Unit 2:
Demand, Supply, and
Consumer Choice
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ACDC Leadership 2018
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Review
Calculate the area of:
1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
P
$22
S
20
CS
1. CS= $40
2. PS= $20
3. Total= $60
18
PS
16
14
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ACDC Leadership 2018
D
20
Q
2
Trade and Taxes
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ACDC Leadership 2018
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
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ACDC Leadership 2018
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Purchasing goods at a lower
World Price
P
$10
SDomestic
8
6
$5
4
CS
PS
What happens to
CS and PS after
trade with $2
World Price?
2
1
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ACDC Leadership 2018
DDomestic
7 8 9 10 11 12 13
Q
5
Purchasing goods at a lower
World Price
P
$10
SDomestic
8
6
$5
4
2
CS
After
Trade with $2
World Price
PS
1
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ACDC Leadership 2018
DDomestic
7 8 9 10 11 12 13
Q
6
Purchasing goods at a lower
World Price
P
$10
SDomestic
8
6
$5
4
2
CS
What happens to
CS and PS after
$2 Tariff?
PS
1
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ACDC Leadership 2018
DDomestic
7 8 9 10 11 12 13
Q
7
Purchasing goods at a lower
World Price
P
$10
SDomestic
8
6
$5
4
After
$2 Tariff
CS
PS
Tariff
2
1
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ACDC Leadership 2018
DDomestic
7 8 9 10 11 12 13
Q
8
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 graphs show the domestic
leads to a world price
supply and demand for grain.
of PT, how much is
imported and what is
The letters represent area.
the CS and PS?
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ACDC Leadership 2018
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ACDC Leadership 2018
Current Events
Trump Administration Proposes Tariffs
Read the NYTimes article about potential
tariffs on steel and aluminum.
Explain which industries this tariff will
help and which it will hurt. Do you agree or
disagree? Why?
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ACDC Leadership 2018
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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.
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Excise Taxes
Supply
Schedule
P
Qs
$5
140
$4
120
Government sets a $2 per
unit
tax
on
Cigarettes
P
S
$5
4
3
$3
100
$2
80
$1
60
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2
1
D
40
60
80
100
120
140
Q
18
Excise Taxes
Supply
Schedule
P
Qs
$5 $7
140
$4 $6
120
Government sets a $2 per
unit
tax
on
Cigarettes
P
S
$5
4
3
$3 $5
100
$2 $4
80
$1 $3
60
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ACDC Leadership 2018
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1
D
40
60
80
100
120
140
Q
19
Excise Taxes
Supply
Schedule
P
Qs
$5 $7
140
$4 $6
120
X
P
S
$5
4
Tax is the vertical
distance between
supply curves
3
$3 $5
100
$2 $4
80
$1 $3
60
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ACDC Leadership 2018
STA
2
1
D
40
60
80
100
120
140
Q
20
Identify the
1.
2.
3.
4.
5.
Excise Taxes
following:
Price before tax
Price consumers
P
pay after tax
Price producers $5
get after tax
Total tax revenue 4
for the
government
3
before tax
Total tax revenue
2
for the
government after
tax
1
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ACDC Leadership 2018
STA
X
S
Tax
Revenue
D
40
60
80
100
120
140
Q
21
Tax Practice
1.
2.
3.
4.
5.
CS Before Tax
PS Before Tax
CS After Tax
PS After Tax
Tax Revenue for
Government
6. Deadweight Loss
assuming society
wants Q2 produced
7. Amount of tax
revenue producers
pay
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ACDC Leadership 2018
2012 Question 18
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2012 Question 19
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Excise Tax
P
S
$14
12
11
8
D
10 12
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ACDC Leadership 2018
Q
Excise Tax
P
Stax
1.
2.
S
3.
Pc$14
4.
12
Pp 11
5.
6.
8
D
10 12
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ACDC Leadership 2018
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
1.
2.
3.
4.
5.
6.
7.
8.
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ACDC Leadership 2018
9.
Calculate
CS Before Tax
Total Expenditures
Before Tax
Tax Per Unit
Total Tax Revenue
that goes to
Government
Amount of Tax paid by
consumers
Amount of Tax paid by
producers
Total Expenditures
after tax
Total Revenue for
firms after tax
CS After Tax
Graph It!
● Draw a correctly labeled model of the market for cotton candy
which in equilibrium at a price of $4.
