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# Assessment Item Macro and Microeconomics - Essay Example

Summary
1a. Price elasticity of demand (PED) is the extent to which quantity demanded changes to a change in price (Bamord, Brunskill, Cain, Grant, Munday, Walton 2002). When PED of a good is between 0 and 1 then it is said to have inelastic demand with the good being more inelastic the closer the value is to zero…

## Extract of sampleAssessment Item Macro and Microeconomics

Download file to see previous pages... The reason for PED being elastic in the long run is that consumers may switch to alternate fuel sources such as gasoline or they may use alternate methods to travel other than private transport such as travelling in public buses. Consumers also take time to adjust to price changes (Grant 2000). In the short run if the price of petrol increases consumers will still demand petrol because it takes time to adjust their demand for petrol to a change in its price. 1c. As the PED of petrol is inelastic a rise in price will cause total expenditure on petrol to rise too. When demand is inelastic, price and total expenditure (also total revenue) move in the same direction (Sloman 2007). For example let us assume that the price of petrol rises in the long run from \$4 to \$5. At \$4 total expenditure on petrol was \$400 with consumption being 100 liters of petrol at PED of 0.2. Given the PED formula: PED= % change in quantity demanded % change in price At PED of 0.2, given a price of \$5 quantity demanded for petrol will fall by 5 liters to 95 liters. The total expenditure after the price increase would be \$5*95= \$475 (more than \$400). Hence this shows that as price is increased total expenditure will also increase if demand is inelastic. 2. Carbon tax is a form of pollution tax. ...
ment decides on a fixed price on one ton of carbon released, a tax is then imposed on the fossil fuels such as coal, petrol, natural gas as well as electricity. Carbon tax has many advantages. The purpose of a carbon tax is to reduce the effect of greenhouse gases by controlling carbon emissions from fossil fuels. The effect of a carbon tax is shown in the following diagram: The diagram shows that levying a carbon tax increases the cost of production. Hence the same quantity of goods is produced at a higher price. The carbon tax shifts the supply curve AS to AS’ by the amount of tax. As can be seen from the diagram the equilibrium point also moves from E to E’. The new equilibrium position is at a higher price and a lower quantity compared to the previous equilibrium position E. Hence the carbon tax is able to control carbon emissions from fossil fuels (as the price of carbon related goods increases less of these goods is demanded and less is consumed leading to a reduction in carbon emission). The tax revenue generated from this can then be used by the government on developing the infrastructure or it may be transferred back to the society in the form of social benefits. A carbon tax makes alternative sources of energy, which are more environmental friendly, such as wind power to be competitive with energy obtained by burning fossil fuels. Hence people find it cheaper to use alternate sources of energy rather than burning fossil fuels. A carbon tax can be quickly implemented by the government without any delay. A carbon tax is easy to understand. The government only needs to decide on a fixed rate per unit of carbon. This can then be converted into kilo watt hours for electricity (Dowdey 2007). Although carbon tax is favored because of its foreseeable nature, ...Download file to see next pagesRead More
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