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Revision Achievement Standard 3.1 4credits Demonstrate understanding of the efficiency of market equilibrium Name ______________________ Define the following words • Allocative Efficiency_______________________________________ _______________________________________________________ • Consumer Surplus ________________________________________ _______________________________________________________ • Producer Surplus _________________________________________ _______________________________________________________ • Dead Weight Loss ________________________________________ _______________________________________________________ • Law of Demand __________________________________________ _______________________________________________________ • Law of Supply _______________________________________________________ _______________________________________________________ Define the following words • Allocative Efficiency A point where no one can be made better off without someone being made worse off. (Consumer and producers surplus is maximised and there is no DWL) • Consumer Surplus The difference between what consumers are willing to pay and the actual price paid for a commodity • Producer Surplus The difference between the revenue received by a producer and the cost necessary to produce the good • Dead Weight Loss A Loss of allocative efficiency in the economy • Law of Demand As price increases quantity demanded decreases vice versa ceteris paribus • Law of Supply As price increases quantity supplied increases vice versa ceteris paribus MARKET EQUILIBRIUM AND ALLOACTIVE EFFICIENCY 1. Label the demand and supply curves 2. Label both axis’s 3. • • • • Use the diagram to show Equilibrium Price (Pe) Equilibrium Quantity (Qe) Producer Surplus (Colour Blue) Consumer Surplus (Colour Red) • Use an arrow to show the allocative efficient point Producer Surplus S Price Allocative efficient point Pe D Qe Quantity Changes to Demand • List the four factors that will shift the demand curve • T___________________________ C _____________________ S______________________ • I ___________ Decrease In demand Increase In demand On both the graphs. Label equilibrium price and quantity. Then shade in the NEW consumer Red and producer surplus Blue Changes to Demand • List the four factors that will shift the demand curve • Tastes and preferneces • Complements • Substitutes • Income Decrease In demand Increase In demand On both the graphs. Label equilibrium price and quantity. Then shade in the NEW consumer Red and producer surplus Blue Changes to Supply • • • • • • • List the factors that can cause a shift of the supply curve C____________________________ E__________________ P____________________ P_____________________________ T_____ S______________ Decrease In Supply Increase In Supply On both the graphs. Label equilibrium price and quantity. Then shade in the NEW consumer surplus Red and producer surplus Blue Changes to Supply • • • • • • • List the factors that can cause a shift of the supply curve Cost of Production Environmental Productivity Price of related goods Taxes Subsidies Increase In Supply Decrease In Supply S S’ On both the S’ graphs. Label equilibrium price and quantity. Then shade in the NEW consumer surplus Red and producer surplus D Blue S D Disequilibrium Define the following words • Surplus ________________________________________________ ______________________________________________________ • Shortage _______________________________________________ ______________________________________________________ Show the effect of a market price above equilibrium Show the effect of a market price below equilibrium Disequilibrium Define the following words • Surplus When quantity supplied is greater than quantity demanded • Shortage When quantity demanded is greater than quantity supplied Show the effect of a market price above equilibrium Show the effect of a market price below equilibrium S S D D QD QS Surplus QS QD Shortage Restoring Equilibrium • Following a surplus explain how market equilibrium is restored _____________________________________________ _____________________________________________ ____________________________________________ __________________________________________ • Following a shortage explain how market equilibrium is restored _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ Restoring Equilibrium • Following a surplus explain how market equilibrium is restored When a surplus is created, producers will respond by lowering prices to get rid of excess stock. As prices decrease the quantity supplied decreases following the law of supply and the quantity demanded increases following the law of demand. This process continues until equilibrium is restored. • Following a shortage explain how market equilibrium is restored When a shortage is created, consumers will bid up the prices as they don’t want to miss out on the good. As prices increase, the quantity supplied increases as the good becomes more profitable following the law of supply and quantity demanded decreases as the good becomes less affordable following the law of demand. This process continues until equilibrium is restored. Restoring Equilibrium 1. Show the effects of the changes on the graphs below 2. Explain the situation created (Either Shortage or Surplus) 3. Say how the market will be restored (Either consumers bid up prices or producers lower prices) Increase in Supply Increase in demand Situation created: S S Situation created: _______________ _______________ How will the market return to equilibrium? _______________ D _______________ Decrease in demand S Situation created: _______________ How will the market return to equilibrium? _______________ D _______________ D Decrease in Supply S How will the market return to equilibrium? _______________ _______________ Situation created: _______________ How will the market return to equilibrium? _______________ D _______________ Restoring Equilibrium 1. Show the effects of the changes on the graphs below 2. Explain the situation created (Either Shortage or Surplus) 3. Say how the market will be restored (Either consumers bid up prices or producers lower prices) Increase in Supply Increase in demand Situation created: S S Situation created: S1 Surplus Shortage How will the How will the P1 market return to market return to P P equilibrium? equilibrium? P1 Producers will Consumers will bid D1 lower prices up the price D D Q Q1 Decrease in Supply Q Q1 Decrease in demand S Situation created: Surplus How will the market return to equilibrium? Producers will D1 D lower prices P P1 Q1 Q S1 S P1 P D Q1 Q Situation created: Shortage How will the market return to equilibrium? Consumers will bid up the price Price Max S Price Pm D Qm Quantity 1. Show the effect of a Price Maximum on the diagram 2. Label the new price as Pmax 3. Label the new quantity demanded as QD 4. Label the new quantity supplied as QS 5. Label the surplus/shortage that exists 6. Shade in the area of consumer surplus red 7. Shade in the area of producer surplus as blue 8. Shade in DWL in black A Maximum Price S Price Pm Pmax D Qm Quantity A Maximum Price •Qs decreases S Price •Although consumers would like to buy more producers only supply Qs Pm •There is a shortage Pmax D Qs Qm Qd Quantity A Maximum Price S Price New CS Pm Pmax D Qs Qm Quantity A Maximum Price S Price New PS Pm Pmax D Qs Qm Quantity A Maximum Price S Price DWL Pm Pmax D Qs Qm Quantity Price Min S Price Pm D Qm Quantity 1. Show the effect of a Price Minimum on the diagram 2. Label the new price as Pmin 3. Label the new quantity demanded as QD 4. Label the new quantity supplied as QS 5. Label the surplus/shortage that exists 6. Shade in the area of consumer surplus red 7. Shade in the area of producer surplus as blue 8. Shade in DWL in black A Minimum Price S Price Pm D Qm Quantity A Minimum Price S Price A minimum price is only effective when set above equilibrium price Pmin Pm D Qm Quantity A Minimum Price S Price •Qd decreases •Although producers would like to sell more they are unable to at this high price Pmin Pm D Qd Qm Quantity A Minimum Price S Price Pmin New CS Pm D Qd Qm Quantity A Minimum Price S Price Pmin New PS Pm D Qd Qm Quantity A Minimum Price S Price Pmin DWL Pm D Qd Qm Quantity Subsidy S Price Pm D Qm Quantity 1. Show the effect of a subsidy on the diagram 2. Label the new price consumers pay as PC 3. Label the new price producers receive as PP 4. Label the new quantity as Q1 5. Outline the total cost to the government in Black 6. Shade in the area of consumer surplus red stripes 7. Shade in the area of producer surplus as blue stripes 8. Shade in DWL in black A Subsidy S Price Pp S+Subsidy Pm Pc D Qm Q1 Quantity 1. Show the effect of a subsidy on the diagram 2. Label the new price consumers pay as PC 3. Label the new price producers receive as PP 4. Label the new quantity as Q1 5. Outline the total cost to the government in Black 6. Shade in the area of consumer surplus red stripes 7. Shade in the area of producer surplus as blue stripes 8. Shade in DWL in black Subsidy On the diagram, show the effect on the market for avocados after a subsidy payment of .60c per avocado Label the new Equilibrium price Pc and Quantity Q1 Before the subsidy Amount consumed =__________ Price consumers pay =________ Price producers receive =______ Total consumer expenditure =______________________ Total producer revenue =_______________________ After the subsidy Amount consumed =__________ Price consumers pay =________ Price producers receive =______ Amount of government expenditure =_______________ Total consumer expenditure =______________________ Total producer revenue =_______________________ Subsidy On the diagram, show the effect on the market for avocados after a subsidy payment of .60c per avocado Label the new Equilibrium price Pc and Quantity Q1 S + Sub pc Q1 Before the subsidy Amount consumed =__________ 80 000 Price consumers pay =________ 1.80 1.80 Price producers receive =______ Total consumer expenditure $144000 =______________________ Total producer revenue $144000 =_______________________ After the subsidy 90 000 Amount consumed =__________ Price consumers pay =________ $1.60 Price producers receive =______ $2.20 Amount of government .60 x 90000= $54000 expenditure =_______________ Total consumer expenditure 1.60 x 90000= $144000 =______________________ Total producer revenue 2.20 x 90000= $198000 =_______________________ Tax S Price Pm D Qm Quantity 1. Show the effect of a indirect Tax on the diagram 2. Label the new price consumers pay as PC 3. Label the new price producers receive as PP 4. Label the new quantity as Q1 5. Outline the total revenue to the government in Black 6. Shade in the area of consumer surplus red stripes 7. Shade in the area of producer surplus as blue stripes 8. Shade in DWL in black An Indirect Tax S+tax S Price Pc Pm Pp D Q1 Qm 1. Show the effect of a indirect Tax on the diagram 2. Label the new price consumers pay as PC 3. Label the new price producers receive as PP 4. Label the new quantity as Q1 5. Outline the total revenue to the government in Black 6. Shade in the area of consumer surplus red stripes 7. Shade in the area of producer surplus as Quantity blue stripes 8. Shade in DWL in black Tax On the diagram, show the effect on the market for Fireworks of a $4 tax per box Label the new Equilibrium price Pc and Quantity Q1 Before the Tax Amount consumed =__________ Price consumers pay =________ Price producers receive =______ Total consumer expenditure =______________________ Total producer revenue =_______________________ After the Tax Amount consumed =__________ Price consumers pay =________ Price producers receive =______ Amount of government revenue =_______________ Total consumer expenditure =______________________ Total producer revenue =_______________________ Tax On the diagram, show the effect on the market for Fireworks of a $4 tax