PRICE ELASTICITY OF D EMAND

• The change in price as a percentage of the average price—the • Responsiveness of the quantity demanded of a good to a
average of the initial and new price change in its price
• (25/87.5) x 100%=28.6 % Percentage change in the quantity demanded
•
Percentage change in the price
• The change in the quantity demanded as a
percentage of the average quantity demanded—the • Price: $75 to $100
average of the initial and new quantity • Percentage change in price?
• 25%? (25/100) or 33.3%? (25/75)
• Depends on the denominator
• Mid-point formula

EXAMPLE: C ALCULATING P RICE ELASTICITY OF DEMAND

• Initially, the price of a pizza is $20.50 and the quantity The price of a pizza falls to $19.50 and the quantity demanded increases
demanded is 9 pizzas an hour to 11 pizzas an hour

The price falls by $1 and the quantity demanded increases by 2 pizzas an

hour

• The average price is $20, and the average quantity demanded is • The percentage change in quantity demanded is DQ/Qave x
10 pizzas an hour 100%
• (2/10) x 100% = 20%
• The percentage change in price is DP/Pave x 100%
• ($1/$20) x 100% = 5%

• The price elasticity of demand is A Few Things About Price Elasticity of Demand
• 20% / 5% = 4
 Why average price and quantity?
 Same elasticity value regardless of whether the price rises
or falls
 Positive or negative value?
 Negative
 Price and quantity move in opposite directions
 Magnitude, or absolute value
 How responsive the quantity change has been to a price
change
Perfectly inelastic demand Perfectly elastic demand
 The quantity demanded doesn’t change when the price • The change in quantity demanded is infinitely large when the
changes price changes

Inelastic and Elastic Demand Elasticity along a linear demand curve

• Inelastic demand  Calculate the price elasticity of demand
• The price elasticity of demand is less than 1  Prices falls from 25 to 15
• The percentage change in the quantity demanded is  Prices falls from 15 to 10
smaller than the percentage change in price  Prices falls from 10 to 0
• Elastic demand
• The price elasticity of demand is greater than 1
• The percentage change in the quantity demanded is
greater than the percentage change in price

ELASTICITY AND SLOPE ALONG A LINEAR DEMAND CURVE

• Price falls from $25 to $15 • Price falls from $15 to $10
• Quantity increases from 0 to 20 • Quantity increases from 20 to 30
• The price elasticity of demand is (20/10)/(10/20)=4 • The price elasticity of demand is (10/25)/(5/12.5)=1

• Price falls from $10 to $0 • Elasticity is not the same as slope

• Quantity increases from 30 to 50 • Points on a linear line have the same slope but different
• The price elasticity of demand is (20/40)/(10/5)=1/4 elasticities
DISCUSSION QUESTION: (TOTAL REVENUE AND PRICE)
• The total revenue from the sale of a good or service equals
the price of the good multiplied by the quantity sold
• Will a rise in price always increase total revenue?
• When the price
rises from 19.5
to 20.5, does
total revenue
increase?
• No!
• Revenue
before=214.5
• Revenue
after=184.5
• %DQ / %DP =
20% / 5% = 4
Implication of inelastic and elastic demand: Total Revenue Example
• Will a rise in price always increase total revenue? (No!) • Which video streaming platforms are most popular
• Depends on the elasticity of demand among Singapore consumers?
• If demand is elastic • Netflix!
• Price increases, total revenue decreases • Over one in three (36%) consumers are
• If demand is inelastic subscribers in 2023
• Price increases, total revenue increases • Demand is elastic or inelastic?
• In 2011, Netflix increases its prices for
Discussion Question: Factors that influence the Elasticity of Demand various packages, and this led to a
significant decrease in the subscriptions
• In 2023, PED is 0.13 (inelastic)
• Why?
• Change in consumer preference
(Covid)/Netflix unique content
CONSUMPTION POSSIBILITIES
• Where does the demand curve come from?
• Consumer choices
• Where does the supply curve come from?
• Producer choices
Basic Assumptions
• Consumers face budget constraints
• Consumers are rational (maximize satisfaction)
• Consumers are fully informed
• There is no saving or borrowing, only buying
Consumer Theory Road Map • The things that you can afford to buy
• Consumption Possibilities • Limited by income and the prices
• Budget line
Example: Sweaters and Jeans
• Prices and income
• Income=300
• Preference: Describe what consumers like?
• Price of Sweaters=$25
• Consumer Choice
• Price of Jeans=$50
• How do consumers choose what to buy and how much to buy?
What are the combinations of sweaters and jeans you can
• Best affordable choice
afford to buy?
• 12 sweaters
• 6 jeans
• 4 sweaters and 4 jeans
Budget line=limits of consumption possibilities Discussion Question: Budget line
Negative
Income=300, Price of
slope?
Sweaters=$25, Price of
Equation?
Jeans=$50

