U2 M50 Taxes-Efficiency and Deadweight Loss Slides HM (1)

Note on Elasticity and Taxes

Page 1: Graphing Exercise

• Graphing Tasks:

  • A. Unit elastic demand curve

  • B. Perfectly elastic supply curve

  • C. Inelastic demand curve

  • D. Supply curve with elasticity of 1.5

Page 2: Elasticity Review

• Do Now Exercise:

  • Regular method for elasticity calculations is sufficient; midpoint formula is not required.

Page 3-4: Module Overview

• Module 50: Taxes:

  • Link to video resource provided.

  • Learning Objectives:

    • Explain the impact of taxes on total surplus.

    • Understand the concept of deadweight loss.

Page 5-6: Consumer and Producer Surplus

• Surplus Definitions:

  • Consumer Surplus (CS): Difference between what consumers are willing to pay and what they actually pay.

  • Producer Surplus (PS): Difference between what producers are willing to accept and what they actually receive.

  • Efficiency: A market is efficient when it maximizes both consumer and producer surplus.

Page 7: Price Controls and Deadweight Loss

• Price Controls:

  • Price ceilings and floors reduce consumer and producer surplus, leading to deadweight loss.

  • Taxes similarly create inefficiencies in the market.

Page 8-10: Excise Taxes

• Definition:

  • A per-unit tax imposed on producers for each unit sold.

  • Aimed at reducing production of harmful goods (e.g., cigarettes, alcohol).

• Example:

  • Market for cigarettes with a $2 per unit tax leading to higher prices for consumers and lower net prices for producers.

Page 11-13: Effects of Excise Tax

• Tax Impact:

  • New equilibrium price established post-tax.

  • Tax revenue calculated based on the difference in prices before and after tax.

Page 14-15: Tax Practice

• Calculations:

  • Identify consumer surplus, producer surplus, tax revenue, and deadweight loss before and after tax.

Page 16-18: AP Exam Questions

• Sample Questions:

  • Determine dollar amount of unit tax and prices paid by consumers and received by producers after tax.

Page 19-21: Tax Incidence

• Tax Burden:

  • Tax incidence depends on elasticity of demand and supply.

  • Consumers pay more of the tax burden when demand is inelastic.

Page 22: Price Ceilings and Floors

• Elasticity Effects:

  • Binding price ceilings increase shortages; binding price floors increase surpluses.

  • Market structure influences the impact of price controls.

Page 23-25: Excise Tax Examples

• Illustrations:

  • Examples of excise taxes on milk and beef, showing shifts in supply and demand curves.

Page 26-27: Discussion Practice

• Tax Revenue Calculations:

  • Identify tax per unit, total tax revenue, and spending impacts on consumers and producers.

Page 28: Tax Imposition on Consumers

• Example:

  • A $40 tax on hotel rooms shifts demand, affecting equilibrium price and quantity rented.

Page 29: Elasticity Comparison

• Exam Question:

  • Comparison of tax shares paid by consumers for goods with different elasticities.

Page 30-31: Graphing Exercises

• Graphing Tasks:

  • Create models for cotton candy market before and after tax imposition.

  • Analyze changes in consumer surplus, producer surplus, deadweight loss, and tax revenue.

This note summarizes the key concepts and exercises related to elasticity and taxes, providing a structured overview for study and