per box Label the new Equilibrium price Pc and Quantity Q1 S + Tax Pc P Q1 Q Before the Tax 100 Amount consumed =__________ Price consumers pay =________ $14 $14 Price producers receive =______ Total consumer expenditure $14 x 100 =$1400 =______________________ Total producer revenue =_______________________ $14 x 100 =$1400 After the Tax 75 Amount consumed =__________ Price consumers pay =________ $16 Price producers receive =______ $12 Amount of government revenue 4 x 75 = $300 =_______________ Total consumer expenditure 16 x 75 = 1200 =______________________ Total producer revenue 12 x 75 = 900 =_______________________ Incidence of a Tax S+tax • Colour the Area of the incidence of the tax on consumers RED (The area of consumer surplus they have lost and is now tax revenue to the government) S Price Pc Pm Pp D Q’ Qm Quantity • Colour the area represents the incidence of the tax on producers BLUE (The area of producer surplus they have lost and is now tax revenue to the government) Incidence of a Tax S+tax • Colour the Area of the incidence of the tax on consumers RED (The area of consumer surplus they have lost and is now tax revenue to the government) S Price Pc Pm Pp D Q’ Qm Quantity • Colour the area represents the incidence of the tax on producers BLUE (The area of producer surplus they have lost and is now tax revenue to the government) Price Elasticity Of Demand • Define the following • Inelastic _______________________________________ ______________________________________________ • Elastic ________________________________________ ______________________________________________ Elastic Demand Curve Inelastic Demand Curve Price Elasticity Of Demand • Define the following • Inelastic When the price increases the quantity demanded falls by proportionately less • Elastic When the price increases the quantity demanded falls by proportionately more Elastic Demand Curve Inelastic Demand Curve D D Incidence of a Tax and Elasticity's Relatively Inelastic Demand Relatively Elastic Demand For both graphs 1. Colour the Area of the incidence of the tax on consumers RED 2. Colour the area represents the incidence of the tax on producers BLUE 3. Who pays most of the tax when the good is inelastic? ____________________________ 4. Who pays most of the tax when the good is elastic ?_____________________________ Incidence of a Tax and Elasticity's Relatively Inelastic Demand Relatively Elastic Demand For both graphs 1. Colour the Area of the incidence of the tax on consumers RED 2. Colour the area represents the incidence of the tax on producers BLUE 3. Who pays most of the tax when the good is inelastic? Consumers 4. Who pays most of the tax when the good is elastic ? Producers Exported Goods • Define Exports _________________________________________ • Explain why NZ is a price taker _____________________________ ______________________________________________________ On the graph • Draw an appropriate world price for an exported good • Label the domestic demand at that price as QD • Label the domestic supply at that price level as QS • Label the level of exports X • Shade in consumer surplus red • Shade in producer surplus Blue Exported Goods • Define Exports Goods that are produced in NZ and consumed/ sold overseas • Explain why NZ is a price taker NZ is a price taker because we are so small in relation to the rest of the world we have no influence over the world price ______________________________________________________ X World Demand curve World Price QD QS On the graph • Draw an appropriate world price for an exported good • Label the domestic demand at that price as QD • Label the domestic supply at that price level as QS • Label the level of exports X • Shade in consumer surplus red • Shade in producer surplus Blue Imported Goods • Define Imports _________________________________________ On the graph • Draw an appropriate world price for an imported good • Label the domestic demand at that price as QD • Label the domestic supply at that price level as QS • Label the level of imports M • Shade in consumer surplus red • Shade in producer surplus Blue Imported Goods • Define Imports Goods produced overseas and sold/ consumed in NZ World Price World supply curve QS QD Imports On the graph • Draw an appropriate world price for an imported good • Label the domestic demand at that price as QD • Label the domestic supply at that price level as QS • Label the level of imports M • Shade in consumer surplus red • Shade in producer surplus Blue Effects of a Tariff • Define a tariff _________________________________________ PW Explain what happens to allocative efficiency _______________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ On the graph • Label the domestic demand at the current world price as QD • Label the domestic supply at the current world price as QS • Show the effect of the government placing a tariff on imports • Label the new level demanded as QD1 • Label the new level supplied as QS1 • Label the new level of imports as M • Shade in DWL (Black) • Shade in the area of government revenue (Green) Effects of a Tariff • Define a tariff – A tax on imported Goods PW + Tariff PW QS QD1 QD QS1 M Explain what happens to allocative efficiency. A Tariff increases the world price. This causes consumer surplus to fall as the price paid by consumers increases . producer surplus to fall and governments increase the amount of revenue gained. However due to not all of the loss in consumer and producer surplus being gained in government revenue a loss in allocative efficiency occurs as represented by the DWL on the graph. On the graph • Label the domestic demand at the current world price as QD • Label the domestic supply at the current world price as QS • Show the effect of the government placing a tariff on imports • Label the new level demanded as QD1 • Label the new level supplied as QS1 • Label the new level of imports as M • Shade in DWL (Black) • Shade in the area of government revenue (Green)
