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Unit 2: Demand, Supply, and Consumer Choice

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1 Unit 2: Demand, Supply, and Consumer Choice
Copyright ACDC Leadership 2015

2 Trade and Taxes Copyright ACDC Leadership 2015

3 Review $22 20 18 16 14 Calculate the area of: P Consumer Surplus
Producer Surplus Total Surplus P $22 20 18 16 14 S CS CS= $40 PS= $20 Total= $60 PS D 20 Q Copyright ACDC Leadership 2015

4 Limits on Trade World Price- Countries can buy products at their own domestic price or they can buy the products at a cheaper world price Tariff- Tax on imports that increases the world price Quota- a limit on number of imports. Purpose of tariffs and quotas: To protect domestic producers from a cheaper world price. To prevent domestic unemployment Copyright ACDC Leadership 2015

5 International Trade and Quotas
Identify the following: CS with no trade PS with no trade Amount we import at world price (PW) PS if we trade at world price (PW) CS if we trade at world price (PW) If government tariff leads to a world price of PT, how much is imported and what is the CS and PS? 1.H 2.TLI 3.Q5-Q1 4. T 5.HIJKLMNRS 6. Import Q4 – Q2, PS is T, CS is HIJK This graphs show the domestic supply and demand for grain. The letters represent area. Copyright ACDC Leadership 2015

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8 6. CS gets smaller and PS gets bigger
1.H 2.TLI 3.HIJKLMNRS 4.T 5.Q5-Q1 6. CS gets smaller and PS gets bigger Copyright ACDC Leadership 2015

9 Excise Tax = A per unit tax on producers
Excise Taxes Excise Tax = A per unit tax on producers For every unit made, the producer must pay $ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: Cigarettes “sin tax” Alcohol “sin tax” Environmentally Unsafe Products Etc. 9 Copyright ACDC Leadership 2015

10 Government sets a $2 per unit tax on Cigarettes
Excise Taxes Supply Schedule Government sets a $2 per unit tax on Cigarettes P P Qs $5 140 $4 120 $3 100 $2 80 $1 60 S $5 4 3 2 1 D Q 10 Copyright ACDC Leadership 2015

11 Government sets a $2 per unit tax on Cigarettes
Excise Taxes Supply Schedule Government sets a $2 per unit tax on Cigarettes P P Qs $5 $7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 S $5 4 3 2 1 D Q 11 Copyright ACDC Leadership 2015

12 Tax is the vertical distance between supply curves
Excise Taxes STAX Supply Schedule P P Qs $5 $7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 S $5 4 3 2 1 Tax is the vertical distance between supply curves D Q 12 Copyright ACDC Leadership 2015

13 Identify the following:
Excise Taxes STAX Identify the following: Price before tax Price consumers pay after tax Price producers get after tax Total tax revenue for the government before tax Total tax revenue for the government after tax P S $5 4 3 2 1 1.$3 2.$4 3.$2 4.$0 5.$160 D Q 13 Copyright ACDC Leadership 2015

14 Tax Practice CS Before Tax PS Before Tax CS After Tax PS After Tax
Tax Revenue for Government Deadweight Loss assuming society wants Q2 produced Amount of tax revenue producers pay 1.ABCD 2.HFEG 3.A 4.G 5.BCHF 6.DE 7.HF Copyright ACDC Leadership 2015

15 2012 Question 18 D 15 Copyright ACDC Leadership 2015

16 2012 Question 19 D 16 Copyright ACDC Leadership 2015

17 A

18 Excise Tax P $14 12 11 8 S D 10 12 Q Copyright ACDC Leadership 2015

19 Excise Tax 12 P Stax S $14 11 Pc 8 Pp D 12 10 Q Calculate Tax Per Unit
Total Tax Revenue Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures Total Revenue for firms P Stax $14 12 11 8 S Pc Pp D 10 12 Q Copyright ACDC Leadership 2015

20 Excise Tax Calculate CS Before Tax Total Expenditures Before Tax
Tax Per Unit Total Tax Revenue that goes to Government Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures after tax Total Revenue for firms after tax CS After Tax DWL Copyright ACDC Leadership 2015

21 Tax Incidence Who ends up paying for an excise tax?
21 Copyright ACDC Leadership 2015

22 EXCISE TAX ON MILK $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q
Demand- Inelastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 22 Copyright ACDC Leadership 2015

23 EXCISE TAX ON MILK $2 TAX on Producers 5 P S1 $10 8 7 6 4 2 S D 9 10 Q
$6.50 =Pconsumers Amount Consumers Pay $2 TAX on Producers $4.50 = Pproducers Amount Producers Pay D 9 10 Q Quantity Doesn’t Fall VERY Much!!! 23 Copyright ACDC Leadership 2015

24 EXCISE TAX ON BEEF $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q
Demand- Elastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 24 Copyright ACDC Leadership 2015

25 EXCISE TAX ON BEEF $2 TAX on Producers 5 P S1 $10 8 S 6 4 2 Pc Pp D 10
DWL? Pp D 7 10 Q Quantity Falls A lot!!! 25 Copyright ACDC Leadership 2015

26 EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7
CS After Pconsumers = $7 Tax per Unit? Total Tax Revenue? Tax paid by consumers? Tax paid by producers? Total spending? Revenue for businesses? Pproducers = $4 D 20 30 Q 26 Copyright ACDC Leadership 2015

27 EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7
CS After Pconsumers = $7 Tax per Unit = $3 Total Tax Revenue = $60 Tax Paid by Consumers = $40 Tax Paid by Producers = $20 Total Spending = $140 Revenue for Businesses=$80 Pproducers = $4 D 20 30 Q 27 Copyright ACDC Leadership 2015

28 Tax Incidence (Who pays?)
ST S ST S ST S ST S ST S D D D D D Perfectly Inelastic Relatively Inelastic Unit Elastic Relatively Elastic Perfectly Elastic Tax burden paid entirely by consumers Tax burden mostly on consumers Tax burden shared by consumers and producers Tax burden mostly on producers Tax burden paid entirely by producers Copyright ACDC Leadership 2015

29 2008 Audit Exam 18.B


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