micro - competitive equilibrium : Government Intervention Flashcards
What are two things the government can impose when the market equilibrium price is unfair and their impacts on the market?
Price ceiling : which is binding if set below the equilibrium, which leads to a shortage- as it is the legal maximum on the price at which a good can sold. Then the on price rationing occurs when the government limits the amount of quantity that an individual can consume for example coupons or vouchers to purchase a scarce product.
Price floors must be above the equilibrium price which is the minimum price that creates a surplus and and there is none rationing of supply (e.g minimum wage , agricultural price supports)
What is the gain from tax and impact to Pg and Pn?
Tax is imposed by the government to raise tax revenue
Pg = Pn with non tax, this is the gross price is the price paid by buyers equal to net price which is the price received by sellers.
This is the same as Qd = Qs and add (Pn + t) to Qd or (Pg + t) to Qs to find new equilibrium price
This leads to Pg = Pn + t
How do you find the maximum and minimum price of Qd and Qs ?
Th maximum price is found by making Qd = 0
The minimum price is found by making Qs =0
What does the Laffer curve show and where has it worked before?
The Laffer curve shows the relationship between tax rates and tax revenue collected by the government. It suggests that reducing tax rates would increase tax revenue because there is an increased incentive to produce and work / consume. This is by the substitution effect that occurs when individuals increase their working hours from response to wage increase (disposable); this is because working incentive increases more than leisure.
This occurred with the American president used this theory for the Economic Recovery Tax Cut in 1981 which reduced income tax from 70% to 50% that resulted in increased tax revenue so was completed again in 1990 Tax Reform Act from 50% to 33%.
What are the criticisms of the Laffer curve and why did it fail for Ronald Reagan?
The criticisms of the Laffer curve is that it oversimplifies the relationship between taxes and economic activity while also ignoring other. important factors that influence economic behaviour such as market structure, regulation and demographics.
American President Ronald Reagan also experienced the biggest deficit before the 2008 global financial crisis. This could have been caused by the income effect
Qd = 100 - 5Pg
Qs = -20 + 5 Pn
a) Find the maximum and minimum price and original equilibrium price and quantity.
b) If tax is 2, find the new equilibrium price and quantity.
a) min = Pn = 4
max = Pg = 20
P = 12 Q = 40
b) Pn / g = 11 Q = 35
should get same answer even if (Pn+2) to Qd or (Pg+2) to Qs was used
What is the burden of the tax incidence dependent on?
This is dependent on the elasticity of supply and demand
The burden of the tax falls on the more heavily on the side of the market that is less elastic (inelastic)
What is price elasticity of demand + notation + 1 benefit and what are the two equations for PED?
Price elasticity of demand is the responsiveness of demand to a change of price. Its notation is capital e with curves with small d.
One benefit is that it is not. dependent on the unit of measurement so can be used to compare different goods.
Equation 1 :
percentage change in quantity demanded / percentage change in price.
Equation 2 : (absolute)
I p/Q(p) x dq/dp I
Why we use the absolute value of PED ?
Elasticity of demand is alway negative because the demand curve goes downwards because of the law of demand, so we just ignore the negative sign.
What conditions are there for price elasticity of demand ?
I PED I > 1 PRICE ELASTIC
I PED I < 1 PRICE INNELASTIC
I PED I = 1 UNIT ELASTIC
What is the equation of revenue and when is revenue maximised?
Revenue is defined as quantity demanded x price
Maximised revenue is reached at unit elasticity when the % change in price = % change in qd
When calculating do not use the absolute PED so maximised revenue is = -1
What does the derivative of revenue show and what are the two equations with R’ as the subject?
This shows the rate of change and the effects of change in the function; this is in respect to quantity sold.
R’ (p) = Q(p)(1-PED).
R’ (p) = Q(p)(1 + p/q(p) x. dp/dq)
What does it mean when R’ is greater than or less than 0?
R’ > 0 means revenue is increasing at that price point.
R’ < 0 means revenue is decreasing at that price point.
According to economic theory what is the primary determinant of price elasticity of demand?
The primary determinant of price elasticity of demand is the availability of substitutes.
If the good has a lot of substitutes the elasticity is very high - elastic.
Given Qd = 500 - 10p
a) compute the PED
b) what is the PED when the price 30 ?
c) What is the % change in the demand if the price is 30 and increase by 4.5%?
a) Ped = p/p-50
b) price elastic PED > 0
c) 6.75%