12 Sweaters 0 Jeans y=12-2x

8 Sweaters 2 Jeans What does the

slope
4 Sweaters 4 Jeans represent?
0 Sweaters 6 Jeans Price of
Jeans/Price of
Sweaters

Discussion Question: Budget line UTILITY

Income=300 Price of Sweaters=$25 Taste and preferences: Like and dislike
Price of Jeans=$50
• The price of a sweater doubles • How do consumers rank two products?
• Or your income falls to $150 a • A consumer prefers good A to good B
month • If the consumer is more satisfied
• Or both the price of a sweater and with A than with B
a pair of jeans double • A consumer prefers good B to good A
• A consumer is indifferent between A and B
• If the consumer is equally satisfied
with A or B
Utility Total utility Marginal Utility
• Benefit or satisfaction from The change in total utility that
consuming a good or service is results from a unit-increase in the
called utility quantity of the good consumed
• Total Utility
• Total benefit a person Increasing or diminishing marginal
gets from the utility?
consumption of goods
• Generally, more consumption Negative Marginal Utility?
results in more total utility
From total utility to marginal utility How to represent preference in graph?
• Indifference Curve
• For simplicity, our consumption basket only has
sweaters and jeans

845
Basket A: 6 sweaters and 3 pairs of jeans
Basket B: 4 sweaters and 5 pairs of jeans
How to represent preference in graph? Indifference Curve
• Indifferent between
• A: 6 sweaters + 3 pairs of jeans
• B: 4 sweaters + 5 pairs of jeans
A Common Assumption: More is Better
• Consumers like both goods
E.g., 2 sweaters + 3 pairs of jeans → 1 sweater + 3 pairs of jeans
E.g., 2 sweaters + 3 pairs of jeans → 2 sweaters + 2 pairs of jeans
E.g., 2 sweaters + 3 pairs of jeans → 1 sweater + 1 pair of jeans
What can we gain from this assumption?
Indifference Curves are Downward Sloping Which baskets are preferred/less preferred to A?

Higher indifference curve, higher satisfaction Preference Map

Special Preferences Example of Perfect Substitutes: iPhones

• Perfect substitutes
• Indifference curves are linear
• Perfect complements
• Indifference curves are L-shaped
Example of Perfect Substitutes
• “White iPhones and black iPhones are equivalent”
• 1 white iPhone always brings the same level of satisfaction as 1 black
iPhone
• To the consumer, white iPhone and black iPhone are perfect
substitutes

Example of Perfect Complements Example of Perfect Complements: Shoes

• “For every right shoe, I need exactly one left shoe”
• 2 right shoes and 1 left shoe brings the same level of satisfaction as 1
right shoe and 1 left shoe
• To the consumer, right shoes and left shoes are perfect complements
Discussion Question: Shin-chan’s indifference curve?
• Shin-chan hates “green pepper” but likes “hamburger”
• The satisfaction from 2 hamburgers exactly offsets the dissatisfaction
from 1 green pepper
• Draw one indifference curve for Shin-chan starting from the origin

CONSUMER CHOICE
Finding the best affordable basket from the Graph Conditions for best affordable basket
• On the budget line
• On the highest attainable indifference curve

Utility-Maximizing Choice: Total Utility

• Consumption possibility that maximizes total utility
• The direct way to find the utility-maximizing choice

1. Find the just-affordable combinations

2. Find the total utility for each just-affordable combination
3. The utility-maximizing combination is the consumer’s
choice
Find Just-Affordable Combinations Discussion Question: Find the Total Utility for Each Just-
• Income=300, Price of Sweaters=$25, Price of Jeans=$50 Affordable Combination (page 39 for total utility)
• Combinations of sweater and jeans you can afford to buy?

