ib-economics-quantitative

Topic 3 – Specific Taxes and SubsidiesYou need to be able to: Plot demand and supply curves for a product from linear functions and then illustrateand/or calculate the effects of the imposition of a specific tax on the market (on price,quantity, consumer expenditure, producer revenue, government revenue, consumersurplus and producer surplus).Plot demand and supply curves for a product from linear functions and then illustrateand/or calculate the effects of the provision of a subsidy on the market (on price,quantity, consumer expenditure, producer revenue, government expenditure,consumer surplus and producer surplus).SPECIFIC TAXESPlot demand and supply curves for a product from linear functions and then illustratethe effects of the imposition of a specific tax on the market (on price, quantity,consumer expenditure, producer revenue, government revenue, consumer surplusand producer surplus).Step 1Use the linear functions given to draw the relevant demand and supply curves and to identifythe equilibrium price and quantity. (See pages 3 & 5, if you cannot remember how to do this.E.g.If the demand and supply functions for a product are Q D = 2000 – 200P andQ S = -400 + 400P.Step 2Change the supply function by taking the amount of the specific tax away from P, simplifythe equation, and then draw the new supply curve.E.g.If the government imposes a specific tax of $0.75, then the supply function ischanged, because the producers will have to pay the tax and so the price theyreceive falls by $0.75. Thus, the price in the equation is (P – 0.75) at each level.If we put this in the equation, we get Q S = - 400 + 400(P - 0.75).Then, we can simplify the supply function and draw the new supply curve.Produced by Ian Dorton & Jocelyn Blink Page 16