1.2.9 Taxes and Subsidies Flashcards
what is excess supply/ surplus?
the gap between supply and demand at a given price
* producers will decrease their prices to get eliminate excess supply
* (when price is above equalibrium price)
when is there equilibrium?
quantity supplied = quantity demanded
supply and demand meet
what is the excess supply/demand at
* 90p
* 40p
* 50p
what happens when there is excess demand/shortage?
(when price is below equilibrium price)
* consumers bid up their price
* only those who can pay high prices can afford
eliminating excess demand
what is direct tax?
tax paid directly to the government.
Levi dead directly on an individual or organisation
* income tax
* corporation tax
what is income tax
tax on earnings
What is indirect tax?
tax on goods and services
* VAT
what are the two types of indirect tax?
- specific tax
- ad velorum tax
both are paid by producers
what is specific tax
a fixed amount of tax paid on each unit sold
fixed tax of £4 per item, if 5 units sold then £20, if 100 items sold then £400
affects producers
how specific tax impact graph
impacts supply curve as producers are the ones that have to pay.
* Shift vertically upwatds creating new line S tax
* difference between original line and S tax is the specific tax applied
* because peoducers require higher prices to make up for the tax
what will the new price equalibrium be after the £4 specific tax?
as price increases, the quantity demanded also decreases
what is the tax revenue that the goverment recieves in total?
sixe of speciic tax × quantity sold (of new equailibrium)
what is the incidence of tax on consumers?
how much the consumers pay on the total tax revenue
differnec between selling prices × quanitity sold
top box
what is the incidence of tax on producers?
how much of the total tax revenue the producers have to pay
draw a speific tax diagram
what is ad velorum tax?
a percentage of the price of a good/serive
eg: VAT
draw an ad valoreum diagram?
what are the two purposes of tax?
- discourage production and consumption of harmful goods
- increase goverment revenue
how do goverments spenf their tax reveue?
- encouraging the production and consumption of goods that are good to society
what is a subsidy?
a grant from the goverment to a firm to increase production/ consumption of a good by lowering prices
grant for every unit of output
what is the effect of subsidies on the supply demand diagram
subsidy moves supply line vertically down. The differnce between the two lines is the size of the subsidy. Increase im supply as producers get an inective to make more
what is the new price after a 400 £ subsidy?
£5,800
what is the goverment spending/ total cost of subsidy?
size of subsidy × quantity sold
what is the
* total cost of subsidy
* consumer benfit
* producer benefit
Draw a subsidy diagram
define VAT
An indirect tax set as a percentage of the price of a good
What are the analysis points of subsidies ?
Reduce production costs —> increase supply
Lower prices—> encouraging people to buy more
subsidy chain of analysis (job creation)
- subsidy shifts supply from S1 to S2 increasing producer’s benefit by area P
- farmers can employ more local workers
- who will spend into the local economy , helping local firms grow and stay afloat
- increase in government corporation and income tax revenue
- can further reinvest into …
subsidy chains of analysis (extra income )
- extra income from the subsidy used an investment into more effficent technology (application)
- increasing output, increasing sales, revenue and profits
- expand and hiring more workers
subsidy (chains of analysis) - dependancy culture
evaluation points
- firms learn to reply on the subsidy
- become lazy and ineffiecent
- reduction in quality and quantity they produce
- consumers recives goods at lower quality, reducing living standards
subsidy (chains of analysis )- opportunity costs
evaluation points
- cost of subsisy (£) creates an opportunity cost
- diverting funds from the education and healthcare, reducing external benefits
- also worsening government budget deficit
explaining the subsidy diagram:
- subsidy reduces the price of “ “ goods
- subsidy shifts supply from S1 to S2, decreasing price
- consumers can afford more goods/ services, improving living standards
- (only works for raw materials ) this has external benefits because supermarkets will be able to purchase food more cheaply, increasing their profits, enabling them to expand and hire more workers
always mark size of subsidy- consumer/producer benefit