A more natural way: Choosing at the Margin Equal Marginal Utility per Dollar
• The marginal utility per dollar MUs MU𝐽
• > , buy more sweaters and less jeans
Ps P𝐽
• The marginal utility from a good divided by its price MUs MU𝐽
• < , buy more jeans and less sweaters
Ps P𝐽
MUs MU𝐽
• =
Ps P𝐽

Why does the demand curve have a negative slope?

Discussion Question: Where is the point on the demand curve for Summary
jeans? • Changes in prices and income change the best affordable
choices
Wrap it up Part 1

• Assuming that Grove decides to increase the price of its Kopi

from $1 to $3, and that results in a 20% decrease in demand,
Calculate the price elasticity of demand for Kopi.
20%/100% = 0.2
• What would the demand curve look like if the increase in price,
does not cause a change in demand?

Wrap it up Part 2
• “For every right shoe, I need exactly one left shoe”
• Income=$1800
• The price of left shoe=$300, the price of right shoe=$600
• What is the best affordable choice?
Discussion Question: Best affordable choice for perfect complements
• What would the demand curve look like if the increase in price,
results in an infinite decrease in demand?

KEY IDEAS FOR LECTURE 3

• The price elasticity of demand is a measure of the responsiveness of the quantity
demanded of a good to a change in its price
• The buyer’s problem has three parts: what you like, prices, and your budget
• An optimizing buyer makes decisions at the margin
• An individual’s demand curve reflects an ability and willingness to pay for a good or
service
The Big Picture: Demand (Preference, Budget Constraint) + Supply Product Curves
→ Market Equilibrium How the firm’s total product, marginal product, and average
Firm’s decisions product change as the firm varies the quantity of labor
1. What industry to enter?
2. How to produce at minimum cost: (How much labor and Total Product Curve for ECON Cheeseman
capital to use)
3. How much to produce? (Maximize Profit)
4. How do firms make these decisions?
KEY IDEAS FOR LECTURE 4
• The seller’s problem has three parts: production, costs, and
revenues
• Almost all production processes have increasing marginal
returns initially and diminishing marginal returns eventually
• When marginal product exceeds average product, average
product increases. While when marginal product is below
average product, average product decreases
• In short run, we distinguish between variable cost and fixed
cost
• Firm will choose the level of quantity at which MR=MC
Marginal Product Curve for ECON Cheeseman Increasing and Decreasing Marginal Product
• Almost all production processes have:
• Increasing marginal product initially + Diminishing • Increasing marginal product: Specialization
marginal product eventually • Diminishing marginal product: Each additional worker
has less access to capital and less space to work in
• Law of diminishing returns
• As a firm uses more of a variable input with a
given quantity of fixed inputs, the marginal
product of the variable input eventually
diminishes

Average and Marginal Product TC=TVC+TFC

Curves - Total fixed cost is the same at each
output level
Marginal Product > Average Product - Total variable cost increases as
Average Product increases output increases
- Total cost also increases as output
Marginal Product < Average Product, increases
Average Product decreases

Marginal Product = Average Product,

Average Product is at its maximum

More Concepts of Costs Short-Run Cost

• Average fixed cost (AFC) =TFC/Q MC<AVC, AVC is falling
• Average variable cost (AVC)=TVC/Q MC >AVC, AVC is rising
• Average total cost (ATC)=TC/Q MC = AVC (Minimum
• TC =TVC+TFC----------ATC =AVC+AFC AVC)
• Marginal cost: The increase in total cost that
results from a one-unit increase in total product

