Supply function: Essay Example

Economics 4

  1. Price elasticity of demand is a measure that indicates how buyers and sellers respond to changes in price of a commodity. In brief, price elasticity of demand is expressed as:

Supply function:

Given that both customers did not look at the price of snapper, it is, therefore, not possible to determine price elasticity of demand of customers.

  1. Given the market for tennis balls, the demand supply functions are obtained as follows

Demand function:

Supply function: 1

Supply function: 2

Supply function: 3

Supply function: 4

Supply function: 5

Supply function: 6

Supply function:

Supply function: 7

Supply function: 8

Supply function: 9

Supply function: 10

The introduction of a tax of 60 cents on the supply side results in equilibrium shown below:

Supply function: 11

Supply function: 12

Supply function: 13

Supply function: 14

Supply function: 15

  1. Sellers now receive

Supply function: 16

Supply function: 17

  1. Buyers pay:

Supply function: 18

Supply function: 19

  1. Approximately 8 tennis balls are bought and sold. This is the new equilibrium point.

  2. Tax revenue is
    Supply function: 20

  3. Deadweight loss is illustrated in the diagram below

Figure 1: Deadweight loss due to Tax of 60 cents introduced on the supply side

Supply function: 21

Section A and B is the deadweight loss.

  1. If the tax had been levied on consumers instead of producers, the demand curve will shift downwards by the amount of tax effectively creating surpluses. Quantity sold will be sold while price paid by consumers will increase. Price received by producers will decline.

  1. Economic efficiency

Productive efficiency is attained when maximum number of goods and services are produced using a given amount of inputs. It takes place on the frontier as shown in figure 2 where there is wastage

Supply function: 22

Figure 2: Productive efficiency

Supply function: 23

Supply function: 24Supply function: 25

Supply function: 26

Supply function: 27Supply function: 28

Supply function: 29Supply function: 30

Supply function: 31

Supply function: 32Supply function: 33

Production of goods that are desired by the society leads to allocative efficiency. It is achieved by producing on the frontier as illustrated on figure 2. Total economic welfare can be improved by producing more of both commodities. Allocative efficiency is further achieved where price is equal to marginal cost.

Thirdly, distributive efficiency is realized by availing the goods and services where they are required.

  1. Externalities are costs or benefits earned by a party even though such a party did not contribute to that cost or benefit. Positive externality associated with consumption is created by consumers. An example is health care services consumed by consumers which creates productive employees hence higher rate of economic growth.

Figure 3: Positive externality associated with consuming health care

Supply function: 34

MPB = Marginal private benefit

MPC = marginal private cost

MSC = marginal social cost

Deadweight loss = region c and f

Government revenue is area = d+e+a+b

  1. An increase in costs associated with employing plasterers will lead to a decline in demand for plasterers given the perfectly elastic situation. This is a leftward shift in demand curve for plasterers. Increased costs can imply that employers will have to pay more in terms of insurance premiums.