World Politics - Revision Consumer surplus a consumers...

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ECON 1001 LECTURE 6 1 Revision Consumer surplus - a consumer’s willingness to pay minus the price they actually pay. Producer surplus - the price a producer receives for a good minus the minimum price that they would be willing to sell the good for. CS - area under the demand curve above market price PS - area above the supply curve under market price Total surplus = CS + PS Free market - good at maximising total surplus.
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ECON 1001 LECTURE 6 2 Taxation Tax reduces consumer and producer surplus by more than the tax revenue it raises. This loss in surplus is called the dead weight loss . Why? Tax puts a wedge between the price consumers pay and producers receive. This reduces the possibility for gains from trade The size of the DWL depends on the elasticities of D and S The more elastic demand or supply the larger the DWL. The more inelastic D or supply the smaller the DWL.
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ECON 1001 LECTURE 6 3 DWL increases with the size of the tax as a higher tax decreases the opportunity for gains from trade. Tax revenue varies with the size of the tax. Tax revenue depends on both the size of the change in the tax, and the change in the quantity sold in the market. The quantity sold depends on the elasticity of demand and supply. The more elastic D and S are the more likely that tax revenue will fall. Laffer suggested a curve - the Laffer curve - that showed that tax revenue at first increases with tax increases, then it decreases with further tax increases.
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ECON 1001 LECTURE 6 4 International trade What determines whether a country exports or imports a good? Identify the winners and losers from trade Show that the gains to the winners exceed the losses to the losers Analyse the welfare effects of tariffs and quotas First - examine a domestic market without international trade - outcome is same as markets studied previously
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ECON 1001 LECTURE 6 5 P q Domestic Supply Domestic Demand CS PS P* q* Domestic market - no international trade
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ECON 1001 LECTURE 6 6 Importer or exporter? The world price - the price of a good that prevails on the world market for that good Also note - small country assumption that country is so small it doesn’t affect the prevailing world price (they are price takers , buying or selling all the want at the world price). If the world price less than domestic price, country become an importer of the good If the world price greater than the dom. (no trade) price, country becomes an exporter of the good The world price indicates comparative advantage
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ECON 1001 LECTURE 6 7 If there is no trade, in Australia you can buy a pure wool suit for 3 grams of gold. In neighbouring countries you can buy the same suit for 2 grams of gold. If trade was allowed in Australia, would it import or export suits? Price of 1 suit in Oz is 3 grams of gold.
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This note was uploaded on 11/06/2011 for the course POLITICS 1102 taught by Professor Unknown during the Three '09 term at University of Sydney.

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World Politics - Revision Consumer surplus a consumers...

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