Profit and Revenue Marginal Analysis and Supply Decision

• Profit=total revenue-total cost
• Total revenue (P☓Q) • If MR > MC: Profit increases if output increases
• The amount of money the firm brings in • If MR < MC: Profit decreases if output increases
from the sale of its outputs • If MR = MC: Profit is maximized
• Marginal revenue • Profit decreases if output changes in either direction
• Change in total revenue results from a
one-unit increase in the quantity sold
PERFECT COMPETITION (PART 2)
Step 1: Profit maximising output Step 2: MC = Supply Temporary Shutdown Decision
- Firms choose the quantity - Is it true for all prices? - TR < TVC
o MR = MC = P - Only when P > min (AVC) - P < AVC
- When P < AVC, quantity supplied
=0 Shut Down Decision – cut off price being
minimum price = min AVC

Step 3: Market supply curve Step 4: Short-run equilibrium

- Total quantity supplied by all

firms at each price
- Each firm’s capital and the
number of firms remain the
same
From individual supply to market supply
- 10000 Firms

Quantity Total Quantity

Supplied By supplied
Individual Firm

0.5 0 0 Short run profit From Short Run to Long Run

- Profit = TR – TC • Profit>0, <0, or =0
- (P-ATC)/Q • If Profit>0
0.79 854 8540000
• The number of firms increases
• New firms enter the industry
1.13 1225 12250000 • If Profit<0
• The number of firms decreases
1.41 1500 15000000 • Existing firms exit an industry

Profits and Losses in the Short Run - P =1.13, P=0.8, P=min (ATC)
FIRM ENTRY IN THE LONG RUN (FOR PRICE = 1.13) FIRM EXIT IN THE LONG RUN (FOR PRICE = 0.8)

Summary Summary
• Profit • Loss
• Entry • Exit
• Market supply curve shifts rightward • Market supply curve shifts leftward
• Price falls • Price rises
• No more incentive for entry (Eliminate the profit) • No more incentive to exit (Eliminate the loss)
• Entry stops (long-run equilibrium) • Exit stops (long-run equilibrium)

Implications of Long Run – Equilibrium Short Run Long Run

- Long run equilibrium price = min (ATC)
- Long run equilibrium profit = 0 Equilibrium Determined by market supply min ATC
Price and demand

Profit >,<,or =0 0

Quantity P=MC P=MC

WHAT HAPPENS IN THE SHORT RUN?

• Market demand curve shifts rightward, price rises, and • Profit>0=Firms enter the market
each firm increases the quantity it produces

WHAT HAPPENS IN THE LONG RUN ?

Enough firms have entered, and firms make zero profit. Entry More firms and higher market quantity
stops
MONOPOLY 2 conditions
- Extreme market structure - No close substitute
- Only one seller provides a good or service that has o With a close substitute, the monopoly firm faces
no close substitutes competition from the producers of the substitute
- Barriers to entry
o Constraint that protects a firm from potential competitors
o Eg govt licence, copyright, and patent.

TWO MORE MARKET STRUCTURES (THAT LIES BETWEEN PERFECT

COMPETITION AND MONOPOLY)

Many competing firms – Products are differentiated → MONOPOLISTIC

COMPETITION (no barriers to entry, any number of firms can enter at any
time. They do have some degree of market power because they produce
different products.
Few firms competing → OLIGARCHY.
TWO MORE MARKET STRUCTURES (THAT LIES BETWEEN PERFECT
IS MONOPOLY LEGAL ? COMPETITION AND MONOPOLY)
Being a dominant business is fine, but in every country has
laws or institutions to promote competition and regulate Many competing firms – Products are differentiated → MONOPOLISTIC
anti-competitive activities. COMPETITION (no barriers to entry, any number of firms can enter at any
Singapore – CCCS oversees anti-competitive activities. time. They do have some degree of market power because they produce
- Merger – Uber and Grab – uber fined for this. different products.
- Anti-competitive agreements Few firms competing → OLIGARCHY.
o CCCS case 2018, penalised 13 fresh chicken
distributors for 1) coordinated amount and CHARACTERISTICS OF MARKET STRUCTURES
timing of price increases, 2) agreeing not to
compete for each other’s customers in the The number of firms is the key to determine the market structure.
market.
- Abuse of dominance.
o Protecting or enhancing the dominant position
is illegal
o Deter competitors from entering the market
o Drive competitors out of the market
o SISTIC Monopoly Case – largest ticketing
agency in Singapore
▪ Fined 769K
▪ Exclusive dealing: Agreement with
Esplanade
▪ All events must use SISTIC as the only
ticketing provider →deters
competitors

