Transcript 4,5,6 Test Review

4,5,6 Test Review
Tax on a seller
P
Ppay: Price buyers pay. This top price will
always be what the buyer pays. In this
case the buyer give the whole amount to
the firm.
S2
S
Ppay
Prec: Price sellers receive. This lower
price will always be what the seller
receives. In this case the seller is sending
money to the government for tax
PE
Prec
D
Qnew
QE
Q
Tax on a seller
P
Ppay: Price buyers pay. This top price will
always be what the buyer pays. In this
case the buyer give the whole amount to
the firm.
S2
S
Ppay
Prec: Price sellers receive. This lower
price will always be what the seller
receives. In this case the seller is sending
money to the government for tax
PE
Prec
D
Qnew
QE
Q
What is the total tax revenue?
Tax on a seller
$480
P
S2
What does the buyer pay?
S
$12
What does the seller receive?
12
$6
What is the amount of tax?
10
$6
How much of the tax does the
seller pay?
$4
How much of the tax does the
buyer pay?
$2
D
6
80
100
Q
What is the total tax revenue?
Tax on a buyer
$480
P
What does the buyer pay?
S
$12
What does the seller receive?
12
$6
What is the amount of tax?
10
$6
How much of the tax does the
seller pay?
$4
How much of the tax does the
buyer pay?
$2
D
6
D2
80
100
Q
Review
 Tax is split between buyers and sellers as long as one curve is
not perfectly inelastic
 It does not matter whom you place the tax on (buyer or
seller) the same distribution occurs
 More tax (or larger part of the tax burden) is paid by
whichever group (buy or seller) is more inelastic.
Elastic Supply, Inelastic Demand
P
S2
Price buyers pay
PE
Price sellers
receive
D
D2
QE
The blue bracket is what
consumers pay, the
difference between the
old price and that buyers
pay S
The red bracket is what
producers pay, the
difference between the
old price and what the
seller receives
Q
Inelastic Supply, Elastic Demand
P
S
The blue bracket is what
consumers pay, the
difference between the
old price and that buyers
pay
Price buyers pay
PE
The red bracket is what
producers pay, the
Ddifference between the
old price and what the
seller receives
Price sellers
receive
QE
Q
Questions for Review
 What does it mean when a price floor or price ceiling is
binding?
 Who advocates for price floors? Who advocates for price
ceilings?
 What is a rationing mechanism?
Questions for Review
At what price would we get a
surplus of 50?
At what price do we
get acould
shortage
What
this of
line represent?
about 10?
How about now?
Questions for Review
 What are some reasons a product may be inelastic?
 How does time frame effect elasticity? How does a narrow
definition of the product? A wide definition?
 What is the equation for price elasticity of demand? Cross
price elasticity? Income elasticity? Total Revenue?
 What does it mean when cross price is negative? What does
it mean when income elasticity is positive?
 If price increases and total revenue increase, demand is elastic
or inelastic?
Questions for Review
P
What is the elasticity of point A?
of point B?
of point C?
A
B (midpoint)
C
Q
Questions for Review
 Recently, in Smalltown, the price of Twinkies fell from $0.80
to $0.70. As a result, the quantity demanded of Ho-Ho's
decreased from 120 to 100. What would be the appropriate
elasticity to compute? Using the midpoint method, compute
this elasticity. What does your answer tell you?
Questions for Review
 You should have used cross-price elasticity.
 The cross-price elasticity is1.36.
 The two goods are substitutes because the cross-price
elasticity is positive.
Questions for Review
 Consider the following pairs of goods. For which of the two
goods would you expect the demand to be more price
elastic? Why?
a.
water or diamonds
b.
insulin or nasal decongestant spray
c.
food in general or breakfast cereal
d.
gasoline over the course of a week or gasoline over the
course of a year
Questions for Review
 a.
Diamonds are luxuries, and water is a necessity.
Therefore, diamonds have the more elastic demand.
 b. Insulin has no close substitutes, but decongestant spray
does. Therefore, nasal decongestant spray has the more elastic
demand.
 c.
Breakfast cereal has more substitutes than does food in
general. Therefore, breakfast cereal has the more elastic
demand.
 d. The longer the time period, the more elastic demand is.
Therefore, gasoline over the course of a year has the more
elastic demand.
Questions for Review
 What is a change in demand? How is it different from a
change in quantity demanded?
 What is a change in supply? How is it different from a
change in quantity supplied?
 What is something that would make the demand curve shift
left? The supply curve shift right?
 What is a normal good? What is an inferior good? What is a
substitute? What is a complement?
 What is it called when it looks like there is no change to
demand or supply when faced with a double shift? What is
another word you may see?
Questions for Review