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Unit 2: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2015 1

Review P \$22 Calculate the area of: 1. Consumer Surplus 2. Producer Surplus 3. Total Surplus S 20 CS 1. CS= \$___ 2. PS= \$___ 3. Total= \$___ 18 PS 16 14 Copyright ACDC Leadership 2015 D 20 Q 3

Limits on Trade World Price- Countries can buy products at their own domestic price or they can buy the products at a cheaper world price Tariff- Tax on imports that increases the world price Quota- a limit on number of imports. Purpose of tariffs and quotas: • To protect domestic producers from a cheaper world price. • To prevent domestic unemployment Copyright ACDC Leadership 2015 4

International Trade and Quotas Identify the following: 1. CS with no trade 2. PS with no trade 3. Amount we import at world price (PW) 4. PS if we trade at world price (PW) 5. CS if we trade at world price (PW) 6. If government tariff This graph shows the domestic leads to a world price supply and demand for grain. of PT, how much is The letters represent area. imported and what is the CS and PS? Copyright ACDC Leadership 2015

Excise Taxes Excise Tax = A per unit tax on producers For every unit made, the producer must pay \$ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: • Cigarettes “sin tax” • Alcohol “sin tax” • Environmentally Unsafe Products • Etc. Copyright ACDC Leadership 2015 8

Excise Taxes Supply Schedule P Qs \$5 140 \$4 Government sets a \$2 per unit tax on Cigarettes P S \$5 120 \$3 100 4 3 \$2 80 2 \$1 60 1 Copyright ACDC Leadership 2015 D 40 60 80 100 120 140 Q 9

Excise Taxes Supply Schedule P Qs \$5 \$7 140 \$4 \$6 P S \$5 120 \$3 \$5 100 STAX 4 Tax is the vertical distance between supply curves 3 \$2 \$4 80 2 \$1 \$3 60 1 Copyright ACDC Leadership 2015 D 40 60 80 100 120 140 Q 10

Excise Taxes 1. 2. 3. 4. 5. Identify the following: Price before tax Price consumers P pay after tax \$5 Price producers get after tax 4 Total tax revenue for the 3 government before tax 2 Total tax revenue for the 1 government after tax Copyright ACDC Leadership 2015 STAX S D 40 60 80 100 120 140 Q 11

Tax Practice 1. 2. 3. 4. 5. Copyright ACDC Leadership 2015 CS Before Tax PS Before Tax CS After Tax PS After Tax Revenue for Government 6. Deadweight Loss assuming society wants Q 2 produced 7. Amount of tax revenue producers pay

Excise Tax P Stax 1. 2. S 3. \$14 Pc 4. 12 Pp 11 5. 8 D 10 12 Copyright ACDC Leadership 2015 6. Q Calculate Tax Per Unit Total Tax Revenue Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures Total Revenue for firms

Excise Tax Copyright ACDC Leadership 2015 Calculate 1. CS Before Tax 2. Total Expenditures Before Tax 3. Tax Per Unit 4. Total Tax Revenue that goes to Government 5. Amount of Tax paid by consumers 6. Amount of Tax paid by producers 7. Total Expenditures after tax 8. Total Revenue for firms after tax 9. CS After Tax 10. DWL

Tax Incidence Who ends up paying for an excise tax? Copyright ACDC Leadership 2015 18

EXCISE TAX ON MILK P \$10 Demand- Inelastic Supply- Unitary S 8 6 \$2 TAX on Producers 5 4 2 D 8 10 Copyright ACDC Leadership 2015 Q 19

EXCISE TAX ON MILK P \$10 S 1 S 8 \$6. 50 =Pconsumers 7 6 5 \$4. 50 = Pproducers 4 Amount Consumers Pay \$2 TAX on Producers Amount Producers Pay 2 D 9 10 Copyright ACDC Leadership 2015 Quantity Doesn’t Fall VERY Much!!! Q 20

EXCISE TAX ON BEEF P \$10 Demand- Elastic Supply- Unitary S 8 \$2 TAX on Producers 6 5 4 D 2 8 10 Copyright ACDC Leadership 2015 Q 21

EXCISE TAX ON BEEF P \$10 S 1 S 8 \$2 TAX on Producers 6 Pc 5 4 Pp DWL? D 2 Copyright ACDC Leadership 2015 7 10 Quantity Falls A lot!!! Q 22

P \$10 EXCISE TAX S 1 S 8 Pconsumers = \$7 7 6 CS After 1. 2. 3. 4. 5. 6. 5 Pproducers = \$4 4 2 Tax per Unit? Total Tax Revenue? Tax paid by consumers? Tax paid by producers? Total spending? Revenue for businesses? D 20 30 Copyright ACDC Leadership 2015 Q 23

Tax Incidence (Who pays? ) ST S D D Perfectly Inelastic Tax burden paid mostly on entirely by consumers Copyright ACDC Leadership 2015 D D D Relatively Inelastic ST S Unit Elastic Tax burden shared by consumers and producers Relatively Elastic Perfectly Elastic Tax burden paid mostly on producers entirely by producers 24

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