using supply and demand to analyse markets

Question 1

what is the producer surplus?

Answer 1

actual price minus the willingness to sell

Question 2

what is the consumer surplus?

Answer 2

the willingness to pay minus the actual outlays

Question 3

what are price limits?

Answer 3

price limits are a maximum price that producers can sell a good at

Question 4

what is the effect of a price ceiling?

Answer 4

a price ceiling will lead to a shortage (excess demand of Qd-Qs). there will be a transfer of surplus and a deadweight loss

Question 5

what are quotas?

Answer 5

quotas are limits on output of a certain good. they are usually set on imports or goods with negative externalities such as pollution

Question 6

what is the effect of a quota?

Answer 6

there is a transfer of consumer surplus to producer surplus and there is a deadweight loss

Question 7

what is a tax incidence??

Answer 7

how the burden of the tax is distributed between the producers and consumers

Question 8

what are major determinents of tax incidence>

Answer 8

the price elasticity of supply and demand. if the demand is more elastic, producers will suffer more burden and vice versa.

Question 9

what is an indirect tax?

Answer 9

a tax levied on goods and services rather than on income or profits. it is based indirectly onto the consumers by the producers

Question 10

what is the effect of an indirect tax on the supply and demand model?

Answer 10

it increases the cost of production so therefore shifts the supply curve upwards. this will result in the equilibrium being at a lower quantity and price being higher. there will be a deadweight loss, increase in government revenue, a loss in consumer surplus and producer surplus

Question 11

what is the general formula for the tax incidence of the share borne by the consumer?

Answer 11

Es/ (Es +Ed)