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What are the fours ways in which a government can intervene in a market?
They can impose a price ceiling, a price floor, a tax, and a subsidy
price controls
legal restrictions on how high or low a market price may go
price ceiling
A legal maximum on the price at which a good can be sold
What do price ceilings do?
They essential cause a shortage, which will decrease the producer surplus and cause deadweight loss
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
price floor
A legal minimum on the price at which a good can be sold
What do price floors do?
They create surpluses, and these surpluses will change the values of the consumer and producer surpluses and cause deadweight loss, which will decrease the total surplus
What does the presence of Deadweight loss mean?
the economy is not operating at an efficient level
Excise taxes
a tax placed on the production of a good, essentially causes the supply curve to shift to the left because the cost to produce is so high
When an excise tax is placed on a good, how does it affect the price?
It raises price by shifting the supply of a good to the left.
To calculate shift, you move each point up by how much the tax is. The new intersection with the demand curve is the equilibrium price with the tax
What is the price for the good that consumers pay?
it is the new equilibrium price
What is the price that producers pay?
it is the price point that intersects the old supply curve directly below the new equilibrium point
How does one calculate the total revenue of a tax?
by calculating the area between the old prices and the new price and the new quantity produced
How does one calculate the amount of the tax that consume pay?
By calculating the area of the tax revenue above the old equilibrium Line
How does one calculate the amount of tax the producers pay?
It is the area of the the tax revenue below the old equilibrium point
Subsidies
a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
shifts the supply curve right because it is now cheap to produce a good.
total expenditures
the total amount spent by consumers on a good or service; calculated as equilibrium price times equilibrium quantity
total revenue
the amount that the seller pays to produce a good multiplied by the quantity.
Total expenditures formula
Consumer price x quantity
Total revenue formula
producer price x quantity
How does one tell if the tax has a good impact?
You see if it produces deadweight loss. Recall, any deadweight loss represents a loss of efficiency and has a negative impact on an economy. Normally, all taxes create deadweight loss and are harmful to efficiency
For a perfectly inelastic good, who pays the tax burden?
The consumer pays the tax entirely
For a relatively inelastic good, who pays the tax burden
The consumer pays most of the tax
For a unit elastic good, who pays the tax burden?
The burden is equally shared between the producers and the consumers
For a relatively elastic good, who pays the tax burden?
The producer pays most of the tax
For a perfectly elastic good, who pays the tax burden?
The consumer pays the tax entirely
total revenue test
A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.
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