Chapter - Economic Graphs Deadweight Loss PDF

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Summary

Shows what part of the graph is deadweight loss with taxes
Consumer vs. Producer surplus
Explains calculations and differences
Consumer Choice Theory
Diminishing Marginal Utility → at some point in consumption pattern of a good, each additional utility yields less additional ...

Description

ii. Before Tax

After tax

Price and Quantity

$5, 30

Consumer Surplus

½ ($9-$5)*30 = 60

Producer Surplus

½ ($5-$1)*30 = 60

Total Surplus

60 + 60 = $120

iii. iv. v.

Total size of tax

$4

Price for consumers

$7

Price received by sellers

$3

Consumer Surplus

½ ($9-$7)*15 = 15

Producer Surplus

½ ($3-$1)*15 = 15

Total tax revenue

($7-$3) * 15 = 60

Tax Paid by consumers

($7-$5) * 15 = 30

Tax Paid by producers

($5-$3) * 15 = 30

Deadweight loss

½ ($7-3) *(30-15) = $30

Part of the surplus goes to the government as tax revenue and the other portion has disappeared If supply is more price elastic than demand (demand is more inelastic) consumer bears a greater burden tax than supplies If demand is more price elastic than supply (supply is more inelastic) supplier bears a greater burden tax than supplies

15. Tax Incidence Elasticities Elasticity Demand > Elasticity Supply Elasticity Demand < Elasticity Supply Perfectly inelastic demand (Ed = 0) Perfectly elastic demand (Ed = ∞) Perfectly inelastic supply (Es = 0)

Tax Incidence: WHO pays the Tax Producers pay more than consumers Consumers pay more than producers Consumers pay ALL of the tax Consumers pay NONE of the tax Producers pay ALL of the tax

Perfectly elastic supply (Es = ∞)

Producers pay NONE of the tax

16. World Price with NO Tariff or Quota a. At world prices the consumers receive huge gains from lower prices; the producer surplus shrinks (still a large net positive gain) 17. World Price with Tariff a. Tariff tax on imports/exports b. Quota limit on quantity of goods imported/exported c. Deadweight loss created + tax revenue

d. 18. Consumer Choice Theory a. Diminishing Marginal Utility at some point in consumption pattern of a good, each additional utility yields less additional satisfaction or utility b. Marginal utility change in total satisfaction per increment 19. The Utility Maximization Rule a. MUX / PX = MU Y/ PY b. Think of marginal utility as satisfaction points Chapter 6: Costs of Production 1. Short run vs. long run a. Long run all resources used in production are variable and supply can adjust to changes in demand b. Short run at least one production input is fixed and supply CANNOT fully adjust to changes in demand i. Firms will only operate if P=MR=AR>AVC

c....