Impact of Tax on the Demand and Supply of Beef - Assignment Example

Question 1 Market equilibrium is the point at which quantity demanded equals to quantity supplied i.e. Qd=Qs. Therefore, it is the point at which the demand curve intersects supply curve (Winters, 2009). Period 1 i. A technological progress in natural gas extraction methods A technological progress in natural gas extraction methods will increase production efficiency and this would cause the supply curve to shift to the right. However, a change technology will not cause a shift in the demand curves but there will be a movement along the demand curve since the price of gas will decrease due to high supply (Richard & Harbury, 2004) . Therefore, a shift in supply curve and a movement along the demand curve will have an impact on the market equilibrium price and quantity of natural gas. The diagrams below show the effect of a technological progress in natural gas extraction methods on the market equilibrium price and quantity of natural gas From the diagram, a technological progress will cause the cost of gas production to fall and thus more will be produced creating a surplus which will increase the equilibrium quantity from Q to Q1 but the equilibrium price will not change. A technological progress will create a surplus in the market and this will cause a movement along the demand curve. A down ward movement in the demand curve will lower the price equilibrium from P1 to P2 and increase the quantity equilibrium from Q1 to Q2. Therefore, the market equilibrium will move from A to B. ii. An increase occurs in the use of motor vehicles powered by natural gas. An increase in the use of motor vehicles powered by natural gas will increase demand for natural gas resulting to a shift in demand curve and a movement along the supply curve. This will have an impact on the on the market equilibrium price and quantity of natural gas as show below From the diagram, an increase in the use of motor vehicles powered by natural gas will cause the natural gas demand curve will shift the right due the increased demand. This will increase quantity equilibrium from Q to Q1 but the price equilibrium will not change. Due to the increased demand of natural gas as a result on an increase in the use of motor vehicles powered by natural gas, there will be an upward movement along the supply curve of the natural gas as shown in the diagram above. As a result there will be an increase in the equilibrium price from P1 to P2 and an increase in the equilibrium quantity from Q1 to Q2. Period 2 i. The price of the oil increases Oil is a substitute to natural gas and there if the price of oil increases, consumer may shift from using motor vehicles powered by oil to motor vehicles powered by natural gas and this will increase the demand of natural gas. This would cause a shift in demand curve and a movement along the supply curve. The following diagrams show this effect on the equilibrium price and quantity of natural gas due to an increase of oil price. From the diagram, an increase in the price of oil will cause the demand curve of natural gas to shift to the right. This will increase quantity equilibrium from Q to Q1 but the price equilibrium will not change. Due to the increased demand of natural gas as a result on an increase in price of oil, there will be an upward movement along the supply curve of the natural gas as shown in the diagram above. As a result there will be an increase in the equilibrium price from P1 to P2 and an increase in the equilibrium quantity from Q1 to Q2 ii. Population shifts A reduction in use of natural gas will reduce demand of this product which will cause the demand curve to shift to the left and a down ward movement along the supply curve of the natural gas. This will have an impact on the equilibrium price and quantity of natural gas due to an increase of oil price as illustrated below From the diagram, a population shift from the use of natural gas will cause the demand curve of natural gas to shift to the left. This will decrease quantity equilibrium from Q to Q1 but the price equilibrium will not change. Population shift from using natural gas has resulted to the demand curve of the natural oil to shift to the left and this will cause a downward movement in the supply curve of the natural gas as shown in the above diagram. The movement along the supply curve will result to a decrease of equilibrium price from P to P1 and a decrease of equilibrium quantity from Q to Q1. Question 2 (Boyes & Melvin, 2008) i. P = 12,000 – 0.16Q When P= 400 cents ii. Where; % change in quantity/price using mid-point method= Price= Quantity= I do not agree with the manager recommendation. Based on midpoint price elasticity which is 0.03 the demand of coffee is price inelastic. Therefore, any change on price will have small effect on the quantity demanded. iii. Where; % change in quantity/price using mid-point method= (Answer is greater than 1, therefore it is price elastic) Muffins is price elastic since a small change in price brings a significant change in quantity demand iv. Relationship between Muffins and cheesecake We will use cross elasticity of demand to explain this phenomenon. Cross elasticity of demand refers to the degree of responsiveness as a result of change of demand of good A with reference to change in price of good B. Good A and B will either be compliments or substitutes (Boyes & Melvin, 2008) The cross elasticity of demand is positive (0.21) and therefore Muffins and Cheesecakes are substitutes. v. Income and Demand This outcome can be explained using income elasticity of demand. Income elasticity of demand refers to the proportionate change in the demand with reference to proportionate change in the income (Boyes & Melvin, 2008) Question 