Changes

You realize that your friend is having a problem with his car, which you can fix.  You offer to fix your friend's car if he fixes your computer.  Now your wealth is the value of your computer minus almost nothing.  The "trade" between you and the homeschooler increased the wealth of both of you.

You realize that your friend is having a problem with his car, which you can fix.  You offer to fix your friend's car if he fixes your computer.  Now your wealth is the value of your computer minus almost nothing.  The "trade" between you and the homeschooler increased the wealth of both of you.

Based on the above example, most economists view trade as as increasing wealth.  Whenever two people enter into a transaction in the free market, each side should be benefiting and increasing their wealth.  When you buy milk at a grocery store, you are paying less than what the milk is really worth to you, or you would not buy it.  That increases your overall wealth.  The store is making money from the milk, or it would not bother trying to sell it.  So the store becomes wealthier from the transaction.  The overall wealth of society is increased by these transactions.  The more transactions, the greater the wealth.  It seems clear that trade within a country, like the examples just described, are to be encouraged because they increase the wealth of both the buyers and the sellers.

Based on the above example, most economists view trade as as increasing wealth.  Whenever two people enter into a transaction in the free market, each side should be benefiting and increasing their wealth.  When you buy milk at a grocery store, you are paying less than what the milk is really worth to you, or you would not buy it.  That increases your overall wealth.  The store is making money from the milk, or it would not bother trying to sell it.  So the store also becomes wealthier from the transaction.  The overall wealth of society is increased by these transactions.  The more transactions, the greater the wealth.  It seems clear that trade within a country, like the examples just described, are to be encouraged because they increase the wealth of both the buyers and the sellers.

The term "free trade" refers to transactions between two different countries, as in trade between China and the United States.  In that case the trade makes the foreign government wealthier, and it may be hostile to our nation and our values.  We may also become wealthier from the transaction, but our gain may not be nearly as much as the hostile nation's gain.  We may actually end up spending more money defending against the foreign government that we trade with, more than our benefit from the trade.  Or our money may be used by the foreign government to enslave its people, which we do not want.  We may be losing jobs because of our trade with foreign governments, as factories are built in the foreign nations rather than in our nation.  For most of the history of the United States "free trade" with foreign nations was not supported, but it has been increasingly used in recent years.  Wal-Mart, for example, imports many billions of dollars of low-cost goods directly from China, where they are produced by paying workers very little in wages.

The term "free trade" refers to transactions between two different countries, as in trade between China and the United States.  In that case the trade makes the foreign government wealthier, and it may be hostile to our nation and our values.  We may also become wealthier from the transaction, but our gain may not be nearly as much as the hostile nation's gain.  We may actually end up spending more money defending against the foreign government that we trade with, more than our benefit from the trade.  Or our money may be used by the foreign government to enslave its people, which we do not want.  We may be losing jobs because of our trade with foreign governments, as factories are built in the foreign nations rather than in our nation.  For most of the history of the United States "free trade" with foreign nations was not supported, but it has been increasingly used in recent years.  Wal-Mart, for example, imports many billions of dollars of low-cost goods directly from China, where they are produced by paying workers very little in wages.

"Imports" are goods shipped into our country by a foreign country, for sale in our country.  China imports many goods that are sold in the United States by Wal-Mart, for example.

"Imports" are goods shipped into our country by a foreign country, for sale in our country.  China imports many goods that are sold in the United States by Wal-Mart, for example.

There are valid reasons to discourage the sale of imports and encourage sale of goods made domestically (made in the United States).  The money paid for imports goes to the foreign companies, and support the foreign governments.  The sale of imports do not help Americans as much as the sale of made-in-America goods do.

There are valid reasons to discourage the sale of imports and encourage the sale of goods made domestically (made in the United States).  The money paid for imports goes to the foreign companies, and support the foreign governments.  The sale of imports do not help Americans as much as the sale of made-in-America goods do.

There are two approaches to disfavoring imports.  The primary way in history was to impose a '''''tariff''''' on imports.  A tariff is a tax on imports.  A tariff raises the price of imported goods, and the supplier must then reduce its received price to attain the same level where supply meets demand.  This has the effect of reducing supply.  Goods made domestically (in the United States) can then increase their sales due to the decrease in sales by the imports.  A tariff on a foreign-made car like the "Honda" would reduce the supply of Honda cars in the market.  American car companies would benefit from that, but consumers who want to buy more Hondas might not.

