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Warm-Up

Warm-Up. How much are you willing to pay for gas? Would you be happy if the price were less? Why?. Consumer & Producer Surplus. Chapter 4: Consumer and Producer Surplus (pages 94-113). Demand for Used Textbooks.

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Warm-Up

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  1. Warm-Up • How much are you willing to pay for gas? • Would you be happy if the price were less? Why?

  2. Consumer & Producer Surplus Chapter 4: Consumer and Producer Surplus (pages 94-113)

  3. Demand for Used Textbooks A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.

  4. Consumer Surplus The total consumer surplus is given by the entire shaded area - the sum of the individual consumer surpluses of Aleisha, Brad, and Claudia - equal to $29 + $15 + $5 = $49.

  5. Consumer Surplus

  6. Consumer Surplus

  7. Consumer Surplus The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price.

  8. Consumer Surplus

  9. Producer Surplus The minimum price at which a supplier is willing to sell is called his or her cost.

  10. Producer Surplus

  11. Producer Surplus

  12. Producer Surplus The total producer surplus generated by sales of a good at a given price is equal to the area above the supply curve but below that price.

  13. Total Surplus

  14. Can we do better?

  15. Can we do better?

  16. Can we do better?

  17. Excise Taxes and Efficiency

  18. Excise Taxes • Tax on each unit of a good or service sold • EXAMPLES: Gas tax, cigarette tax • Disrupts market efficiency

  19. Excise Taxes – Initial Situation

  20. Excise Tax – $1 Tax Instituted • Tax of $1 instituted • Wedge of $1 created • Shifts Qs to right • Increase in equilibrium P and Q

  21. Excise Taxes • Price paid by consumers/suppliers called TAX INCIDENCE • Wedge = size of tax • Size of tax incidence depends on elasticity

  22. Tax Incidence – Consumers • Inelastic Demand + Elastic Supply • Consumers bare majority of cost • Little flexibility for consumers • Producers have substitutes for product

  23. Tax Incidence – Consumers

  24. Tax Incidence – Suppliers • Elastic Supply + Inelastic Supply • Suppliers pay majority of cost • Consumers have many substitutes • Suppliers do not have other options for product

  25. Tax Incidence – Suppliers

  26. Benefits and Costs … • Revenue for government • Necessary for gov’t to function • Pays for parks, roads, fire, police, etc.

  27. Revenue from excise tax…

  28. Benefits and Costs … • Revenue for government • Necessary for gov’t to function • Pays for parks, roads, fire, police, etc. • Deadweight loss • Lost transactions eliminate producer and consumer surplus

  29. Deadweight Loss

  30. Deadweight Loss + Elasticity

  31. Deadweight Loss + Elasticity

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