Lecture 1 Flashcards
Partial equilibrium analysis
Focuses on a singular market rather than others.
What does efficiency require from a singular market?
That the marginal benefit of producing one more unit of the good equals its marginal cost
Comparative stats analysis
Compares outcome of a model before and after a given change. eg how equilibrium outcome changes with intro of quantity tax
Perfect competition
- Participants are price takers
- Traded good is homogenous
- Perfect info
- No barriers to entry
- 0 Externalities
- Transaction costs
Market unrealistic
Market equilibrium
When quantity demanded equals total quantity supplied
How to calculate the market equilibrium price and quantity exchanged when demand and supply curves linear?
D(P) = a - bp
S(P) = c + dp
What happens at the equilibrium price?
D(P) = S(P)
a - bp* = c+dp*
What does P* equal?
P* = a-c/ b+d
How do you get q*?
You substitute P* Value into the demand function to get
q* = ad + bc / b+d
Excise tax
The tax is levied on sellers
Sales tax
The tax is levied on buyers
Incidence of the tax
The division of the £t between buyers and sellers.
How do you measure tax incidence? (Ratio)
Pb - P/ P- Ps
The larger the ratio…
The larger share of the tax is paid by the buyers
What does it mean if the ratio is equal to 1?
Both sides pay the same share of tax
Ratio larger than 1?
Buyers pay larger share of tax
Ratio smaller than 1?
Buyers pay smaller share of the tax
What does a quantity tax to to a competitive market?
Reduces quantity traded and so reduces gains to trade
Gains to trade
Measure of the social welfare generated by the market
Wquals the sum of the producers and consumers surplus
Deadweight loss
The total surplus lost when the tax is levied
