1. Antony Davies, Ph.D. Duquesne University Click here for instructions.

2. Navigation through the course will occur by clicking on the following action buttons located in the lower right corner of each screen: The HOME button will be placed in the center of each slide and will bring you to the Table of Contents for further navigation. The NEXT and BACK buttons will move you through the course content. The EXIT button will be placed at the end of each unit and will exit the unit and return you to the course menu.

3. This course is meant to be self-paced, though there will be opportunities to interact with your local and global JPIC groups. Course content and activities should be completed in the order that they are presented to maximize student success. The Table of Contents will be your starting point for each Unit

4. Each type of course activity has a unique icon located in the upper right corner of the screen. In this course you will: Global discussion Watch video Online journal Local discussion Read online ReflectCreate doc Quiz/test

6. This unit is divided into several sections. Start with the micro-lecture. Then proceed onto each section. You can click on a link below to navigate to the section where you had recently left off. Micro-Lecture Section 1: Making Profit Section 2: Tax Burden Section 3: Luxury vs. Necessity Unit Summary & Assignment

7. View the Lecture (02:41) Read the Text of the Lecture

8. MAKING PROFIT

9. In this experiment, you control a firm that sells a product. You must choose what price to charge.  Charging a lower price will encourage consumers to buy more units from you, but you will make less profit on each unit.  Charging a higher price will encourage consumers to buy fewer units from you, but you will make more profit on each unit. Your goal is to make the most profit that you can.

10. Profit Profit = Revenue – Cost Revenue = (Price per Unit) x (Number of Units Sold) Cost = ($1) (Number of Units Sold)

11. Example The chart to the right is a demand schedule. It shows the number of units consumers will buy from you depending on what price you decide to charge. For example, if you charge $6.50 per unit, consumers will buy 820 units from you. You must choose what price to charge for your product so as to maximize your profit.

12. Example Suppose you decide to charge $10 per unit. 1.You will sell 750 units. 2.Your revenue will be ($10)(750 units) = $7,500. 3.Your cost will be ($1)(750 units) = $750. 4.Your profit will be $7,500 – $750 = $6,750.

13. Example Suppose instead that you decide to charge $20 per unit. 1.You will sell 550 units. 2.Your revenue will be ($20)(550 units) = $11,000. 3.Your cost will be ($1)(550 units) = $550. 4.Your profit will be $11,000 – $550 = $10,450. Charging $10 per unit generates a profit of $6,750, but charging $20 per unit generates a profit of $10,450. So, it is better for you to charge $20 than it is to charge $10 per unit.

14. Round 1 Choose the price you will charge for your product. After you have selected your price, advance to the next slide to see the answer.

15. Round 1 You make the most profit when you choose a price of $15 per unit. 1.You sell 64 units. 2.Your revenue is ($15)(64) = $960. 3.Your cost is ($1)(64) = $64. 4.Your profit is $960 – $64 = $896.

16. TAX BURDEN

17. Statutory tax burden is the amount of tax collected from a person. Economic tax burden is the amount of tax paid by a person. Example: With no taxes, the price of gas is $3.00 per gallon. The government imposes a 50 cent per gallon tax on gasoline. The tax is collected from the producer. In response to the tax, the producer raises the price of gas to $3.50.  The statutory burden is on the producer, but the economic burden is on the consumer.

18. Statutory tax burden is the amount of tax collected from a person. Economic tax burden is the amount of tax paid by a person. Example: With no taxes, the price of gas is $3.00 per gallon. The government imposes a 50 cent per gallon tax on gasoline. The tax is collected from the producer. In response to the tax, the producer does not change the price of gas.  The statutory burden is on the producer and the economic burden is on the producer.

19. Statutory tax burden is the amount of tax collected from a person. Economic tax burden is the amount of tax paid by a person. Example: With no taxes, a person earns $50,000 per year. The government imposes a $10,000 income tax. The tax is collected from the worker. In response to the tax, the employer gives the worker a $5,000 raise.  The statutory burden is on the worker, but the economic burden is shared between the worker and the employer.

20. Statutory tax burden is the amount of tax collected from a person. Economic tax burden is the amount of tax paid by a person. Example: With no taxes, a person earns $50,000 per year. The government imposes a $10,000 income tax. $5,000 of the tax is withheld from the worker’s pay. The employer is required to pay the other $5,000. In response to the tax, the employer cuts the worker’s salary by $5,000.  The statutory burden is shared by the worker and employer, but the economic burden is on the worker only.

21. When the government imposes a tax, the price the consumer pays is no longer the same as the price the producer receives. Example: $10 per unit tax.  The consumer pays $35 per unit, but the producer receives (net of the tax) only $25 per unit. The $10 difference goes to the government. We call the $35 the “consumer price” or the “price including tax” and the $25 the “producer price” or the “price excluding tax.”

22. Round 2: Statutory Tax Burden is on Consumers In this round of the experiment, consumers will pay an additional $5 per unit tax. The price consumers pay (the consumer price) is the price you decide to charge (the producer price) plus $5.  The statutory tax burden is on the consumer.

