Principles of Economics- Mankiw (5th) 126

Principles of Economics- Mankiw (5th) 126 - 130 PA R T T W...

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130 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK We can, in this case, be precise about how much the curve shifts. Because of the $0.50 tax levied on buyers, the effective price to buyers is now $0.50 higher than the market price. For example, if the market price of a cone happened to be $2.00, the effective price to buyers would be $2.50. Because buyers look at their to- tal cost including the tax, they demand a quantity of ice cream as if the market price were $0.50 higher than it actually is. In other words, to induce buyers to de- mand any given quantity, the market price must now be $0.50 lower to make up for the effect of the tax. Thus, the tax shifts the demand curve downward from D 1 to D 2 by exactly the size of the tax ($0.50). To see the effect of the tax, we compare the old equilibrium and the new equi- librium. You can see in the figure that the equilibrium price of ice cream falls from $3.00 to $2.80 and the equilibrium quantity falls from 100 to 90 cones. Because sell-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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