There are two approaches to disfavoring imports.  The primary way in history was to impose a '''''tariff''''' on imports.  A tariff is a tax on imports.  A tariff raises the price of imported goods, and the supplier must then reduce its received price to attain the same level where supply meets demand.  This has the effect of reducing supply.  Goods made domestically (in the United States) can then increase their sales due to the decrease in sales by the imports.  A tariff on a foreign-made car like the "Honda" would reduce the supply of Honda cars in the market.  American car companies would benefit from that, but consumers who want to buy more Hondas might not.

   

   

The other approach to limiting imports is the use of quotas.  Instead of imposing a tariff on Hondas, our government could set an upper limit (quota) on the total '''''quantity''''' of Hondas that may be sold in the United States each year.  Quotas also reduce supply, but without generating any revenue to the government.  Instead, quotas have the effect of increasing the price of the good (Hondas in this case) with the higher price going to the company that sells the Hondas.  The government does not obtain any revenue from a quota, while it does obtain revenue from tariffs.  So quotas help the foreign companies more than tariffs do.

The other approach to limiting imports is the use of quotas.  Instead of imposing a tariff on Hondas, our government could set an upper limit (quota) on the total '''''quantity''''' of Hondas that may be sold in the United States each year.  Quotas also reduce supply, but without generating any revenue to the government.  Instead, quotas have the effect of increasing the price of the good (Hondas in this case) with the higher price going to the company that sells the Hondas.  The government does not obtain any revenue from a quota, while it does obtain revenue from tariffs.  Quotas help the foreign companies more than tariffs do, without bringing revenue to the government imposing the quota.

Prior to the passage of the Sixteenth Amendment that legalized the income tax in 1913, and even afterward, the major source of revenue for our national (federal) government in Washington, D.C. was tariffs.  But tariffs have long been controversial, and divided the North (which liked them because they "protected" the northern manufacturers against competition from imports) and the South (which disliked them because it increased the prices of goods they purchase and caused foreign nations to retaliate by placing tariffs on cotton and other exports from the South).  Tariffs were a major cause of the Civil War.

Prior to the passage of the Sixteenth Amendment that legalized the income tax in 1913, and even afterward, the major source of revenue for our national (federal) government in Washington, D.C. was tariffs.  But tariffs have long been controversial, and divided the North (which liked them because they "protected" the northern manufacturers against competition from imports) and the South (which disliked them because it increased the prices of goods they purchase and caused foreign nations to retaliate by placing tariffs on cotton and other exports from the South).  Tariffs were a major cause of the Civil War.

During World War II, the government imposed controls to prevent companies from raising prices during the war.  The needs of our military for goods increased demand that would ordinarily shift the demand curve and increase prices.  But the government prohibited this from happening by limiting price increases.  "Price controls" are limits on the prices at which certain goods can be sold.

During World War II, the government imposed controls to prevent companies from raising prices during the war.  The needs of our military for goods increased demand that would ordinarily shift the demand curve and increase prices.  But the government prohibited this from happening by limiting price increases.  "Price controls" are limits on the prices at which certain goods can be sold.

Controls on prices (and also wages) were also imposed to control inflation (increases in all prices) in the early 1970s.  A war in the Middle East, and assistance in that war by the United States of Israel, caused the Arab nations to reduce their supply of oil to us.  That created gasoline shortages and increased energy costs, which then drove up inflation.  Price controls were designed to limit the increases.  But as the graph below illustrates, price controls create shortages:

Controls on prices (and also wages) were also imposed to control inflation (increases in all prices) in the early 1970s.  A war in the Middle East, and assistance in that war by the United States of Israel, caused the Arab nations to reduce their supply of oil to us.  That created gasoline shortages and increased energy costs, which then drove up inflation.  Price controls were designed to limit the increases.  But as the following graph illustrates, price controls create shortages:

[[File:Price control curves 0001.jpg|600px]]

[[File:Price control curves 0001.jpg|600px]]

When a price control causes a difference between the supply quantity and the demand quantity, it is the lower quantity that becomes the market.  The market can never be more than the lesser of the quantity in supply or quantity in demand.  Because the quantity supplied is much less than the quantity demanded, a shortage results.

When a price control causes a difference between the supply quantity and the demand quantity, it is the lower quantity that becomes the market.  The market can never be more than the lesser of the quantity in supply and the quantity in demand.  Because the quantity supplied is much less than the quantity demanded in the graph, a shortage results.

