Unit 4 Flashcards
Define price floor.
- A minimum price set above the equilibrium price.
- In order to provide increase the income of low-skilled workers.
What do government often do after imposing a price floor?
They buy the surplus.
What is welfare loss?
Social surplus lost due to the misallocation of resources.
Define price ceiling.
- A maximum price set below equilibrium price.
- In order to make goods more affordable.
Define indirect tax
Expenditure tax that increases cost of production for firms but can be transferred to consumers via higher prices
Define indirect tax
Expenditure tax that increases cost of production for firms but can be transferred to consumers via higher prices
Define direct tax
Tax on income that can’t be transferred onto consumers
Example of direct tax
Income tax, corporation tax, National insurance
What is a specific tax
Type of indirect tax per unit of a good (vertical distance represents tax) parellel
Ad valorem tax
tax as a percentage of a price being charged (supply curbe will be pivoted) the tax will be the same everywhere despite smaller distance between curve. 20% of high price at more quantity will be higher revenue compared to lower quantity.
Impact on consumers indirect tax
Raise price, lower consumer surplus
Indirect tax is regressive and takes a larger proportion of low income households (demand inelastic affects even more)
Impact on producers price ceiling
Lower revenue, lower producer surplus
Potential loss of jobs due to lower demand
Impact of tax on government
Higher revenue
Fix market failure
Could harm consumers (regressive nature)
Might increase unemployment
Black market creation for illicit goods
This is the deadweight loss creation
Impact of tax on government
Higher revenue
Fix market failure
Could harm consumers (regressive nature)
Might increase unemployment
Black market creation for illicit goods
This is the deadweight loss creation
How to evaluate an economic policy?
- Consequences for society.
- Consequences for consumers.
- Consequences for producers.
- Consequences for government.
- Consequences for foreigners.
- Effectiveness.
Price elastic demand>1 what happens to consumer and producer burden, and gov revenue
Consumer Burden:Lower
Producer Burden:Higher
Government Revenue:Lower
PED=infinity (Producers take entire burden)
Price inelastic demand <1 what happens to consumer and producer burden, and gov revenue
Consumer Burden:Higher
Producer Burden: Lower
Government Revenue:Higher
PED=0 (Consumer take entire burden)
Price inelastic supply <1 what happens to consumer and producer burden, and gov revenue
Consumer Burden:Higher
Producer Burden:Lower
PED=infinity (consumer burden will be everything)
Price inelastic supply >1 what happens to consumer and producer burden, and gov revenue
Consumer Burden:Lower
Producer Burden:Higher
PES=0 producer burden will be everything
Benefits of price floor
Protect producers from price volatility:
Minimum income: The price floor guarantees that producers will receive at least the minimum price set by the government. This ensures a certain level of income and protects them from extremely low prices that could result in financial losses.
Stability: Price floors offer producers stability by preventing extreme price drops. They provide a safety net during periods of price volatility, ensuring that producers can cover their production costs and continue operating even when market conditions are unfavorable.
Solve market failure:
Higher prices, less demand
What happens to producer revenue when minimum price floor induced
increase if intervention buying
Decrease without intervention buying
Key impact on minimum price floor on consumers, government and producers
Paying higher prices
consumer surplus decreases
Take greater proportion of income of poorer, regressive outcome
Consumers:
depends if intervention buying or not
If yes increased revenue, increases quality of life, if not revenue might not increase revenue
Government:
Could form blakck market
IB cost, Excess supply stock problem if IB, creates deadweight loss
Maximum price floor (price ceiling)
A fixed price (price ceiling) enacted by the government usually set below the equilibrium market price
main function of Max price floor
Increase affordability of goods/services
Main effects of price ceiling
Price:decrease
Demand:Increase
Creates excess demand
Producer revenue: decreases
Main effects of min price
Price:increase
Demand:decrease
Creates excess supply
Producer revenue: decreases (could increase if IB)
Creates deadweight loss
Key impact on maximum price floor on consumers, government and producers
Consumers:
Greater affordability
consumer surplus rising
However, high demand could mean lack of accessibility
Source alternative supply such as smuggling (black market)
Producers:
Negative, fall producer surplus, fall supply, fall revenue and living standard
Government:
Some consumers are benefiting
Not happy about consumers being affected
And excess demand
Black markets forming, might need to intervene
How to evaluate an economic policy?
- Consequences for society.
- Consequences for consumers.
- Consequences for producers.
- Consequences for government.
- Consequences for foreigners.
- Effectiveness.
Subsidy definition
Money grant to firms by the government to reduce costs of production and encourage an increase in output
Main functions of subsidy
Solve market failure
Increase affordability
Where will Supply curve shift after subsidy
Shift downwards (right)
Vertical divergence is amount of subsidy
Key impact of subsidy on consumers, government and producers
Consumer:
Prices fall, higher quantity, greater affordability, greater consumer welfare
Producers:
Increase revenue, big increase producer surplus, greater employment due to greater demand
Government:
solving market failure, helping low income households, long run funding cost, how subsidies being used by producers, long run producers becoming dependent when producing
How to calculate cost of government
At new equilibrium look at vertical distance and draw line to the price curve and times price by quantity (box)
Main effects of Subsidy
Price: Decrease
Prod revenue: Increase
Consumer saving
Increase quantity supplied
