burden of a tax - 4-1Economics as a Second Language Chapter...

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Unformatted text preview: 4-1Economics as a Second Language Chapter 4: Extensions of the Demand and Supply Model Martha L. Olney olney@econ.berkeley.edu May 26, 2008 Several extensions of the demand and supply model are common in principles of economics courses. In this chapter we look at how to model price floors and ceilings, and excise taxes. Elasticity the responsiveness of something to changes in something else and the concepts of consumer surplus, producer surplus, and deadweight loss are also covered. Key terms and concepts $Price Floor $Binding $Price Ceiling $Inefficient $Excise Tax $Burden of the Tax $Bears the Burden $Elasticity $Price Elasticity of Demand $Income Elasticity of Demand. 4-7a minimum wage. Equity and fairness issues, not efficiency, guide the determination of the minimum wage. A common price ceiling is the price of milk, which is regulated in many states. Californias website says it sets a price ceiling for milk because [w]ithout economic regulation, a strong potential exists for volatile and chaotic production and marketing practices [of milk]. [Source: http://dairy.ca.gov/dairy_questions_main.html#4, accessed 3/27/07.] Draw a graph that depicts each of the following. Is the price floor or ceiling binding? Will the market equilibrium quantity be sold? 1. The equilibrium price is $3 and the price floor is $4. 2. The equilibrium price is $3 and the price floor is $2. 3. The equilibrium price is $3 and the price ceiling is $5. 4. The equilibrium price is $3 and the price ceiling is $1. Excise TaxesAn excise taxis a tax assessed on the purchase of a particular product. For example, the federal and most state governments impose excise taxes on alcohol and tobacco. A tax changes an items equilibrium price and equilibrium quantity. The easiest way to see how a tax affects a market is with a specific example. Suppose the equilibrium price of cigarettes is $3 per pack. The TRY4-8government now imposes an excise tax of $2 per pack. What happens to the price of cigarettes?...
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This note was uploaded on 02/14/2011 for the course ECON 1 taught by Professor Martholney during the Spring '08 term at University of California, Berkeley.

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burden of a tax - 4-1Economics as a Second Language Chapter...

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