss

• Without tax, the consumer surplus is A+B+C, the producer surplus is D+E+F.
• With tax, the tax revenue is B+D, the consumer surplus is A, the producer surplus is F.
• C+E is deadweight loss(welfare loss).
• Deadweight loss occurs when the total surplus of the consumption is smaller than the tax required. At that time, people will not consume goods, that means consumers and producers will not get surplus they should get if the tax is not imposed. Besides, tax is not levied on this consumption because this consumption does not exist.

The Determinants of the Deadweight Loss

• Each diagram has a same size of tax.
• The greater the elasticities of supply and demand, the larger the deadweight loss of a tax.

Deadweight Loss and Tax Revenue as Taxes Vary

• As the tax rate increases, the tax revenue increases first. Then it decreases.
• The deadweight loss surges as the tax rate increases(because the area of triangle is the deadweight loss).
• The curve shows that the tax revenue first increases then decreases is called Laffer curve.

Definitions

1. Deadweight loss– the fall in total surplus that results from a market distortion, such as a tax

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1.A tax on a good has deadweight loss if_____(Correct answer: A)

a. the reduction in consumer and producer surplus is greater than the tax revenue

b. the tax revenue is greater than the reduction in consumer and producer surplus

c. the reduction in consumer surplus is greater than the reduction in producer surplus

d. the reduction in producer surplus is greater than the reduction in consumer surplus

My wrong answer: B

2. Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax_____(Correct answer: C)

a. increases by less than 50 percent and may even decline

b. increases by exactly 50 percent

c. increases by more than 50 percent

d. The answer depends on whether supply or demand is more elastic

3.Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government’s tax revenue_____ (Correct answer: A)

a. increases by less than 50 percent and may even decline

b. increases by exactly 50 percent

c. increases by more than 50 percent

d. The answer depends on whether supply or demand is more elastic

Tips: As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. 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 the tax gets large enough, tax revenue starts to fall.