28. Price New Consumer Surplus Original Consumer Surplus Loss in Surplus: Consumers paying more P1 Loss in Surplus: Consumers buying less Po D Qo Q1 Change in Consumer Surplus: Price Increase Quantity
32. Price Support/Buffer Stock Schemes Governments intervene when there are extreme price fluctuations brought about by seasons factors (agricultural products) and/or economic factors (commodities).
33. Price Lost Consumer Surplus New Consumer Surplus Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Too High a Price (Price Floor) S PH Price Floor Po D Qo QL
34. Price Lost Consumer Surplus New Consumer Surplus Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Too Low a Price (Price Ceiling) S Po PL Price Ceiling D Qo QL
35. Elasticities Price elasticity of demand PED Cross elasticity of demand XED Income elasticity of demand YED Price elasticity of supply PES
49. Impact on Total Revenue of Firms Total revenue is the amount paid by buyers and received by sellers of a good. TR = P x Q With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases. With an elastic demand curve, an increase in price leads to a increase in quantity that is proportionately smaller. Thus, total revenue decreases.
50. Taxation Governments levy taxes to raise revenue for public projects Critics of taxation argue that: Taxes discourage market activity. When a good or service is taxed, the quantity sold is smaller.
53. Tax Incidence Tax incidence is the manner in which the burden of a tax is shared among participants in a market. How this burden is shared depends on elasticity.
55. Tax and Relatively Inelastic Demand Price for Buyers = .35 Price for Sellers = .2 (150m X .35) (150m X .2) (150m X .15)
56. Tax and Relatively Inelastic Demand Before Tax Buyers paid .25 After Tax Buyers pay .35 Buyers contribute 15 m to Revenue (150 X .1) Price for Buyers = .35 Price for Sellers = .25
58. Summary The incidence of a tax refers to who bears the burden of a tax. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. The incidence of the tax depends on the price elasticities of supply and demand. The burden tends to fall on the side of the market that is less elastic.
61. Some Practical Applications of PED With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
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63. Theory of the Firm The Goal Provide advice about the following: The best price The best output The most profit To breakeven price The shutdown price
70. Total Costs (TC) = total cost to produce a certain output. TC = TFC + TVC Total Fixed Costs (TFC) = total cost of fixed assets used in a given time period. Total Variable Costs (TVC) = total cost of the variable assets that a firm uses in a given period of time.
71. Average Fixed Costs (AFC) Average Variable Costs (AVC) Total Fixed Costs (TFC) Marginal Cost (MC) = increase in TC of producing an extra unit of output Total Costs TC Average Total Costs (ATC) Total Variable Costs (TVC)
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