23. Round 2 In this round, consumers will pay an additional $5 per unit tax. The consumer price is the price you charge plus the $5 tax. Suppose you decide to charge $7. The consumer price will be $7 + $5 tax = $12. At $12 per unit, consumers will buy 77 units. Your revenue will be ($7) (77 units) = $539. Your cost will be ($1) (77 units) = $77. Your profit will be $539 – $77 = $462.

24. Round 2 Choose the price you will charge for your product (the producer price). The consumer price is the price you charge plus $5. After you have selected your price, advance to the next slide to see the answer.

25. Round 2 You make the most profit when you choose a price of $13.50 per unit. 1.The consumer price is $18.50. 2.You sell 50 units. 3.Your revenue is ($13.50)(50) = $675. 4.Your cost is ($1)(50) = $50. 5.Your profit is $675 – $50 = $625.

26. Round 3: Statutory Tax Burden is on Producers In this round of the experiment, producers will pay a $5 per unit tax for every unit they sell. The price consumers pay is the price you charge.  The statutory tax burden is on the producer.

27. Round 3 In this round, producers pay a $5 per unit tax. The price you receive is $5 less than the consumer price. Suppose you decide to charge $7. The consumer price will be $7. At $7 per unit, consumers will buy 101 units. After the tax, you receive $2 per unit. So, your revenue will be ($2) (101 units) = $202. Your cost will be ($1) (101 units) = $101. Your profit will be $202 – $101 = $101.

28. Round 3 Choose the price you will charge for your product. The consumer price is the price you charge. The producer price is the price you receive net of the tax – it is $5 less than the consumer price. Every unit you sell costs you $1 to produce. After you have selected your price, advance to the next slide to see the answer.

29. Round 3 You make the most profit when you choose a price of $18.50 per unit. 1.The consumer price is $18.50. 2.The producer price is $13.50. 3.You sell 50 units. 4.Your revenue is ($13.50)(50) = $675. 5.Your cost is ($1)(50) = $50. 6.Your profit is $675 – $50 = $625.

30. Summary Round 1: No tax Producer Price$15 Consumer Price$15 Units Sold64 Tax Revenue$0 Round 2: Statutory tax burden ($5 per unit) is on the consumer Producer Price$13.50 Consumer Price$13.50 + $5.00 tax = $18.50 Units Sold50 Tax Revenue($5) (50) = $250

31. Summary Round 3: Statutory tax burden ($5 per unit) is on the producer Producer Price$18.50 – $5.00 tax = $13.50 Consumer Price$18.50 Units Sold50 Tax Revenue($5) (50) = $250

32. Summary Compare Round 2 to Round 1 When the $5 statutory burden is on the consumer, the producer’s best response is to lower his price by $1.50 from $15 to $13.50. The result is that the economic burden is shared: $1.50 is paid by the producer and the remaining $3.50 is paid by the consumer. Compare Round 3 to Round 1 When the $5 statutory burden is on the producer, the producer’s best response is to raise his price by $3.50 from $15 to $18.50. The result is that the economic burden is shared: $1.50 is paid by the producer and the remaining $3.50 is paid by the consumer.

33. Summary Round 1: No tax Producer Price$15 Consumer Price$15 Round 2: Statutory tax burden ($5 per unit) is on the consumer Producer Price$13.50 Consumer Price$13.50 + $5.00 tax = $18.50 Round 3: Statutory tax burden ($5 per unit) is on the producer Producer Price$18.50 – $5.00 tax = $13.50 Consumer Price$18.50 Conclusion: The government has no control over who ultimately pays a tax. Tax the producer and the producer will pass on some of the tax burden. Tax the consumer and the producer will absorb some of the tax burden.

34. Summary Also notice the following: 1.The government’s tax revenue was the same ($250) when it taxed the consumer as when it taxed the producer. 2.The consumers were less happy in Rounds 2 and 3 than in Round 1. In Rounds 2 and 3, the consumers buy fewer units (50 instead of 64) and pay a higher price per unit ($18.50 instead of $15) than in Round 1. 3.In Rounds 2 and 3, the government’s tax revenue rose by $250 (from $0 to $250), but the firm’s profit declined by $271 (from $896 to $625). We call this a deadweight loss. When the government imposes a tax, the tax revenue the government obtains is outweighed by the decline in the sellers’ profits and the consumers’ happiness.

35. Summary What is noteworthy is that it does not matter on whom the statutory tax burden falls. Market forces will decide how the economic burden is shared among producers and consumers. If the government taxes consumers, producers will lower their prices so as to absorb some of the tax burden. If the government taxes producers, producers will raise their prices so as to pass on some of the tax burden.

36. LUXURY vs. NECESSITY

37. A luxury good is a good for which consumers are more sensitive to price changes. For example, suppose the price of the good rises 10% and consumers, in response, want to buy 30% fewer units.  We say that consumers are sensitive to the price change.

