THE ROLE OF GOVERNMENT IN MICROECONOMICS

Question 1

what is ad valorem tax?

Answer 1

ad valorem is a percentage based tax and is a specific percentage added to sale price of the good. It is payed by the producer increasing production costs.
* dollar value of the tax increases with price

Question 2

what are indirect taxes?

Answer 2

taxes placed upon the expenditure on a good or service, eg. value added tax, or goods and services tax

Question 3

what is minimum wage?

Answer 3

the lowest wage permitted by law or by a special agreement
* minimum wage in Australia is $23.23 (1st July 2023)

Question 4

what is a price ceiling?

Answer 4

a maximum price set by the government, below the equilibrium price which prevents producers from raising the price above it

Question 5

what are price controls?

Answer 5

restrictions imposed by governments on the price that producers can set for goods and services in a market

Question 6

what is a price floor?

Answer 6

the minimum legal price at which a good can be sold. governments implement price floors above equilibrium price to prevent the price from being too low, especially in agriculture goods and in the labour market, in the form of a minimum wage

Question 7

what are subsidies?

Answer 7

the amount of money given to producers of a product by the government. A subsidy increases the supply of the good by effectively lowering the firms’ costs of production.

Question 8

what is unit / specific / flat tax?

Answer 8

a specific dollar value per unit paid by producers that causes a parallel shift in the supply curve
* unit tax = vertical distance between the two supply curves

Question 9

what does a price ceiling do?

Answer 9

more affordable
* discourage production
* combat inflation

positive
- lower price consumer
* lower cost

negative
* loss of efficiency (social surplus)
* loss of producer surplus
* can be loss of consumer surplus

Question 10

what does a price floor do?

Answer 10

• increases producer revenue
• encourages production
• less affordable

positive
* stabilise producer
* revenue
* encourage production

negative
* less affordable
* loss of cs and ps
* DWL or government has to spend extra

Question 11

what does a subsidy do?

Answer 11

• more affordable
• encourages production

Question 12

what does an indirect tax do?

Answer 12

• increases price
• discourage production
• less affordable

positive
* discourage production
* government income

negative
* less affordable
* loss of cs + ps and therefore ss = DWL