Oligopoly
An oligopoly is a market structure characterized by a small number of firms that dominate the industry. These firms hold significant
market power, allowing them to influence prices and output levels. In an oligopoly, firms are interdependent, meaning the actions of
one firm can directly impact the others. This often leads to strategic behaviour, such as price-fixing, collusion, or non-price competition
(like advertising and product differentiation). Examples of oligopolistic industries include the automotive, airline, and
telecommunications sectors. The presence of few competitors makes the market less competitive than perfect competition but more
so than a monopoly.
Can be divided into TWO CATEGORIES
HOMOGENEOUS PRODUCTS DIFFERENTIATED PRODUCTS
o Steel o Cereal
o Gasoline o Automobiles
o Computer hard drives o Laundry detergent
o Cigarettes
Oligopolies’ Problem
2 characteristics
- Significant barriers to entry (very similar to monopoly)
- High degree of interdependence between the few firms (quite unique)
o Only few firms are operating
o Each firm’s profits and maybe the profit maximising choices really depends on other firms’ actions/ There exists a high
degree of interdependence between the few firms.
One of the easiest cases of oligopoly is an industry with two competing firms – duopoly.
 DUOPOLY WITH HOMOGENEOUS PRODUCTS OLIGOPOLY WITH DIFFERENTIATED PRODUCTS
Industry with two firms that compete against one another by A more realistic industry is a set of firms that make similar but not
setting prices homogenous/different products
- Betrand competition Boeing VS Airbus, Coke VS Pepsi, Apple VS Samsung
Assumption: The firms are producing H OMOGENEOUS PRODUCTS Three important points
- These differentiated products are substitutes.
Example: Bottled Water o Consumers have incentive to substitute among those
• A and B products.
• Total demand=1000 bottles of water - As a result, no company will be able to capture the entire
• If your price is less than B’s price, demand = 1000 market
• If you price is equal to B’s price, demand = 0 - 1000 - When consumers view the products as less substitutable,
• If your price is more than B’s price, demand = 0 economic profits will be higher.
• What does the demand curve look like? o Consumers view the products as being somewhat
unique. This differentiation helps the seller a lot,
because the market structure is actually closer to a
monopoly. So, economic profits will be higher as well.
Equilibrium Apple Versus Samsung
Both have a MC of $1 • Innovation and Differentiation
A is charging $5 • Quality
B is charging $4 • Global Expansion and Localized Approach:
Is this an equilibrium? • Affordable Pricing
What should A do in response? • Marketing and Promotion
Then, what should B do in • Customer Service and Support
response? • Partnerships and Collaborations
Residual demand Where does it end?
It depends on the prices
charged by A and B • P=MC=$1
• Profit=0
• How could A and B avoid a
price war?
COLLUSION PROBLEMS OF COLLUSION KEY IDEAS FOR LECTURE 5
• Firms conspiring to set the • Illegal • Firms will shut down when price is lower than minimum AVC
market price • Strong incentive to cheat • Long-run equilibrium price equals min(ATC) and equilibrium
• P=$5, each company will • (4.9-1)1000=3900 profit is zero
get half of the demand • Detection and punishment • Monopoly represents an extreme market structure with a
• Profit=(5-1)500=2000 of cheaters single seller
• Two market structures that lie between perfect competition
and monopoly are oligopoly and monopolistic competition
• The residual demand curve depends on the prices of all firms
in the industry
 Consumer Surplus
- Difference between the consumer’s willingness to pay for a product and the cost of purchasing the product.
o Willingness to pay 1 mil for a house.
o Only paid 0.8 million
o CS is then 0.2 million.
- CS is the area below the demand curve and above the price. (downward sloping demand curve)
Example: Willingness to Pay for Candy.
- $0.9 for the first candy
- $0.7 for the second candy
- $0.5 for the third candy
- $0.1 for the fourth candy

Can we construct the demand curve for candy? Yes, we can!