3 i. Price QD QS 0 200,000 -25,000 100 150,000 15000 200 100,000 55000 300 50,000 95,000 400 0 135,000 ii. Price equilibrium is $250 and Quantity demand is 75, 000 tickets iii. Calculate consumer surplus and producer surplus Consumer surplus is the difference between what consumers are willing to pay and what they actually pay for a good or service and producer surplus is the difference between what producers are willing to accept for their produce and what they actually receive for a good or service Consumer surplus or produce surplus= (½)(base)(height) From the demand and supply curve iv. Price Ceiling Price Ceiling refers to the government action to impose a price on a commodity or service beyond which it cannot be sold. Therefore, it is set below the equilibrium price. When the government sets $200 price ceiling on match tickets more people will attend the match since the quantity demanded will increase from 75,000 tickets to 100,000 tickets. Therefore price ceiling will cause an excess demand of tickets. v. Deadweight loss occurs when supply and demand are not in equilibrium and it can be applied to any deficiency caused by an inefficient allocation of resources. Price floors, price ceiling as well as taxation also create deadweight losses (Lind & Granqvist, 2010). Substituting the quantity obtained in part 4 (100,000 tickets) in the demand function the corresponding price on the demand curve is; The price on the demand curve ($200) and the price ceiling price ($200) are the same and therefore there is deadweight loss vi. The immediate effect of price ceiling will be an excess demand of tickets. It is fair since it ensures that prices of tickets are affordable by most people in the economy especially low income earners. However, price ceiling may result to the football organizers to in cure losses Question 5 Markets are the means through which the sale of a commodity or service is realized. Salons operate in a perfect competition market since: There are many sellers and buyers i.e. no single buyer or seller can influence the market in the determination of the price and quantity and therefore forces of demand and supply control and dominate the market The services offered are homogenous There is free entry and exist in this market There is no government interventions i.e. there are no subsidies, price control Consumers and sellers are assumed to be fully aware of all the relevant information regarding the services been offered The only cost involved is cost of offering the services and no other cost such as transportation cost The major goal of the salon is on profit maximization and no other goal is persued In a perfect competition market there is free entry and free exists of firms in any industry. Therefore, an increase in number of hair salons will decrease the revenue of this salon. In the short run, the salon should not quit the industry due to competition. Moreover, it does not necessarily have to make profit. Whether it makes profit or loss the salon should consider the position of the short run average total cost (SATC) curve i.e if the SATC is below the average revenue (AR) curve the salon will super normal profit. However, if the SATC curve is above the AR curve the salon will in cure a loss. In case the salon in cure a loss due to competition, it should continue offering its services to its clients if its SATC curve is below the AR curve since this would mean that the salon is able to cover for its average variable cost. However, if the salon’s SAVC curve is above the AR curve, it should close down since it cannot meet its average total cost. To cope with competition in the long run, the salon should charge a relatively lower price than that charged in the short run period. This would therefore mean in the long run the salon will make normal profit. Question 4 i. Impact of tax on the demand and supply of beef ii. How much tax on the beef. Cost=price-profit. Cost before tax=30-20=10 Cost after tax=36-20=16 Therefore, tax per kg is 16-10=6 iii. Revenue collected from the tax = area of a rectangle (length*width) =81,000*6 =486000 iv. Tax incidence This refers to who bears the greatest burden which is determined by the price elasticity (Fall, 2010). In this case, the price elasticity is 1 meaning that the change is prie is proportionate to change in quantity demanded. In this case the tax incidence will be equally borne by both the consumer and the producer at a cost of $ 3 per k.g of beef v. Impact when tax is levied on producer If you look at the outcome here, the result is Identical to what happened when the tax was levied on the buyer instead (Fall, 2010) . This is an important lesson: Who actually pays the tax (i.e., the tax incidence) does not depend on who the tax is levied on but on the elasticity of supply. vi. Dead weight loss vii. Impact of tax on demand of lamb The demand for lamb is going to do down as the demand for beef goes down due to the increased prices of beef due to tax imposition.. References Richard & Harbury (2004) First Principles of Economics 2nd Edition, Oxford University press: New York, United States Winters A, (2009) International Economics 4th Edition, Oxford University press: New York, United States Boyes W & Melvin M (2008), Microeconomics: South-Western Cengage learning, USA Fall (2010) Principles of Microeconomics, Chapter 7: Taxes. Retrieved on 22nd December 2013 from http://www2.econ.iastate.edu/classes/econ101/herriges/Lectures10/Chapter%207H-%20Taxes.pdf Lind, H. & R Granqvist (2010) A Note on the Concept of Excess Burden Economic Analysis and Policy 40:63-73 Riley G (2012) Perfect Competition - Economics of Competitive Markets, Retrieved on 21st December 2013 from http://tutor2u.net/economics/revision-notes/a2-micro-perfect-competition.html Read More