Applications of Supply and Demand Flashcards
How do you calculate market equilibrium price?
Qs = Qd
1. set the two function equations equal to each other
2. Solve for P
How do you calculate the market equilibrium quantity?
Substitute what P equals into either function equation (should be the same number for both; otherwise pick a number in between the values)
Which function is tax drawn on / what is its equation?
Supply function
QsTax = b(p-tax)+a
What does P represent in the tax equation?
The price the producer receives
= consumer price - tax to govt
Why is the new price not equal (lower than) to what it should be with tax?
The producer is paying part of the new price with the tax so they don’t lose too much market shares
- put the whole price onto the consumers and reduce demand
Define consumer surplus
the units of benefit
difference between what consumers are willing to pay vs what they actually pay
If consumer surplus is larger after a policy, the consumer is better off
Define producer surplus
economic benefit for a producer
- the difference between the price a producer would be willing to supply a good for vs the price they actually receive
- If producer surplus is larger after a policy, the producer is better off
What does the supply curve represent?
The supply curve represents the minimum price a firm would supply at a certain quantity
- Supply curve represents the price where the firm’s cost of production is covered
What is the subsidy calculation?
QsSub = b(P+Sub)-a
Why is the Consumer price drop not equal to the added subsidy?
The firm may keep some of the subsidy for themselves
What does the difference between Consumer Price and Producer Price show?
The difference between the two curves / the cost of subsidy (or tax)
How do you calculate total surplus?
Add producer and consumer surplus and subtract the cost of subsidy/tax (a 2 cost cancels out a 2 producer surplus)
How can units be attainable outside the supply curve?
The price increase (from Pe to PP) makes them achievable
What is dead weight loss?
loss of efficiency/surplus, market failure
What is world price equal to for Exports vs No Trade?
World demand
Where does world price go on Exports vs No Trade?
world price is higher than the domestic price so anywhere above the market equilibrium
How is the quantity demand affected by Exports vs No Trade?
Nz consumers may no longer be able to demand at the price - Qd decreases from Qe
How is the quantity supplied affected by Exports vs No Trade?
Exporters increase their output as the price is higher - Qs increases from Qe
What are the curves for Exports, Imports, and Tariffs?
Both supply and demand curves are domestic (NZ producers and consumers)
What is world price equal to for Imports vs No Trade?
World supply
Where does world price go for Imports vs No Trade?
anywhere below the market equilibrium
How do you calculate Exports on Exports vs No Trade?
Qs-Qd
How does Imports vs No Trade affect consumers?
Quantity demanded increases as consumers can get cheaper goods with imports
How does Imports vs No Trade affect producers?
Leaves us with most efficient local producers - Q supplied for NZ producers will fall as they cannot sell at the new price
How do you calculate Imports on Imports vs No Trade?
Qd-Qs
Where do Pw and Pw+Tariff sit on Imports with a Tariff graph?
Pw - below the market equilibrium
Pw+Tariff - above Pw but still below the market equilibrium
(don’t put Qe on this graph)
How are local producers affected by Imports with a Tariff
They recieve the same price but don’t have to pay the tariff
What is the goal of a Tariff?
To protect local producers / jobs from cheaper imports
How is the GOVT affected by Imports with a Tariff?
They gain a tariff revenue, in the difference of Pw and Pw+Tariff
How is total surplus calculated for imports with a Tariff?
C.S + P.S + Tariff revenue (gain by govt) = Total surplus
What is the purpose of a Binding Maximum Price?
makes a good more affordable for consumers (alternative to a subsidy)
What is Pmax for Binding Maximum Price?
the maximum price by law firms can charge for a good or service
What is unique about the cut of Qs for Binding maximum price?
it is where Pmax hits the supply curve, but rises up to the demand curve to show where demand is met by supply
What is the calculation for excess demand (Binding Maximum Price)?
Qd-Qs
(although there is an increase in demand, consumers can’t get it due to excess demand)
What does the Binding Minimum Price do?
It is a policy to help producers
What is Pmin (Binding Minimum Price)?
the minimum price the govt legislates, it is illegal to sell a good for less (drawn above the market equilibrium)
What is the calculation for excess supply (Binding Minimum Price)?
Qs-Qd
How does the government interact with excess supply for Binding Minimum Price?
The GOVT buys any excess supply
- treat any units “cost to govt purchases” as negative
- Could be minimized if govt could sell the surplus, but more often than not it ends up getting dumped
What are reasons for a demand curve shift?
TRIBE
- Tastes and preferences
- Related good prices (compliments)
- Income
- Buyers (number of consumers)
- Expectations (of economic climate)
What are reasons for a supply curve shift?
ROTTEN
- Resource costs
- Other good prices (stay competitive)
- Technology
- Taxes / regulations
- Expectations (of economy), climate events
- Number of sellers in the market
Change in demand/ supply means
A shift of the S/D curves
Change in quantity demand / supplied
Movement along S/D curves
Total surplus minimum price calculation
Cs + Ps - Cost to govt purchases
Total surplus maximum price calculation
Cs + Ps
Total surplus govt indirect tax calculation
Cs + Ps + Tax revenue
Total surplus subsidy calculation
Cs+Ps- Cost of subsidy
Total surplus Exports / Imports vs no trade calculation
Cs + Ps
Total surplus imports with tariff calculation
Cs + Ps + Tariff revenue
What is the law of supply?
as the quantity of goods supplied increases, so does the price (vice versa)
What is the law of demand?
as price falls the quantity demanded increases (vice versa)
What is market shortage?
quantity demanded is greater than quantity supplied at market price
What is market surplus?
quantity supplied is greater than quantity demanded at market price
