Econ 100.

2 Microeconomics

Discussion Class
September 27, 2018
UP School of Economics

Glacer Vasquez
glacervasquez@gmail.com

9/27/18 Econ 100.2 Discussion Class   1

  
 
 
Ques&ons?  
 

9/27/18 Econ 100.2 Discussion Class   2

Reminders

Ø  Exercise  Set  3  will  be  uploaded  today.  

Ø  Results  

 
 
 
9/27/18 Econ 100.2 Discussion Class   3
Recap

Ø  Welfare  Economics  

Ø  Consumer  
•  Willingness  to  Pay  
•  Willingness  to  Pay  and  Demand  
•  Consumer  Surplus  
Ø  Producer  
•  Cost  
•  Cost  and  Supply  
•  Producer  Surplus  
Ø  Total  Surplus  
Ø  Market  Efficiency  

9/27/18 Econ 100.2 Discussion Class   4

Recap
P
1000

900

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   5
 TAXATION AND
efficiency
9/27/18 Econ 100.2 Discussion Class   6
Outline

Ø  The  Effects  of  a  Tax  

Ø  The  Deadweight  Loss  
Ø  What  determines  the  size  of  DWL?  
Ø  DWL  and  Tax  Size  
Ø  Revenue  and  Tax  Size  

 
9/27/18 Econ 100.2 Discussion Class   7
Our Goal for Today: Market Efficiency
P
1000

900

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   8
The Effects of a Tax

•  A  tax  drives  a  wedge  between  the  price  buyers  pay  and  the  price  
sellers  receive.    
•  A  tax  raises  the  price  buyers  pay  and  lowers  the  price  sellers  
receive.      
•  A  tax  reduces  the  quan&ty  bought  &  sold.      

 
 
9/27/18 Econ 100.2 Discussion Class   9
The Effects of a Tax
P
1000

900

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   10
The Effects of a Tax
P
1000
What is the equilibrium price and
900 quantity?

800

700

600
S
500

PE 400

300

200
D
100

0
0 50 100 150 200 250 300
QE Q
9/27/18 Econ 100.2 Discussion Class   11
The Effects of a Tax
P
1000
Determine the consumer and producer
900 surplus.

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   12
The Effects of a Tax
P
1000
Determine the total surplus.
900

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   13
The Effects of a Tax
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=200
300

200
D
A tax drives a wedge between the
100 price buyers pay and the price sellers
receive.
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   14
The Effects of a Tax
P
1000
What happens to the price buyers pay
900 and the price sellers receive?

800

700

600
S
PB 500

400

PS 300

200
D
A tax raises the price buyers pay and
100 lowers the price sellers receive.

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   15
The Effects of a Tax
P
1000
What happens to the quantity bought
900 and sold?

800

700

600
S
PB 500

400

PS 300

200
D
A tax reduces the quantity bought and
100 sold.

0
0 50 100 150 200 250 300
QT Q
9/27/18 Econ 100.2 Discussion Class   16
The Effects of a Tax
P
1000
Determine the consumer and producer
900 surplus.

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   17
The Effects of a Tax
P
1000
Determine the tax revenue.
900

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   18
The Effects of a Tax
P
1000
What is the tax revenue paid by the
900 consumers? producers?

800

700

600
S
500
   
400    
   
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   19
The Effects of a Tax
P
1000
What is the tax revenue paid by the
900 consumers? producers?

800

700

600
S
500
   
400
   
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   20
The Effects of a Tax
P
1000
Determine the total surplus.
900

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   21
The Effects of a Tax
P
1000
Determine the total surplus.
900

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   22
The Effects of a Tax
P
1000
Notice the change in total surplus.
900

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   23
The Deadweight Loss
P
1000
What is that yellow triangle called?
900

800

700

600
S
500

400

300

200
D
Deadweight loss of a tax. It is the fall
100 in total surplus that results from a
market distortion such as a tax.
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   24
The Deadweight Loss
P
1000
Let’s examine the deadweight loss.
900
Because of the tax, the units between
800 QT and QE are not sold. The value of
these units to buyers is greater than
700 the cost of producing them, so the tax
prevents some mutually beneficial
600 trades.
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
QT QE Q
9/27/18 Econ 100.2 Discussion Class   25
  
 
 
Ques&ons?  
 

9/27/18 Econ 100.2 Discussion Class   26

What determines the size of DWL?

•  Price  elas&ci&es  of  supply  and  demand.  

•  The  price  elas&city  of  demand  measures  how  much  QD  changes  
when P changes.    
•  The  price  elas&city  of  supply  measures  how  much  QS changes  
when  P  changes.    
 

