University:
University of Edinburgh
Course:
ECNM10070 | Topics in Microeconomics
Academic year:

2019
Views:

260

Pages:

3
Author:

folclord7m

Taxes and Subsidies: “Elasticity= ESCAPE” The more elastic side of the market will pay a smaller share of the tax (smaller burden) The less elastic (more inelastic) side of the market will pay a greater share of the tax (greater burden) When demand is more elastic than supply, suppliers bear more of the burden of a tax and receive more of the benefit of a subsidy ● Governments are better off taxing goods/services with inelastic supply and demand curves A subsidy is a negative tax where the government gives money to consumers (or producers) ● Subsidies must be paid for by taxpayers and they create inefficient increases in trade (deadweight loss) ● When demand is more elastic than supply, suppliers bear more of the burden of a tax and receive more of the benefit of a subsidy ● Are expensive because pays for every unit sold Deadweight: ● Deadweight Losses are larger the more elastic the demand curve. If the demand curve is inelastic, a tax will not deter as many trades Speculation: ● ● ● Raise prices today but lower prices in the future, good because resources are moved through time from lower to higher value users (2 Graphs) Price Ceiling: Maximum price allowed by law (graph) ● Shortages ● Reductions in product quality ● Wasteful lines and other search costs ● A loss in gains from trade (deadweight loss) ● Misallocation of resources Price Floor: A minimum price allowed by law (graph) ● Surpluses ● Lost gains from trade (deadweight loss) ● Wasteful increases in quality ● Misallocation of resources Competitive Market: In a competitive market, firms maximize profits by choosing outputs such that MR=P=MC ● No control over price, market determines each firm's price ● Profit=Total Revenue- Total Cost ● Total Revenue: Price*Quantity (P*Q) ● Total Cost: Fixed and variable costs ● When the firm produces an additional unit there are additional revenues and additional costs: ○ Profit Maximization is about comparing the additional revenues and costs ○ Marginal Revenue (MR)= The addition to total revenue from selling an additional unit of output ○ Marginal Cost (MC)= The additional to total cost from producing an additional unit of output Profits are Maximized at the level of output where MR=MC ● MR>MC you are not profit maximizing, producing more will add to your profit ● MRAC, profits are above normal. Output in this industry is worth more than inputs. Profit signal says we want more of this good ● Exiting market is P MC THEN  firms leave ● IF Profit < MC THEN  firms enter ● IF Profit = MC THEN  firms do neither Understanding Graphs Monopolies ● MC