MICROECONOMICS

• Basic economic concepts

• Suply, Demand and Market equilibrium
• Suply, Demand and Government Policies
• Elasticity
• International trade
• Production and Cost
• Market structures
SUPPLY, DEMAND & GOVERNMENT POLICIES

• Consumer’s surplus and Producer’s surpus

• Price Control: Price Ceiling and Price Floor
• Market based policies: Tax
Look for the answers to these questions:

• How do taxes affect market outcomes? How do the effects

depend on whether the tax is imposed on buyers or sellers?
• What is the incidence of a tax? What determines the incidence?
• How does a tax affect consumer surplus, producer surplus, and
total surplus?
• What is the deadweight loss of a tax?
• What factors determine the size of this deadweight loss?
• How does tax revenue depend on the size of the tax?
4
 Taxes
• Government uses taxes
• To raise revenue for public projects
• Roads, schools, and national defense
• Tax incidence
• Manner in which the burden of a tax is shared among
participants in a market
• The government can make the seller or the buyer to pay the tax
A Tax on Sellers
Effects of a $1.50 per unit tax on sellers
The tax effectively raises sellers’ costs
P S2
$11.50 by $1.50 per pizza.
Tax S1
Sellers will supply 500 pizzas only if P
$10.00 rises to $11.50, to compensate for this
cost increase.
Hence, a tax on sellers shifts the S
D1 curve up by the amount of the tax.

Q
500
6
A Tax on Sellers
Effects of a $1.50 per unit tax on sellers
• New equilibrium:
P S2 • Q = 450
PB = $11.00
S1 • Buyers pay PB = $11.00
Tax
• Sellers receive PS = $9.50
$10.00
PS = $9.50
• Difference between them
= $1.50 = tax
D1

Q
450 500
A Tax on Buyers
Effects of a $1.50 per unit tax on buyers
• Hence, a tax on buyers shifts the D
P curve down by the amount of the tax.
S1 • The price buyers pay is now $1.50 higher
than the market price P.
$10.00
Tax
• P would have to fall by $1.50 to make
$8.50 buyers willing to buy same Q as before.
D1
• E.g., if P falls from $10.00 to $8.50,
D2
Q buyers are still willing to purchase 500
500 pizzas. 8
A Tax on Buyers
Effects of a $1.50 per unit tax on buyers
• New equilibrium:
• Q = 450
P • Sellers receive PS = $9.50
PB = $11.00
S1 • Buyers pay PB = $11.00
Tax • Difference between them =
$10.00 $1.50 = tax
PS = $9.50

D1 how the burden of a tax is shared

D2 among market participants
Q
450 500 9
The Outcome Is the Same in Both Cases!
• The effects on P and Q, and the tax incidence are the same
whether the tax is imposed on buyers or sellers!
P
S1
PB = $11.00
Tax
$10.00
A tax drives PS = $9.50
a wedge between
the price buyers D1
pay and the price
sellers receive.
450 500 Q
1. When a tax is placed on the sellers of a product, 3. A tax levied on the sellers of blueberries
buyers pay a. increases sellers’ costs, reduces profits, and
a. more, and sellers receive more than they did before shifts the supply curve up.
the tax. b. increases sellers’ costs, reduces profits, and
b. more, and sellers receive less than they did before the shifts the supply curve down.
tax. c. decreases sellers’ costs, increases profits, and
c. less, and sellers receive more than they did before the shifts the supply curve up.
tax. d. decreases sellers’ costs, increases profits, and
d. less, and sellers receive less than they did before the shifts the supply curve down.
tax.
2. Suppose sellers of perfume are required to send 4. When a tax is placed on the sellers of cell
$1.00 to the government for every bottle of perfume phones, the size of the cell phone market
they sell. Further, suppose this tax causes the price a. and the effective price received by sellers both
paid by buyers of perfume to rise by $0.60 per bottle. increase.
Which of the following statements is correct? b. increases, but the effective price received by
a. The effective price received by sellers is $0.40 per sellers decreases.
bottle less than it was before the tax. c. decreases, but the effective price received by
b. Sixty percent of the burden of the tax falls on sellers. sellers increases.
c. This tax causes the demand curve for perfume to shift d. and the effective price received by sellers both
downward by $1.00 at each quantity of perfume. decrease.
d. All of the above are correct.
 Tax incidence: who bear the tax burden
P P St
St S

S
D

D
Q Q
Elasticity and Tax Incidence
CASE 1: Supply is more elastic than demand
P It’s easier for sellers than
buyers to leave the market.
Buyers’ share PB S
So buyers bear most of the
of tax burden
Tax burden of the tax.
Price if no tax

