Unit 2: Demand, Supply, and Consumer Choice 1 Copyright ACDC Leadership 2015

2 Trade and Taxes Copyright ACDC Leadership 2015

S P Q D Review $ CS PS 3 Calculate the area of: 1.Consumer Surplus 2.Producer Surplus 3.Total Surplus 1.CS= $40 2.PS= $20 3.Total= $60 Copyright ACDC Leadership 2015

World Price- Countries can buy products at their own domestic price or they can buy the products at a cheaper world price Tariff- Tax on imports that increases the world price Quota- a limit on number of imports. Purpose of tariffs and quotas: To protect domestic producers from a cheaper world price. To prevent domestic unemployment 4 Limits on Trade Copyright ACDC Leadership 2015

International Trade and Quotas Identify the following: 1.CS with no trade 2.PS with no trade 3.Amount we import at world price (P W ) 4.PS if we trade at world price (P W ) 5.CS if we trade at world price (P W ) 6.If government tariff leads to a world price of P T, how much is imported and what is the CS and PS? This graphs show the domestic supply and demand for grain. The letters represent area. Copyright ACDC Leadership 2015

Copyright ACDC Leadership 2015

Excise Taxes Excise Tax = A per unit tax on producers For every unit made, the producer must pay $ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: Cigarettes “sin tax” Alcohol “sin tax” Environmentally Unsafe Products Etc. 9 Copyright ACDC Leadership 2015

Excise Taxes Q $ P 10 Supply Schedule PQs $5140 $4120 $3100 $280 $160 D S Government sets a $2 per unit tax on Cigarettes Copyright ACDC Leadership 2015

Excise Taxes Q $ P 11 Supply Schedule PQs $5 $7140 $4 $6120 $3 $5100 $2 $480 $1 $360 D S Government sets a $2 per unit tax on Cigarettes Copyright ACDC Leadership 2015

Excise Taxes Q $ P 12 Supply Schedule PQs $5 $7140 $4 $6120 $3 $5100 $2 $480 $1 $360 D S Tax is the vertical distance between supply curves S TAX Copyright ACDC Leadership 2015

Excise Taxes Q $ P 13 D S Identify the following: 1.Price before tax 2.Price consumers pay after tax 3.Price producers get after tax 4.Total tax revenue for the government before tax 5.Total tax revenue for the government after tax S TAX Copyright ACDC Leadership 2015

1.CS Before Tax 2.PS Before Tax 3.CS After Tax 4.PS After Tax 5.Tax Revenue for Government 6.Deadweight Loss assuming society wants Q2 produced 7.Amount of tax revenue producers pay Tax Practice Copyright ACDC Leadership 2015

2012 Question Copyright ACDC Leadership 2015

16 Copyright ACDC Leadership Question 19

S P Q D Excise Tax $ Copyright ACDC Leadership 2015

S P Q D Excise Tax $ Calculate 1.Tax Per Unit 2.Total Tax Revenue 3.Amount of Tax paid by consumers 4.Amount of Tax paid by producers 5.Total Expenditures 6.Total Revenue for firms S tax PcPc PpPp Copyright ACDC Leadership 2015

Excise Tax Calculate 1.CS Before Tax 2.Total Expenditures Before Tax 3.Tax Per Unit 4.Total Tax Revenue that goes to Government 5.Amount of Tax paid by consumers 6.Amount of Tax paid by producers 7.Total Expenditures after tax 8.Total Revenue for firms after tax 9.CS After Tax 10. DWL Copyright ACDC Leadership 2015

Tax Incidence Who ends up paying for an excise tax? 21 Copyright ACDC Leadership 2015

S P Q D Demand- Inelastic Supply- Unitary $ $2 TAX on Producers 108 EXCISE TAX ON MILK 22 Copyright ACDC Leadership 2015

S P Q D $ $2 TAX on Producers 109 S1S1 $6.50 =P consumers $4.50 = P producers Quantity Doesn’t Fall VERY Much!!! Amount Producers Pay Amount Consumers Pay EXCISE TAX ON MILK 23 Copyright ACDC Leadership 2015

S P Q D Demand- Elastic Supply- Unitary EXCISE TAX ON BEEF $ $2 TAX on Producers Copyright ACDC Leadership 2015

S P Q D $ $2 TAX on Producers 10 7 S1S1 PcPc PpPp DWL? Quantity Falls A lot!!! EXCISE TAX ON BEEF 25 Copyright ACDC Leadership 2015

S P Q D $ Tax per Unit? 2.Total Tax Revenue? 3.Tax paid by consumers? 4.Tax paid by producers? 5.Total spending? 6.Revenue for businesses? 3020 S1S1 P consumers = $7 P producers = $4 CS After EXCISE TAX 26 Copyright ACDC Leadership 2015

S P Q D $ Tax per Unit = $3 2.Total Tax Revenue = $60 3.Tax Paid by Consumers = $40 4.Tax Paid by Producers = $20 5.Total Spending = $140 6.Revenue for Businesses=$ S1S1 P consumers = $7 P producers = $4 CS After EXCISE TAX 27 Copyright ACDC Leadership 2015

28 Tax Incidence (Who pays?) D D D D D Perfectly Inelastic Relatively Inelastic Unit Elastic Relatively Elastic Perfectly Elastic Tax burden paid entirely by consumers Tax burden mostly on consumers Tax burden shared by consumers and producers Tax burden mostly on producers Tax burden paid entirely by producers SSTST SSTST SSTST SSTST SSTST Copyright ACDC Leadership 2015

2008 Audit Exam