Looks a bit weird. It is because candy is not divisible. So,
suppose the price of candy is 30 cents.

How can we quantity the lower satisfaction? Calculate the change

in consumer surplus. The blue shaded area represents the
decrease in consumer surplus, which is $750.

Producer Surplus
- Difference between the amount producers actually receive by producing and selling a certain unit and the
amount producers have to receive to produce a certain unit. (price minus cost essentially)
- PS is the area below the price and above the supply curve.

Example: PS in the market for houses.

- 3 construction firms
- Each firm can only build 1 house in a year.
- Firm 1 cost = 0.4 million
- Firm 2 cost = 0.5 million
- Firm 3 cost = 0.6 million.
Suppose the market price is 0.7 million. Then, all three firms will build a
house.

Total Surplus (CS+PS)

- Efficient market outcome - Not efficient market outcome
o Total surplus is maximised. o Total surplus is not maximised.
o Suffer from deadweight loss (net loss in total
surplus).
Price Discrimination

Price discrimination is a pricing strategy where a seller charges different prices for the same product or service
to different consumers or groups. The goal is to maximize profits by tailoring prices based on consumers'
willingness to pay. There are various forms of price discrimination, such as first -degree (individualized pricing),
second-degree (tiered pricing based on quantity or features), and third-degree (charging different prices to
different demographic groups).

Charging different prices to different consumers for the same good, 1st, 2nd, and 3rd degree.

1st degree price discrimination Example of 3rd degree price discrimination

- Charge each consumer at his-her willingness to pay - Age
(hypo situation) o Senior discount, student discount
o Closest example would be at the auction. - Gender
Consumer surplus here is ZERO, CS=0 o Ladies’ night in bars and clubs
2nd degree price discrimination - Geographical location
- Quantity discount o Staples charges different prices based on where
- Buy two get 15% discount, for example. the online shoppers live (by postal code).
▪ E.g., MacDonalds in Orchard would
3rd degree price discrimination charge higher prices.
- Firm offers different prices for different groups/segments - Mac users vs. PC users in the future?
of consumers. o Orbitz (online travel agency) recommends
pricier hotels to Mac users.

Progressive Tax System

A progressive tax system is a structure in which the rate of taxation increases as the taxable income of an individual rises .
In other words, higher-income earners face a higher percentage of taxation on their income, while those with lower incomes
are taxed at lower rates. The objective of a progressive tax system is to distribute the tax burden more equitably, placing a
relatively heavier burden on those with greater financial means. This approach is often designed to promote income equality
and address socioeconomic disparities within a society.

Redistribute Income to Address Fairness Issues

Average tax rate = total taxes divided by total income
- On average, for one dollar, how much you need to pay
for tax.

Marginal tax rate = the rate paid on the last dollar of income

Average and marginal tax rates are higher for households with
higher income.
- Takes higher share from higher income earning
individuals in order to decrease inequality.

- Suppose your taxable income is $60K, which falls in the third

category.
- For each dollar, 14.98 cents for tax.
- Marginal tax rate – last dollar, 22%

Suppose your income has doubled to 120k.

