Unit 2: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2018 1 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 Copyright ACDC Leadership 2018 D 20 Q 2 Trade and Taxes Copyright 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 Copyright ACDC Leadership 2018 4 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 Copyright 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 Copyright 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 Copyright 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 Copyright 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? Copyright ACDC Leadership 2018 Copyright 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? Copyright ACDC Leadership 2018 16 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 2018 17 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 Copyright ACDC Leadership 2018 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 Copyright ACDC Leadership 2018 2 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 Copyright 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 Copyright 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 Copyright ACDC Leadership 2018 2012 Question 18 Copyright ACDC Leadership 2018 24 2012 Question 19 Copyright ACDC Leadership 2018 25 Excise Tax P S $14 12 11 8 D 10 12 Copyright ACDC Leadership 2018 Q Excise Tax P Stax 1. 2. S 3. Pc$14 4. 12 Pp 11 5. 6. 8 D 10 12 Copyright 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. Copyright 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? Copyright ACDC Leadership 2018 31 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? Copyright ACDC Leadership 2018 32 Tax Incidence Who ends up paying for an excise tax? Copyright ACDC Leadership 2018 33 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 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 Copyright 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 Copyright 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 Copyright ACDC Leadership 2018 7 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 Copyright ACDC Leadership 2018 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 Copyright 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 Copyright ACDC Leadership 2018 40 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 Copyright ACDC Leadership 2018 41 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 Copyright ACDC Leadership 2018 42 Putting it all together: FRQ Practice! 46 47 48