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101+Class+09+W2008 - Principles of Economics I Economics...

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Unformatted text preview: Principles of Economics I Economics 101 Section 400 Class 8 Announcements Reading: Chapter 4 Assignment 5 for discussion this week Reminder: Exam February 11 8:00pm 10:00pm Practice exam available on CTools Coverage: Everything including today's class 2/4/2008 Class 8 2 Exam Room Assignments Section # 401 402 403 404 405 407 409 410 411 Section Time Fr 10:00 AM 11:30 AM Fr 11:30 AM 01:00 PM Fr 01:00 PM 02:30 PM Fr 11:30 AM 01:00 PM Fr 01:00 PM 02:30 PM Th 02:30 PM 04:00 PM Th 11:30 AM 01:00 PM Th 04:00 PM 05:30 PM Fr 02:30 PM 04:00 PM GSI Dimitriy Dimitriy Owen Dan Andrew Annika Annika Dan Andrew Exam Room 1800 CHEM 1800 CHEM 1210 CHEM 1210 CHEM 1800 CHEM 1800 CHEM 1800 CHEM 1210 CHEM 1800 CHEM 2/4/2008 Class 8 ? 3 GSI Office Hours Wednesday 5:30 pm 7:00 pm Lorch 107 with Dimitriy Thursday 9:00 am 10:00 am Lorch 351F with Annika MH 3330 with Andrew MH 3330 with Annika Friday 12:00 noon 1:00 pm Friday 3:00 pm 4:00 pm Monday 10:00 am 11:30 am Monday 1:00 pm 2:30 pm Lorch M101 with Andy (Location ???) Lorch 351F with Dan 2/4/2008 Class 8 4 Review Sessions Friday Feb 8 and Saturday Feb 9 4:00 pm 6:00 pm Angel Hall Auditorium D With Dimitriy 2/4/2008 Class 8 5 Minimum Wage w Transfer from Extra Lost W consumers to min Producer producers Consumer Surplus Surplus W* Unemployment Labor Supply Deadweight Loss Lost Producer Surplus Labor Demand Ld L* Ls Class 8 2/4/2008 L 6 Agricultural Price Support P Net effect on consumer and Increased Producer Surplus Government purchase producer surplus Supply Psupport P* Lost consumer surplus Deadweight Loss (if Deadweight Loss (if the govt purchase is the govt purchase is distributed to the not distributed to the public) public) Demand Taxes Raised Qd Q* Qs Q 2/4/2008 Class 8 7 Price ceiling: Rent Control Rent control takes various forms Simple case ceiling imposed on prices To charge higher rents is illegal Rent control is supposed to be a benefit to renters Is it? 2/4/2008 Class 8 8 Rent Control $/apartment Underestimate of Lost consumer surplus Deadweight loss P P* P Supply Price Ceiling Lost Increased producer consumer surplus surplus Price Ceiling Demand Q Q* Class 8 # of Apartments 9 2/4/2008 Price Distortions: Taxes and Subsidies We know: We have seen: How to predict competitive market prices Competitive markets in equilibrium generate efficient allocations of resources Inefficiency generated by price controls Now we investigate the effects of taxation in the market Prices are allowed to adjust Market finds equilibrium (Supply = Demand) But taxes/subsidies change incentives, and so distort market allocations away from the efficient ones Class 8 10 2/4/2008 Taxation Applying a $t Sales Tax Market prices can adjust so that Qd = Qs If P is the price at which the good sells, then P+t is the price that the consumer must pay Effectively, we have two prices The price the seller receives (which determines the quantity supplied) The price that the consumer pays (which determines the quantity demanded) The difference between them is the tax 2/4/2008 Class 8 11 Taxation Applying a $t Sales Tax P Deadweight Loss Pc = Pp + t $t P0 Pp Supply Demand Q1 Qo 2/4/2008 Class 8 Q 12 Observations 1. 2. Imposing the sales tax leads to reduced output Imposing the sales imposes a deadweight loss 3. 4. Price that consumers pay rises Output is below the efficient level Consumers are worse off Producers are worse off Class 8 Price that producers receive falls 13 2/4/2008 Taxation Applying a $t Sales Tax Lost P Consumer Surplus Pc = Pp + t P0 Pp Lost Producer Surplus Tax revenue Q1 Qo 2/4/2008 Class 8 Supply Deadweight Loss Demand Q 14 Who gains and who loses? The incidence of the tax Some of the burden of the tax is borne by the consumer Some of the burden of the tax is borne by the producer This is true whether Consumers have to pay the taxman Producers have to pay the taxman 2/4/2008 Class 8 15 Upon whom should the tax be levied? Does it matter whether the tax is imposed upon The answer is "No" Producers (production tax) Consumers (sales tax) Production taxes (i.e. taxes levied on producers) are partially passed on to consumers in the form of higher prices Consumption taxes (i.e. taxes levied on consumers) are partially borne by producers, who have to accept lower prices in order to sell their goods In either case, producers and consumers pay different prices, and those prices differ by the amount of the tax 2/4/2008 Class 8 16 ...
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