What is Market Supply?
The horizontal sum of all individual supply curves.
What is a key assumption of a Competitive Market?
Firms are price-takers (atomistic firms that cannot influence the market price).
What is the Equilibrium Price (p*)?
The price where quantity demanded equals quantity supplied: D(p) = S(p).
What happens in a market when the price is below equilibrium (p’ < p*)?
There is a shortage (excess demand), which creates upward pressure on prices until equilibrium is restored.
What happens in a market when the price is above equilibrium (p’ > p*)?
There is a surplus (excess supply), which creates downward pressure on prices until equilibrium is restored.
In a Fixed Supply case, what determines the equilibrium price and quantity?
The equilibrium price is determined by the demand curve. The equilibrium quantity is determined by the supply curve.
In a Horizontal Supply Curve case, what determines the equilibrium price and quantity?
The equilibrium price is determined by the supply curve. The equilibrium quantity is determined by the demand curve.
How can inverse demand and supply functions be used to find equilibrium?
Set the inverse demand price equal to the inverse supply price: P_D(q) = P_S(q).
What is the difference between a Sales Tax and an Excise Tax based on who pays?
A Sales Tax is legally imposed on buyers. An Excise Tax is legally imposed on sellers.
What is the difference between a Quantity Tax and an Ad Valorem Tax?
A Quantity Tax adds a fixed amount t to the price: p + t. An Ad Valorem Tax adds a percentage τ to the price: (1+τ)p.
What is the relationship between the buyer’s price (P_b) and seller’s price (P_s) when a quantity tax t is imposed?
P_b = P_s + t.
What is the relationship between the buyer’s price (P_b) and seller’s price (P_s) when an ad valorem tax τ is imposed?
P_b = (1 + τ)P_s.
What is the key insight about who bears the economic burden of a tax?
The statutory incidence (who legally pays the tax) does not determine the economic incidence (who actually bears the burden). The effect on market equilibrium is the same.
How do you model a tax imposed on buyers using inverse functions?
P_D(q) - t = P_S(q)
How do you model a tax imposed on sellers using inverse functions?
P_D(q) = P_S(q) + t
How does the elasticity of supply affect who bears the tax burden?
If the supply curve is elastic, buyers bear more of the tax. If it is inelastic, sellers bear more of the tax.
In the extreme case of a perfectly inelastic supply curve, who bears the entire tax burden?
Buyers bear the entire tax. They pay p + t**, while sellers receive p.
In the extreme case of a perfectly elastic supply curve, who bears the entire tax burden?
Sellers bear the entire tax. Buyers pay p*, while sellers receive p* - t.
What is Tax Incidence?
The study of how the burden of a tax is divided between buyers and sellers.
What is the formula for the division of the tax burden, approximately?
(P_b - p) / (p - P_s) ≈ - (ε_S / ε_D), where ε_S is elasticity of supply and ε_D is elasticity of demand.
WELFARE EFFECTS OF TAX
What does the area (A + C) represent on a standard tax graph?
The total tax revenue collected by the government.
What is the Deadweight Loss (Excess Burden) of a tax?
The loss of total surplus (consumer + producer surplus) that is not transferred to the government as tax revenue. It is a pure economic loss to society.
On a graph, which areas typically represent the deadweight loss?
The areas labeled B + D.
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Lesson 221
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Lesson 333
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Lesson 418
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Lesson 525
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Lesson 622
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Lesson 719
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Lesson 814
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Lesson 915
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Formulas18
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Market Equilibrium27
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Technology26
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Profit Maximization28
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Cost Minimization64
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Cost Curves17
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Firm supply24
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Industry Supply26
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General Equilibrium51
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Monopoly and Monopsony42
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Oligopoly32
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Externalities5