38. A necessity good is a good for which consumers are less sensitive to price changes. For example, suppose the price of the good rises 10% and consumers, in response, want to buy only 1% fewer units.  We say that consumers are insensitive to the price change.

39. Be careful not to confuse price sensitivity with income. Just because consumers are price sensitive toward a product does not mean that they cannot afford the product. It simply means that they will react strongly to changes in the product’s price.

40. Consumption of luxury goods is more sensitive to price changes. Consumption of necessity goods is less sensitive to price changes. Example: At a price of $10 per ticket, you will see 10 movies per year. If the price rises to $12, you will cut back to 5 movies per year.  20% rise in price results in a 50% reduction in consumption  Your consumption is highly sensitive to price changes.  For you, movies are a luxury good.

41. Consumption of luxury goods is more sensitive to price changes. Consumption of necessity goods is less sensitive to price changes. How the tax burden is shared is different for luxuries versus necessities The more of a necessity a good is, the more of the economic tax burden will fall on the consumer. The more of a luxury a good is, the more of the economic tax burden will fall on the producer.

42. The U.S. Social Security wage tax provides a useful test. In the U.S., the government imposes a tax on wages (called the Social Security tax). The tax is currently 12.4%. By law, one-half of the tax is to be paid by the worker and the other half is to be paid by the employer. That means that the statutory burden is split equally between the employer and employee. What matters, however, is how the economic burden is split.

43. Source: Social Security Administration and the U.S. Bureau of Labor Statistics. Here, you see the annual growth in median wages (adjusted for inflation) in the U.S. since 1951. Let us compare the wage growths in years in which the Social Security tax remained constant to the wage growths in years in which the Social Security tax was increased.

44. Source: Social Security Administration and the U.S. Bureau of Labor Statistics. Average annual wage growth when tax increases = 1.0% Average annual wage growth when tax does not change = 1.3%

45. When the tax rate increases, it increases (on average) by 0.3% The employer passes on the employer’s half of tax increases to the worker in the form of lower wages. Conclusion:The entire burden of the Social Security tax falls on the worker. Increasing the tax slows average wage growth by 0.3%. Average annual wage growth when SS tax increases = 1.0% Average annual wage growth when SS tax does not change = 1.3%

46. In this unit, you learned that the difference between a statutory tax burden and an economic tax burden is that the former describes from whom a tax is collected, while the latter describes who ultimately pays the tax. The statutory burden is largely irrelevant; what matters is the economic tax burden.

47. You also learned that the government has no control over the economic tax burden. Markets will divide the economic tax burden between consumers and producers based on how much of a luxury or necessity the good is. The more of a necessity the good is, the more of the economic tax burden will fall on the consumer. The more of a luxury the good is, the more of the economic tax burden will fall on the producer.

48. Pick a good or service that is taxed. Collect data on (1) the price of the good or service over time, and (2) the tax rate. Calculate the growth rate (percentage change) in the price from each period to the next, and calculate the change in the tax rate. Compare the average growth rate in the price during periods when the sales tax remained constant to the average growth rate in the price when the tax did change. On the following slides, you will see an example using wage and Social Security tax data for the United States. Because prices tend to increase over time, when looking at prices over time, it is typical to look at the growth rates in the prices rather than the prices themselves.

49. Data on average annual wages (adjusted for inflation) and Social Security tax rates over time.

50. Change in the tax rate. Percentage change in the wage rate.

51. Years in which the tax rate did not change. Average wage growth = 1.17% Calculate this.

52. Years in which the tax rate did change. Average wage growth = 1.23% Calculate these. Average tax change = 0.62%

53. Consumer price rises 0.07% when the tax increases. When the tax rises, it does so by 0.62%. 1) Compare the average price change in years without tax changes to the average price change in years with the tax change. The difference is the amount by which the consumer price changes (on average) when the tax changes. 2) Compare the average change in the consumer price to the average change in the tax. In this example, when the tax rises by 0.62%, the consumer price rises by only 0.07%. This means that, of the 0.62% tax increase, 0.07% is paid by the buyer and the remaining 0.55% is paid by the seller. The product in this example is labor, which means that the “seller” is the worker. These results show that, when the government raises wage taxes, regardless of whether the tax is collected from the employer or from the worker, it is the worker who ultimately pays most of the tax.

54. Read the following article, which is available on the JPIC 220 ERes site at the Gumberg Library. To access these articles, click on the links below. You may be prompted to enter a password ( JPIC ). Landsburg, Steven E. "Why Taxes Are Bad: The Logic of Efficiency." The Armchair Economist: Economics and Everyday Life. New York: Free, 1993. Print.

55. After reading the Landsburg article, post a two-paragraph response to the reading on the JPIC 220 Wiki.JPIC 220 Wiki Additionally, reply to at least two other students’ posts. Your replies may be comments, questions, shared stories, or any type of engaging response. HOW TO POST ONTO WIKI 1.Click on the Wiki discussion link above. 2.Sign into Wikispaces so that you are able to post via the “Sign In” link. 3.Type your response in the reply box at the bottom of the page