Chapter 5 - Application of Demand, Supply and Elasticity Flashcards
How do you calculate total revenue / expenditure
Product Price x Quantity Traded
What is an indirect tax?
An indirect tax is a tax levied on goods and services.
Types: Specific and ad valorem tax.
Define deadweight loss
Deadweight loss refers to the loss of social welfare when a socially optimal level of output is not reached.
What is a quota (or quantity controls)?
A quota is an upper limit on the quantity of a good that can be bought or sold.
What does a quota do in the market?
Intended effects:
- Keep quantity of a good at a level that is socially acceptable
- Prevent depletion of scarce resources or the extinction of valuable resources
Consequences:
- Shortage
- Deadweight loss
- If PED < 1, quota leads to higher consumer expenditure and higher revenue for firms
- IF PED > 1, quota leads to lower consumer expenditure and lower revenue for firms. Incentivises producers to produce more than the quota and charge lower prices in order to increase revenue (since PED elastic) Possible development of black market.
What is moral suasion?
Moral suasion is the use of persuasion rather than coercion or legislation, to influence the activity of consumers. If effective, demand decreases (discourage) or increases (encourage consumption).
List down the tools that can discourage consumption and production of goods
- Indirect taxes
- Quota and Bans (extreme form of quota)
- Moral Suasion
- Restrictions in consumption (e.g. no alcohol / cigarettes for minors)
- Minimum price (making it more expensive to consume)
List down the tools that can encourage consumption and production of goods
- Supply-side subsidy
- Demand-side subsidy
- Moral suasion
- Compulsory Consumption
- Maximum price
What is a subsidy?
A subsidy is a form of financial aid or support extended to firms or consumers with the aim of promoting an economic objective.
What is a supply-side subsidy?
Supply-side subsidies offset production cost, raising supply of goods, lowering prices, encouraging more consumption.
Supply-side subsidies raise total revenue regardless of PED.
If PED < 1, consumer expenditure falls.
If PED > 1, consumer expenditure rises.
If PED < 1, lower price entice them to buy even more than if PED > 1 (where price decrease is not as much).
What is demand-side subsidy?
Demand-side subsidy is a tool used by the government to finance private consumption of certain goods. More people are willing and able to buy the good, increasing demand.
Effects:
- Higher equilibrium price (higher price received per unit for producers)
- Lower prices for consumers due to subsidies
- Government pay the difference between new equilibrium price and subsidised price
Limitations:
Demand-side subsidies tend to be less effective in increasing consumption if supply is price inelastic.
How does government raise revenue?
Taxes (direct or indirect).
Tax revenue = tax per unit x new equilibrium quantity
Lower PED, the more tax revenue is collected.
List down the tools that can increase the affordability of goods.
- Supply-side subsidy
- Demand-side subsidy
- Maximum price
- Minimum wage
What is a price ceiling (maximum price)?
A price ceiling is a legally established maximum price that is set below the equilibrium price.
What does a price ceiling do?
Objectives:
- Keep prices of certain goods affordable
- Prevent exploitation by suppliers who may charge high prices in times of shortage
Effects:
- Permanent shortage
- Improve consumer surplus and well-being
Consequences;
- Black market
- Not all consumers are able to consume due to shortage
- Scalpers
- Deadweight loss
The higher the PED and PES, the larger the shortage and the larger the deadweight loss.