(9875 x 0.1) + ((40125 - 9875) x 0.12) + ((85525 -40125) x 0.22) +
((120000-85525) x 0.24) = 22879.50 (total tax payable, which is
more than doubled).
Average tax rate = 19.07 %, Marginal rate, 24%
WELFARE ANALYSIS TAX INCIDENCE
- No government intervention - Who bears the burden of a tax
o TS = CS +PS o How the burden of taxation is distributed.
- With government intervention (tax)
o TS = CS + PS + tax revenue collected
- With government intervention (subsidy) 𝐷𝐷 ↑ 𝑆𝑆 ↓
o TS = CS + PS – subsidy payment
TAX ON PRODUCERS
$3 TAX ON SELLERS , CS, PS, $3 TAX PER HAT WITHOUT TAX, BEFORE AFTER
DWL. WHAT FRACTION OF THE SUPPLY: 𝑷 = 𝟎. 𝟏𝑸𝒔 (RECALL CHANGE IN 𝟎. 𝟏𝑸𝒔 = 𝟔 − 𝟎. 𝟎𝟓𝑸𝒅, TAX TAX
$3 TAX IS PAID BY THE BUYERS ? Y/ CHANGE IN X ), DEMAND: 𝑷 = 𝟔 − 𝑃𝑆 = 40 𝑥 4 𝑥 0.5, P CONSUMER PAY
𝟎. 𝟎𝟓𝑸𝒅 𝐶𝑆 = 2 𝑥 40 𝑥 0.5,
𝑇𝑆 = 120 $4 PER $5
Price Supply Demand UNIT PER
UNIT
$0 0 120 WITH TAX, EQ IS,
𝟑 + 𝟎. 𝟏𝑸𝒔 = 𝟔 − 𝟎. 𝟎𝟓𝑸𝒅, P PRODUCERS
$1 10 100 RECEIVE
𝑃𝑆 = 2 𝑥 20 𝑥 0.5,
$2 20 80 𝐶𝑆 = 1 𝑥 0.5 𝑋 20 = 10, $4 PER $2
𝑇𝑆 = 10 + 20 + 60 (𝑡𝑎𝑥) = 90 UNIT PER
$3 30 60
UNIT
$4 40 40 DWL=30 GOVERNMENT
$5 50 20 RECEIVES
Incidence on Consumers $0 PER $3
$6 60 0 = $1 per unit UNIT PER
Incidence on Producers UNIT
= $2 per unit

TAX ON CONSUMERS
$3 TAX ON BUYERS , CS, PS, $3 TAX PER HAT WITHOUT TAX, BEFORE AFTER
DWL. WHAT FRACTION OF THE SUPPLY: 𝑷 = 𝟎. 𝟏𝑸𝒔 (RECALL CHANGE IN 𝟎. 𝟏𝑸𝒔 = 𝟔 − 𝟎. 𝟎𝟓𝑸𝒅, TAX TAX
$3 TAX IS PAID BY THE BUYERS ? Y/ CHANGE IN X), DEMAND: 𝑷 = 𝟔 − 𝑃𝑆 = 40 𝑥 4 𝑥 0.5, P CONSUMER PAY
*AFFECTS DD CURVE 𝟎. 𝟎𝟓𝑸𝒅 𝐶𝑆 = 2 𝑥 40 𝑥 0.5,
𝑇𝑆 = 120 $4 PER $5
UNIT PER
Price Supply Demand WITH TAX, EQ IS, UNIT
P PRODUCERS
$0 0 120 𝟎. 𝟏𝑸𝒔 = 𝟑 − 𝟎. 𝟎𝟓𝑸𝒅,
RECEIVE
𝑃𝑆 = 2 𝑥 20 𝑥 0.5,
$1 10 100 𝐶𝑆 = 1 𝑥 0.5 𝑋 20 = 10, $4 PER $2
$2 20 80 𝑇𝑆 = 10 + 20 + 60 (𝑡𝑎𝑥) = 90 UNIT PER
UNIT
$3 30 60
DWL=30 GOVERNMENT
$4 40 40 RECEIVES
$5 50 20 Incidence on Consumers $0 PER $3
= $1 per unit UNIT PER
$6 60 0 Incidence on Producers UNIT
= $2 per unit

$10 Subsidy on Producers

WITHOUT SUBSIDY, Q = 9, P = 15
CS = A + B, PS = D + F, TS = A + B + D + F

WITH SUBSIDY. Q = 12, P = 10

CS = A + B + D + E, PS = B +C +D + F

SUBSIDY = B + D + C + E + G

TS = A + B + D + F – G

DWL = G