Week 2B

Week 2B - COMM/FRE 295 Week 2b Taxes Revenue Estimating...

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COMM/FRE 295 Week 2b September 16, 2010 Taxes; Revenue; Estimating Demand
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Today’s Topics Finish material from last lecture Examine how equilibrium prices are impacted by a tax (e.g., HST) Examine the connection between the elasticity of demand and how revenue responds to price changes Estimating a demand schedule from data Be sure to read Chapter 3 (see reading list)
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Remaining Topics from Last Lecture Aggregating supply Supply elasticity Market equilibrium
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Aggregating Supply Suppose 100 identical students offer tutoring services and each has the following supply equation: q S = -20 + 0.2P Graph the market supply curve The market supply curve is given by Q S = 100q S = -2000 + 20P Inverse market supply, required for graphing is P = 100 + 0.05Q When aggregating, multiply regular supply schedule (not inverse supply) by the number of firms
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Supply Elasticity Calculate ε S for Q S = -20 + 2P at P = 10 What can you say about the supply elasticity when the supply schedule intersects the vertical axis? How about the horizontal axis? What is the supply elasticity for a vertical supply curve? A horizontal supply curve? Is a supply schedule likely to be more or less elastic in the long run versus the short run? Explain
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Equilibrium Price In perfectly competitive markets, equilibrium price and quantity is determined by the intersection of supply and demand You should be able to think through what happens to equilibrium P and Q given: Increase in consumer income Increase in the price of labour for the supplier Increase in the price of a complementary good Simultaneous decrease in income and adoption of cost saving technology by supplier
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Example Demand is given by Q D = 10 – 2P + 0.2I where I is income Supply is given by Q S = -3 + 4P Derive expressions for the equilibrium price and quantity as a function of income Show your results on a graph for two separate values of I Predict what will happen to the equilibrium price when income changes if the good in question is inferior rather than normal
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How Price is Impacted by a Tax This topic is timely given the lively discussion in the media about the new HST in British Columbia HST stands for “harmonized” sales tax. It replaces the former combination of provincial sales tax (PST) and goods and services tax (GST) Public will vote in a provincial referendum next September about whether to repeal HST
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Pass Through A tax levied on a firm’s output (e.g., booze) causes consumer price to go up and firm’s net price to go down A $1/unit tax will cause consumer price to increase by x (“pass through”) where generally 0 < x < 1
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Week 2B - COMM/FRE 295 Week 2b Taxes Revenue Estimating...

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