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PRINCIPLES OF MACROECONOMICSText: Principles of Macroeconomics, N. Gregory Mankiw, Sixth Edition.
Instructor: Sue Guzek, Kansas State University SalinaMusic: We Gonna Make You… By Troy “Trombone Shorty” Andrews and Orleans
Avenue – Orleans and Claiborne
APPLICATION: INTERNATIONAL TRADE
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TAXES!!! WHO BEARS THE BURDEN?
Supply Curve MarketS1S2
90
Tax on Sellers
Supply Curve MarketS1
D2
D1
Tax on Buyers
In either case, price paid by buyers rises and price received by sellers falls
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TAX WEDGE
Supply Curve MarketS
90D
100
Because of the Tax Wedge, quantity sold falls below the level sold without tax (from 100 to 90)
Tax Revenue
T X Q
Gallons of gas per month
Buyer pays $3.20
Seller receives $2.77
PriceFor example, the price of gasoline in Salina, KS
Govt. entities receive $.43 X 90 Gal per person or $37.80
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Supply Curve MarketS
90D
DEADWEIGHT LOSS
100
Decrease in total surplus (consumer + producer) that results from a market distortion, such as a tax
Deadweight Loss
- Consumer
Surplus
-Pro
duce
r Sur
plus
Tax Revenue
In this example:• Change in consumer surplus is
negative• Change in producer surplus is
negative• Change in tax revenue is positive
• Loss to buyers and sellers is greater than the revenue gained by government by the amount of triangles C and E
C
E
Taxes are an incentive to buyers to buy less and to
sellers to produce less
As buyers and sellers respond to incentives, size of the market shrinks
below optimum
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TAX DISTORTION AND ELASTICITY
The more elastic the supply, the larger the deadweight loss of tax
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DEADWEIGHT LOSS AND LABORIs supply of labor elastic???
Or inelastic???
If labor supply is Elastic, then increase in taxes will cause more people to decrease their working hours
If labor supply is INelastic, then increase in taxes will have little impact on supply of labor
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DEADWEIGHT LOSS AND TAX REVENUE
Small tax = Small Revenue
Larger tax = More Revenue
Very Large Tax = Reduced Revenue
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LAFFER CURVE – WHAT DOES IT REALLY LOOK LIKE?
IS IT THIS…Or This???
OR THIS???
What is the shape and at
what point are we on the curve???
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TERMS AND CONCEPTS
Deadweight Loss Laffer Curve
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SOURCES
Principles of Macroeconomics, N. Gregory Mankiw, Sixth Edition: PowerPoint Slides prepared by: Andreea CHIRITESCU, Eastern Illinois University