 
9/27/18 Econ 100.2 Discussion Class   27
What determines the size of DWL?
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=200
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   28
What determines the size of DWL?
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800
S
700

600
T=200
500

400

300

200
•  the more inelastic is supply D
•  harder for firms to leave the market
•  smaller decrease in Q
100
•  smaller deadweight loss
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   29
What determines the size of DWL?
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=200
300

200
•  the more elastic is supply D
•  easier for firms to leave the market
•  larger decrease in Q
100
•  larger deadweight loss
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   30
What determines the size of DWL?
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=200
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   31
What determines the size of DWL?
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800 •  the more inelastic is demand

•  harder for consumers to leave the
700 market
•  smaller decrease in Q
600
•  smaller deadweight loss S
500

400

300
T=200
200

100
D
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   32
What determines the size of DWL?
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800 •  the more elastic is demand

•  easier for consumers to leave the
700 market
•  larger decrease in Q
600
•  larger deadweight loss S
500

400 T=200
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   33
What determines the size of DWL?

Compare  the  size  of  DWL    

•  short-­‐run  vs  the  long-­‐run  
•  necessi&es  vs  luxuries      
•  goods  with  subs&tutes  vs  goods  without  close  subs&tutes  

9/27/18 Econ 100.2 Discussion Class   34

  
 
 
Ques&ons?  
 

9/27/18 Econ 100.2 Discussion Class   35

DWL and Tax Size
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=200
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   36
DWL and Tax Size
P
1000
Suppose a PhP300 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=300
300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   37
DWL and Tax Size
P
1000
Suppose a PhP400 per unit tax is
900 levied on good Z.

800

700

600
S
500

400 T=400
300

200
D
100 Doubling the tax results in a more than
double DWL.
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   38
DWL and Tax Size
P
1000
Suppose a PhP600 per unit tax is
900 levied on good Z.

800

700

600
S
500

T=600
400

300

200
D
100 Tripling the tax results in a more than
triple DWL.
0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   39
DWL and Tax Size

DWL

Tax size

When a tax increases, DWL rises even

more.

9/27/18 Econ 100.2 Discussion Class   40

Revenue and Tax Size
P
1000
Suppose a PhP200 per unit tax is
900 levied on good Z.

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   41
Revenue and Tax Size
P
1000
Suppose a PhP400 per unit tax is
900 levied on good Z.

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   42
Revenue and Tax Size
P
1000
Suppose a PhP600 per unit tax is
900 levied on good Z.

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   43
Revenue and Tax Size

Tax Revenue

The Laffer Curve

Tax size

At lower levels of tax, increasing the tax will

increase tax revenue, however, at higher levels of
tax, increasing the tax will decrease tax revenue.

9/27/18 Econ 100.2 Discussion Class   44

  
 
 
Ques&ons?  
 

9/27/18 Econ 100.2 Discussion Class   45

Review
P
1000
Suppose a PhP400 per unit tax is
900 levied on good Z.

800

700

600
S
500

400    

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   46
Review
P
1000
Suppose a PhP400 per unit tax is
900 levied on good Z.

800

700

600
S
500    

400

300    

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   47
Review
P
1000
Suppose a PhP400 per unit tax is
900 levied on good Z.

800

700

600
S
500

400

300

200
D
100

0
0 50 100 150 200 250 300
Q
9/27/18 Econ 100.2 Discussion Class   48
  
 
 
Ques&ons?  
 

9/27/18 Econ 100.2 Discussion Class   49

Outline

Ø  The  Effects  of  a  Tax  

Ø  The  Deadweight  Loss  
Ø  What  determines  the  size  of  DWL?  
Ø  DWL  and  Tax  Size  
Ø  Revenue  and  Tax  Size  

 
9/27/18 Econ 100.2 Discussion Class   50
Where are we now?
C. Markets and Welfare

1. Market Efficiency
2. Taxation and Efficiency

Mankiw, Chapters 7-9

Samuelson and Nordhaus, Chapter 17
Harford, Chapter 3
Landsburg, Chapter 8

D. Market Failures and Economics of the Public Sector

1. Externalities
2. Public goods

Mankiw, Chapters 10-11

Samuelson and Nordhaus, Chapter 11, 16-17
Levitt and Dubner [2009], Chapter 5
Lansburg, Chapter 9
Miller, et.al, Chapter 25 and 27

SECOND EXAMINATION
9/27/18 Econ 100.2 Discussion Class   51
What’s next?

Next:  Externali-es  
 
 

9/27/18 Econ 100.2 Discussion Class   52

  
 
 
Thank  you  
 

9/27/18 Econ 100.2 Discussion Class   53