Sellers’ share PS
of tax burden
D
Q
Elasticity and Tax Incidence
CASE 2: Demand is more elastic than supply

P
• It’s easier for buyers
S than sellers to leave
Buyers’ share the market.
PB
of tax burden • Sellers bear most of
Price if no tax the burden of the tax.
Tax
Sellers’ share
of tax burden PS
D

Q
 Items Market Tax The Effects of a Tax
Quantity P

Buyer’s price

Seller’s price A
S
PB
Consumer’s surplus B C
P*
D E
Producer’s surplus
PS D
Dead weight loss F

Tax
Q
Total surplus QT QE
5. When a tax is placed on the buyers of lemonade, the 6. The per-unit burden of the tax on buyers is
a. sellers bear the entire burden of the tax. a. $6.
b. buyers bear the entire burden of the tax. b. $8.
c. burden of the tax will be always be equally divided
c. $14.
between the buyers and the sellers.
d. $24.
d. burden of the tax will be shared by the buyers and the
sellers, but the division of the burden is not always 7. The per-unit burden of the tax on sellers is
equal. a. $6.
b. $8.
c. $10.
d. $14.
8. The tax revenue is
a. $210
b. $420.
c. $980.
d. $1680.
9. The Dead weight loss of the tax is
a. $420.
b. $210.
c. $510.
d. $980.
Effects of a tax
The market for
P
140 hotel rooms
The market for hotel S
130
rooms is in equilibrium 120
as in the graph.
110
• Suppose the 100
government imposes a 90
tax on buyers of $30 80 D
per room 70
60
• Find the new 50
Q, PB, PS, and incidence
40
of tax. 0 Q
50 60 70 80 90 100 110 120 130
 Items Market Tax
The market for
Quantity
P
140 hotel rooms
S
Buyer’s price 130
120
Seller’s price PB = 110
100
Consumer’s surplus Tax
90
Producer’s surplus PS = 80 D
70
Dead weight loss 60
50
Tax
40
0 Q
Total surplus 50 60 70 80 90 100 110 120 130
18
 Supply, demand and Government policy
Given market demand and supply as follows: Qd = 180–P, Qs = P.
a. Government imposes tax on the sellers, new supply curve is Qs
= P – T. Find the new market equilibrium, seller price, buyer
price, tax revenue, dead weight loss by T.
b. If T = 40, find the new equilibrium price and quantity,
consumer’s surplus, producer’s surplus, total surplus, tax
revenue, dead weight loss (if any) before and after tax.
c. Find the tax burden for the parties.
d. If government wants to maximize tax revenue, what is T?
 Supply, demand and Government policy
Given market demand and supply as follows: Qd = 180–P, Qs = P.
a. Government imposes tax on the sellers, new supply curve is Qs = P – T.
Find the new market equilibrium, seller price, buyer price, tax revenue,
dead weight loss by T.
• Demand Qd = 180–P, Equilibrium 180 – P = P – T
• Supply Qs = P - T.
"#$%&
• Buyer price: 𝑃! = Replace P to demand
' B
"#$(&
• Quantity: 𝑄𝑡 =
'
"#$(& Replace QT to supply
• Seller price: 𝑃) =
'
 Supply, demand and Government policy
• Demand Qd = 180–P, 190
180
• Supply: Qs=P 170
160
• Supply with tax Qs = P - T. 150
140
Equilibrium 180 – P = P – T 130
120
"#$%&
• Buyer price: 𝑃! = '
110
100
Replace PB to demand 90
80
"#$(& 70
• Quantity: 𝑄𝑡 = 60
' 50
Replace QT to supply 40
30
"#$(& 20
• Seller price: 𝑃) = ' 10
0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190
 Supply, demand and Government policy
190
180
170
• Demand Qd = 180–P 160
150
• Supply Qs = P 140
130
• T=40 120 110
110
• Buyer price? 100
90
• Seller price? 80 70
70
• Quanity? 60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190
10 As the figure is drawn, who sends the tax
payment to the government?
a. The buyers send the tax payment.
b. The sellers send the tax payment.
c. A portion of the tax payment is sent by the
buyers, and the remaining portion is sent
by the sellers.
d. The question of who sends the tax payment
cannot be determined from the graph.
11. Buyers pay how much of the tax per unit?
a. $0.50.
b. $1.50.
c. $3.00.
d. $5.00.
12 How much tax revenue does this tax
generate for the government?
a. $80.
b. $60.
c. $15.
d. $45.