1. 2.9 Determination of price in competitive markets (2)
To explain the effects of taxes and subsidies on price and quantity in competitive markets.
Explain the effects of maximum and minimum price.

2. Recap notes on Indirect tax.
Indirect Taxes are taxes placed on the producer which are used as revenue.

3. Specific Tax Get down key term.
This is a flat tax. EG £2 on a bottle of wine.
As it is placed on producer it will effect his ‘Costs of Production’ therefore the cost will be passed onto the consumer. The supply curve will shift left and price rises and quantity sold falls.
The type of products it will effect are cigarettes, alcohol and petrol. Inelastic products.

4. On the diagram Supply shifts S1 to S2.
The equilibrium moves P2 and Q2.
If we are being precise the supply curves shifts vertically upwards by the amount of tax.
Refer to personal diagram- is all the tax passed on?

5. Ad valorem tax Here it is a % of the product.
An example would be VAT at 20%. (Hint – during exam use UK taxes)
Here the higher the price of the product the higher the tax.
As diagram shows the gap grows.
Product A = 20% = £20 TAX.
Product B = £ 20% = £40 TAX.

6. Subsidies Opposite of tax.
Government give Producers money for certain reasons.
Along with reasons on page 31 also for green issues and to help relocate business into high unemployment areas.
Being precise The supply curve will drop by the amount of the subsidy.

7. Minimum Price
Here the government get involved and set a minimum price.
This will lead to an excess of supply/
Example European farmers. Farmers complain of not being able to make enough money. Demand goes down, excess supply which is bought. – Butter mountains and wine lakes. Here over half of the EU budget is spent.

8. Maximum price This can lead to excess demand.
ON diagram it’s a first come basis and those at Q3 (the equilibrium) will not be able to get hold of the product as not enough supplied.
Milk and Un-official milk starts to come into play – black market. Producers will sell milk at a higher price under the counter.
Question if looking at Q2 and P max for cup final tickets is what would that price be? £300?