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4,5,6 Test Review

4,5,6 Test Review. Tax on a seller. P pay : 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. P. S 2. S. P pay.

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4,5,6 Test Review

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  1. 4,5,6 Test Review

  2. Tax on a seller 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. P 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 Q Qnew QE

  3. Tax on a seller 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. P 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 Q Qnew QE

  4. Tax on a seller What is the total tax revenue? $480 P S2 What does the buyer pay? S $12 What does the seller receive? 12 $6 10 What is the amount of tax? $6 D 6 How much of the tax does the seller pay? $4 Q How much of the tax does the buyer pay? 80 100 $2

  5. Tax on a buyer What is the total tax revenue? $480 P What does the buyer pay? S $12 What does the seller receive? 12 $6 10 What is the amount of tax? $6 D 6 How much of the tax does the seller pay? D2 $4 Q How much of the tax does the buyer pay? 80 100 $2

  6. 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.

  7. Elastic Supply, Inelastic Demand P The blue bracket is what consumers pay, the difference between the old price and that buyers pay S2 S Price buyers pay Price sellers receive The red bracket is what producers pay, the difference between the old price and what the seller receives PE D D2 Q QE

  8. Inelastic Supply, Elastic Demand P The blue bracket is what consumers pay, the difference between the old price and that buyers pay Price buyers pay Price sellers receive PE The red bracket is what producers pay, the difference between the old price and what the seller receives D Q S QE

  9. 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?

  10. Questions for Review At what price would we get a surplus of 50? At what price do we get a shortage of about 10? What could this line represent? How about now?

  11. 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?

  12. Questions for Review P What is the elasticity of point A? of point B? of point C? A B (midpoint) C Q

  13. 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?

  14. 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.

  15. 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

  16. 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.

  17. 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?

  18. Questions for Review

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