Lecture%2011 - Econ 208 lecture 11 page 1 Lecture 11 Supply...

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Econ 208 lecture 11 page 1 Lecture 11: Supply and Demand and Factor Markets Exercises in Supply and Demand Excess demand and excess supply 1. Price too high. Excess supply. Some suppliers prepared to sell at lower price rather than not at all, makes it possible for price to be bid down. 2. price too low: excess demand: opposite situation holds. Some demanders prepared to pay higher than going price rather than go without. Hence bid price up. Some applications: 1. Incidence of sales tax. How do we analyze a sales tax that is levied on producer? Start with cost curve. At the sales tax in effect raises average cost by the amount of the sales tax. Say, 10 percent. Start in long-run equilibrium, and impose tax. AC rises, implies exit. Supply moves to the left. By how much? Enough to make the difference between the demand price and the pre-tax cost equal to the tax. Note incidence of tax. Buyers pay some in form of higher price than under old equilibrium: sellers pay some in form of lover take- home.
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