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ECON 2P23 Tutorial One

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### Transcript of Tutorial One Slides

ECON 2P23 Tutorial One

Introduction

Dana MareiEmail: [email protected]

Office: PL 420

Office Hours: Monday 15.00-16.00 Tuesday 9.30-10.30

or by appointment

Tutorials

• Go over the material covered in the lecture by Professors

• Clarify concepts and demonstrate their practical application by solving problems

• Prepare for the weekly quizzes and tests• Distribute the quizzes written the week

prior to the tutorial

Tutorials

What can you find at the website?

•Tutorial Materials

Tutorial One

• Demand and Supply• Taxes– Graphical Solution– Numerical Example

• Subsidies– Graphical Solution– Numerical Example

Demand and Supply

Things to Remember:

•Demand vs. Quantity Demanded

•Law of Demand:– Why do you purchase more when Price for the

good decreases?• Substitution Effect• Income Effect

Taxes: Numerical Example

Health Canada has decided that smoking is bad for your health. Accordingly, Health Canada is proposing a \$20 per unit tax on cigarettes. What are the economic effects of such a tax? The demand and supply equations are given below:

PQ

PQ

S

D

2033

120

Taxes: Numerical Example

Step 1: Make sure that the equations are in a normal equation form***starts with P

S

D

QP

QP

20

3120

Taxes: Numerical Example

Step 2: Find the original price and quantity by equating the functions together

45\$252020

25

420120

203120

S

SD

QP

Q

Q

QQ

Taxes: Numerical Example

Step 3: Now Analyze•Is the tax imposed on buyers or on suppliers?– If the tax is imposed on suppliers – shift the supply

curve to the left (add tax to the original supply equation)

– If the tax is imposed on buyers – shift the demand curve downwards (deduct tax from the original demand equation)

– If not specified in the problem – do any method you prefer (supply is usually easier)

REMEMBER: The result is the same!!!

Taxes: Numerical Example

Step 3 (continued):•Let’s assume that tax was imposed on suppliers •The new supply equation is:

SSS QQTaxQP 40202020

Original Supply Equation

Taxes: Numerical Example

ALTERNATIVE

Step 3 (continued): •What if the tax is imposed on buyers?•The new demand equation is:

DDD QQTaxQP 31002031203120

Original Demand Equation

Taxes: Numerical Example

Step 4 (continue with supply equation): Equate the new supply equation to the old demand equation to find the new quantity

Step 5: Substitute the new quantity into either the original demand equation or the new supply equation to determine the new price

20

440120

312040

Q

Q

QQ DS

60\$204040 SQP

Taxes: Numerical Example

Step 6: What amount of tax does the consumer pay? And what amount of tax does the supplier pay?

5\$4045:_

40202020:___

20

5\$1520:_

15\$4560:_

PaysSupplier

QPSoriginalinsub

Q

OR

PaysSupplier

S

n

New Price – Original Price=Tax Paid by Buyer

Tax– Tax paid by Buyer=Tax Paid by Supplier

Taxes: Numerical Example

Step 7: How much revenue does the government receive from the tax?

Fill out the information for the following:

400\$20*20\$_* unitsSoldQuantityTax

Original Price Burden of the tax on Consumer

Original Quantity Burden of the tax on the Supplier

New Price Government Revenue

New Quantity

Subsidies: Numerical Example

Health Canada decided that students do not obtain enough calcium in their diets. Accordingly, Health Canada is proposing that a \$20 per bottle subsidy be given to students who purchase milk. What are the economic effects of such a subsidy?The demand and supply equations are given below:

S

D

QP

QP

30

3110

Subsidies: Numerical Example

Step 1: Make sure that the equations are in a normal equation form

Step 2: Find the original price and quantity by setting the two functions equal to each other

50\$203030

20

303110

S

SD

QP

Q

QQ

Subsidies: Numerical Example

Step 3: Analyze•Is the subsidy given to buyers or to suppliers?– If the subsidy is given to the suppliers – shift the

supply curve to the right (deduct the subsidy from the original supply equation)

– If the subsidy is given to the buyers – shift the demand curve upwards (add subsidy to the original demand equation)

– If not specified in the problem – do any method you prefer (supply is usually easier)

REMEMBER: The result is the same!!!

Subsidies: Numerical Example

Step 3 (continued): Let’s assume that subsidy is given to the suppliersThe new supply equation is:

If subsidy is given to the buyers, then the new demand equation is:

SSS QQSubsidyQP 10203030

DDD QQSubsidyQP 31302031103110

Subsidies: Numerical Example

Step 4 (Subsidy is given to the suppliers): Equate the new supply equation to the original demand equation to find the new quantity

Step 5: Now substitute the new quantity into either the original demand equation or new supply equation to determine the new price

25

311010

Q

QQ DS

35\$251010 SQP

Subsidies: Numerical Example

Step 6: Find the amount of subsidy that a consumer gets and the amount of a subsidy that a producer receives

Step 7: How much does it cost the government to pay this subsidy?

5\$1520:Re_

15\$3550:Re_

ceivesSupplier

500\$25*20\$* QuantitySubsidyCost

Next Week

• Quiz Results

• Economic Effects of Import Supply

• Economic Effects of Export Demand

Don’t forget to practice and do extra problems on the website!