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ECON 2P23 Tutorial One
Introduction
Dana MareiEmail: [email protected]
Office: PL 420
Office Hours: Monday 15.0016.00 Tuesday 9.3010.30
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
https://sites.google.com/site/danamareiclass/
What can you find at the website?
•Tutorial Materials
•Additional Problems for Practice
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
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
PaysBuyer
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
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
ceivesBuyer
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!
Good Luck on Your Quiz!