Lecture 5 - 9/18/2008 The Market Do market forces operate...

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9/18/2008 1 The Market ± The market does many things ± Pricing ± Quantity ± Allocation ± Do market forces operate so that price and quantity move towards the equilibrium? YES! ($ per unit) ± Efficient rationing ± Incentives ± We explore what happens when the market is restricted Quantity S D Q E P E E Tax ± Specific (quantity) tax – tax per unit ± We denote the price demanders pay: P d price suppliers get: P s ± Before tax: P = P d = P s tax ± After tax: P d = P s + t ± We’ll draw the new supply curve in terms of P d Price ($ per unit) S´(+Tax) Tax Tax - Beer Beer ± Supply curve shifts up by the amount of the tax ± p d ; p s ± tax (per unit) = p d -p s ± expenditure = p d • Q ± supplier revenue = p •Q ± Sin tax ± discourage consumption ± boost government revenue Revenue Supplier Revenue Quantity S t Consumer Expenditure D P E Q E E Q E ´ P d ´ P s ´ supplier revenue = p s • Q ± difference is government tax revenue ± tax revenue larger if demand less sensitive to price
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9/18/2008 2 Prohibition ± Law prohibiting trade of a good ± Simple idea: illegal, so no sale or use?
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This note was uploaded on 03/21/2010 for the course ECON 101 taught by Professor Gerson during the Fall '08 term at University of Michigan.

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Lecture 5 - 9/18/2008 The Market Do market forces operate...

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