● Suppose the government imposes a $1 per unit excise tax on
producers of cotton candy.
○ On a NEW correctly labeled model of the market for cotton
candy, show the result of this tax on the price and quantity of
cotton candy.
● On each model, shade the area of CS with horizontal lines, the
area of PS with vertical lines, the area of DWL (if appropriate)
with diagonal lines, and darkly outline the border of tax revenue
(if appropriate).
Following the imposition of the tax, what happened to CS, PS,
DWL, and TR?
Does TR add to total surplus? Why or why not?
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Graph It!
● Now suppose the government imposes a $1 per unit excise tax on
consumers of cotton candy.
○ On a NEW correctly labeled model of the market for cotton
candy, show the result of this tax on the price and quantity of
cotton candy.
● On each model, shade the area of CS with horizontal lines, the
area of PS with vertical lines, the area of DWL (if appropriate)
with diagonal lines, and darkly outline the border of tax revenue
(if appropriate).
Regarding CS, PS, DWL, and TR, does it appear to matter
whether the tax was placed on consumers or producers? Why
might this be?
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Tax Incidence
Who ends up paying for an excise
tax?
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EXCISE TAX ON MILK
P $10
Demand- Inelastic
Supply- Unitary
S
8
6
$2 TAX on
Producers
5
4
2
D
8 10
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ACDC Leadership 2018
Q
34
EXCISE TAX ON MILK
S1
P $10
S
8
$6.50 = Pconsumers7
6
5
$4.50 = Pproducers 4
Amount Consumers Pay
$2 TAX on
Producers
Amount Producers Pay
2
D
9 10
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ACDC Leadership 2018
Quantity Doesn’t Fall VERY Much!!!
Q
35
EXCISE TAX ON BEEF
P
$10
Demand- Elastic
Supply- Unitary
S
8
$2 TAX on
Producers
6
5
4
D
2
8 10
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ACDC Leadership 2018
Q
36
EXCISE TAX ON BEEF
P
$10
S1
S
8
$2 TAX on
Producers
6
Pc 5
4
Pp
DWL?
D
2
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10
Quantity Falls A lot!!!
Q
37
P
$10
EXCISE
TAX
S1
S
8
Pconsumers = $7 7
6
CS After
1.
2.
3.
4.
5.
6.
5
Pproducers = $4 4
Tax per Unit?
Total Tax Revenue?
Tax paid by consumers?
Tax paid by producers?
Total spending?
Revenue for businesses?
2
D
20 30
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Q
38
P
$10
EXCISE
TAX
S1
S
8
Pconsumers = $7 7
6
CS After
1.
2.
3.
4.
5.
6.
5
Pproducers = $4 4
Tax per Unit = $3
Total Tax Revenue = $60
Tax Paid by Consumers = $40
Tax Paid by Producers = $20
Total Spending = $140
Revenue for Businesses=$80
2
D
20 30
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ACDC Leadership 2018
Q
39
Tax Incidence (Who pays?)
ST S
ST S
ST S
ST S
ST S
D
D
D
D
D
Perfectly
Inelastic
Relatively
Inelastic
Unit
Elastic
Relatively
Elastic
Perfectly
Elastic
Tax
burden
paid
entirely by
consumers
Tax
burden
mostly on
consumers
Tax
burden
shared by
consumers
and
producers
Tax
burden
mostly on
producers
Tax
burden
paid
entirely by
producers
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Who pays more of the tax?
1.
2.
3.
4.
5.
Supply is less elastic than demand
Demand is less inelastic than supply
Supply is perfectly elastic and demand is perfectly inelastic
Supply is perfectly inelastic and demand is relatively elastic
Demand is perfectly inelastic and supply is relatively
inelastic
1. Producers
2. Producers
3. Consumers
4. Producers
5. Consumers
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Designing an effective tax
When the policymakers design a tax, what is
typically their goal regarding tax revenue & DWL?
Assume that policymakers want to maximize tax revenue and
minimize DWL. For each of the following goods/services,
decide whether an excise tax on this g/s would be likely to
achieve this goal. (Hint: how does elasticity affect the size of
the DWL?)
1.
2.
3.
4.
Gasoline
Luxury yachts
Subway tokens
Mint chocolate chip ice cream
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Putting it all together: FRQ Practice!
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