Introduction to enconomy.pptVIP

* Result: Price paid by consumers will increase. Quantity transacted will decrease. However, note that the price increase in the market is normally less than the amount of unit tax. Tax burden will normally be shared between the consumers and the suppliers. The steeper the demand curve (or more inelastic), the more the price increase (for a given amount of unit tax) and the larger share of the tax burden that consumers have to bear. * * * * * AF3901 Economics for Engineers Topic 2 * Revision of Topic 1 What is demand (D)? A change in D versus a change in Qd What is supply (S)? A change in S versus a change in Qs What happens at equilibrium? Qd = Qs = quantity transacted Why would there be a change in equilibrium? A change in D or S or both Can you tell how P* and Q* will change? * Contents of Topic 2 Motivations Why does a government regulate the price of a good or service? Will minimum wage increase unemployment in Hong Kong? Consumer surplus, producer surplus and social surplus Price ceiling and price floor Price elasticity of demand Implications for total revenue and tax revenue * Economic surpluses created in the market Social surplus = Consumer surplus + Producer surplus Consumer surplus is the excess of marginal benefit (max. price willing to pay) over the actual price, summed over the quantity consumed. Producer surplus is the excess of price over marginal cost (min. price willing to accept), summed over the quantity produced. * Consumer Surplus (CS) P = 80, Lisa buys 1, CS = 0 P = 60, Lisa buys 2, CS = 20 P = 40, Lisa buys 3, CS = 40+20 = 60 Hamburgers) Hamburgers) Hamburgers) Hamburgers) CS = Total benefit derived from the good – total cost of (payment for) the good The lower the price, the larger the CS; The higher the price, the smaller the CS. Demand Consumer surplus illustrated with a “Digital” Demand Curve Units/day 1 1 2 3 4 5 6 7 8 9 10 11 12 2 3 4 5 6 7 8 9 10 11 12 0 Marginal benefit of vanilla ice cream ($/unit) When P = $6, Qd