Rent control in New York City is an example of a price control that has terrible effects.  The people lucky enough to be a rent controlled apartment pay much less than the market rate, and never move out.  New housing is not created as quickly as it should be, because landlords are not sure they will be able to charge the market rate.  Nearly every economist, liberal or conservative, agrees that rent control is harmful.

Rent control in New York City is an example of a price control that has terrible effects.  The people lucky enough to be a rent controlled apartment pay much less than the market rate, and never move out.  New housing is not created as quickly as it should be, because landlords are not sure they will always be able to charge the market rate.  Nearly every economist, liberal or conservative, agrees that rent control is harmful, and yet liberal politicians impose it in most big cities.

== Minimum Wage ==

== Minimum Wage ==

There is another effect to raising the minimum wage that is also hurtful.  Researchers have found that raising the minimum wage causes some students drop out of school, or not go on to college, because they can make more money working at jobs than they could before.  This can be understood as follows.  Suppose that "x" number of students quit school to work at jobs when the minimum wage is $6 per hour.  If the minimum wage is raised from $6 per hour to $7 per hour, then jobs appear more attractive to students and even more will leave school than before.  More than "x" students will quit school and work at $7 per hour than at $6 per hour.  Therefore raising the minimum wage causes more students to leave school in order to work at jobs.

There is another effect to raising the minimum wage that is also hurtful.  Researchers have found that raising the minimum wage causes some students drop out of school, or not go on to college, because they can make more money working at jobs than they could before.  This can be understood as follows.  Suppose that "x" number of students quit school to work at jobs when the minimum wage is $6 per hour.  If the minimum wage is raised from $6 per hour to $7 per hour, then jobs appear more attractive to students and even more will leave school than before.  More than "x" students will quit school and work at $7 per hour than at $6 per hour.  Therefore raising the minimum wage causes more students to leave school in order to work at jobs.

The more education that someone has, the higher their average income is.  Studies show that going to a four-year college increases the lifetime income of an average person by about $500,000.  Students who complete four-year colleges make more money on average than students who completely only two-year colleges.  Students who complete two-year colleges likewise have higher average incomes than students who end their education after high school.

The more education that people have, the higher their average income is.  Studies show that going to a four-year college increases the lifetime income of an average person by about $500,000.  Students who complete four-year colleges make more money on average than students who completely only two-year colleges.  Students who complete two-year colleges likewise have higher average incomes than students who end their education after high school.

Increasing the minimum wage entices students to take advantage of a "short-term" benefit of the higher wage, but they are worse off in the "long-run" over the time period of their entire lives.

Increasing the minimum wage entices students to take advantage of a "short-term" benefit of the higher wage, but they are worse off in the "long-run" over the time period of their entire lives.

There are laws against price discrimination, but most sellers find clever ways to do it anyway.  Airlines have distinguished between business customers and tourists by its “Saturday night stay-over” rule, or by changing the price depending on how far in advance the purchase is made (tourists can buy further in advance than businessmen can).  If the traveler reserves the return flight to include staying over at least one Saturday night, or if he buys months in advance, then he is likely a tourist.  If he flies out and back in the same week without staying through the weekend, or if he buys his ticket only a week before take-off, then he is likely a businessman.  So the airline tickets have been priced much more cheaply for those who stay over at least one Saturday night or purchase a long time in advance.

There are laws against price discrimination, but most sellers find clever ways to do it anyway.  Airlines have distinguished between business customers and tourists by its “Saturday night stay-over” rule, or by changing the price depending on how far in advance the purchase is made (tourists can buy further in advance than businessmen can).  If the traveler reserves the return flight to include staying over at least one Saturday night, or if he buys months in advance, then he is likely a tourist.  If he flies out and back in the same week without staying through the weekend, or if he buys his ticket only a week before take-off, then he is likely a businessman.  So the airline tickets have been priced much more cheaply for those who stay over at least one Saturday night or purchase a long time in advance.

In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers.  If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y.  The price discrimination would collapse due to the resale market.  Price discrimination only works when the goods cannot be resold, as in a tailored suit or dress, or an airline ticket that limits use to the person whose name is on the ticket.

In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers.  If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y.  The price discrimination would collapse due to the resale market.  Price discrimination works only when the goods cannot be resold, as in a tailored suit or dress, or an airline ticket that limits use to the person whose name is on the ticket.

==Assignment==

==Assignment==