Supply function: Essay Example
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:
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.
Given the market for tennis balls, the demand supply functions are obtained as follows
The introduction of a tax of 60 cents on the supply side results in equilibrium shown below:
Sellers now receive
Approximately 8 tennis balls are bought and sold. This is the new equilibrium point.
Tax revenue is
Deadweight loss is illustrated in the diagram below
Figure 1: Deadweight loss due to Tax of 60 cents introduced on the supply side
Section A and B is the deadweight loss.
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.
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
Figure 2: Productive efficiency
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.
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
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
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.
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