Unit 1 - Microeconomics Flashcards
Indirect Tax
Placed upon the selling price of a product
Specific Tax
- Fixed tax imposed on unit of product
- Shifts supply vertically by amount of tax.
- Rate of specific tax independent of price or quantity
Percentage/Ad Valorem Tax
- Tax percentage imposed on selling price
- Shifts supply more as price rises
- Tax based on the taxable or base value of good
Incidence of tax
Division of burden of an excise tax between buyer and seller
Extent of ↑P from tax
- Low: PED > PES
- High: PED < PES
Extent of tax (consumer) from tax
- Low: PED > PES
- High: PED < PES
Extent of ↓Q from tax
- Low: PED < PES
- High: PED > PES
Extent of ↓Revenue from tax
- Low: PED < PES
- High: PED > PES
Extent of government revenue from tax
The same in ALL cases
Reason for supply shift from subsidy
Costs of production are covered
Percentage Subsidies
- Money given on % of selling price
- Subsidises more as price rises
- Bigger gap as graph goes right
Specific Subsidy
Specific amount of money given for each unit of product
Price at Subsidy
↓P (not whole subsidy)
Consumer Expenditure at Subsidy
Varies depending on PED and PES
Producer Revenue at Subsidy
Increases
Engel’s Law
As income rises, percentage of wages spent on food diminishes
Easy Credit to Farmers
- Granting of loans to farmers on easier terms
- Providing more funding
- Reducing interest costs
Price Support (offer to purchase): Basics
- May/may not have price floor
- Purchases surpluses of goods set by certain price
- Prevents prices of goods from falling below certain level
Extent of tax (producer) from tax
- Low: PED < PES
- High: PED > PES
Extent of ↓employment from tax
- Low: PED < PES
- High: PED > PES
Price Support (offer to purchase): The Consumer
- Higher price
- Demand smaller quantity
- Pay higher taxes from surplus purchase + storage costs
Price Floor (offer to purchase): When Not to Use
- The market is price elastic
- Tax burden will be higher from less quantity demanded
Deficiency Payments: Basics
- Gives higher revenue from price per unit to suppliers
- Lower price for consumers
- Difference given through subsidies
Deficiency Payments: The Consumer
Consumers receive lower price, but pay taxes for subsidy.
Deficiency Payments: When Not to Use
- Markets with price inelasticity
- Consumers won’t purchase much more goods, causing higher tax burden
Price Support v. Deficiency Payments
- Farmers gain same amount of revenue
- Consumers pay same amount when adding taxes AND expenditure on good
Small vs. Big Farmers from Govt Supports
- Benefits larger farmers more
- Producer who sells 200 vs 20 units receives greater revenue from govt, despite having lower unit costs
Direct Income Subsidies: Basics
- Products are subsidized directly
- Prices for agricultural products left entirely to market
Direct Income Subsidies: Criticisms
- Determining criteria on which to base an income subsidy is difficult
- Other industries may demand subsidies if one is subsidized
Market Quotas: Basics
- Each producer receives maximum no. of goods to sell
- Price fluctuations are reduced from fixed supply
Market Quotas: Cons
- Direct restriction of output can be socially undesirable
- Farmers typically oppose this policy
Elasticity of Supply
The change in quantity supplied at a change in price
Reason for Elasticity of Supply
- When Qs can be changed at low cost, producers can release extra quantity when price rises and withdraw some when price falls
- Above option isn’t available for goods whose Qs changes at a high cost
PES [Definition]
- The x% change in quantity supplied at a 1% change in price (always positive)
- OR a 2/5/10x% change in quantity supplied at a 2/5/10% change in price
↑Inventory
↑PES
↑Storage Cost (perishable good)
↓PES
↑Time
↑PES
↑Factor Mobility
↑PES
Costs rise significantly as firms use more resources
Inelastic supply
Costs don’t rise much as firms use more resources
Elastic supply
Price
- Measures MB (benefit of “last” unit brought)
- (i.e. the unit the consumer wouldn’t have brought at any higher price)
Consumer Surplus Definition
- Difference between amount consumers pay vs. what they’re willing to pay (in a competitive market)
- Under demand curve and above market price
Consumer Surplus (alternative definition)
- Number of units “before” last unit that consumer would be willing to pay more for
- Benefit the consumer gets from buying in a competitive market.
Producer Surplus Definition
- Difference between selling price producers receive vs. what they’d be willing to sell at
- Above curve and below market price
Producer Surplus (alternative definition)
- Number of units “before” last unit that producer would be willing to sell at less for
- Benefit the producer gets from buying in a competitive market.
Community/Social Surplus
Total economic (consumer’s and seller’s) benefit of the transaction
Marginal Benefit
- Maximum price willingly paid (or utility received) for another unit of good/service
- Decreases as more units brought (diminishing marginal utility)
Marginal Cost
- Minimum price producers must receive to sell another unit of good/service
- Increases as more units brought
Marginal Social Benefit
Sum of consumer’s utility from good/service PLUS how benefits apply to community at large
Marginal Social Cost
Sum of firms’ costs of production for good/service PLUS how costs apply to community at large
Government Intervention in Market Form (i.e. taxes, price controls)
Creates inefficiency in market and generates deadweight (welfare) loss
Deadweight Loss
- Cost to society as whole from market inefficiency caused by inequality between MSB and MSC
- Indicates either too much/little of good is produced
Causes of deadweight loss
- Taxes/subsidies
- Price controls
- Externalities
- Monopoly Pricing
