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NCEA level 1 market equilibrium cheat sheet with definitions, examples, model answers, etc.
Subsidies and Sales Tax
Tax is an amount collected by the government from consumers and producers so the government. |
Taxes are paid can pay so the government can pay for infrastructure, encourage merit goods, discourage demerit goods, etc. |
-Direct tax is paid straight to the government by the party concerned (individual income tax, PAYE). |
-Indirect tax is collected by a third party and then paid to the government (GST) |
Taxes make goods less affordable and less profitable. Tax adds to cost- add to previous costs. |
Subsidy is a payment made by the government to producers. |
Subsidies may be paid to reduce the price of the good in order to increase consumption or to ensure that producers receive an "acceptable" price for their goods. |
Subsidies make goods more affordable and profitable. Subsidy adds to revenue- subtract from previous costs. |
Tariff is a tax on imported goods. |
This makes imports more expensive and less competitive against local goods. |
Tariffs increase a producers cost of production. |
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Changes in Equilibrium
If the equilibrium price of a good decreases due to a non-price factor eg. the bikini market in winter, flow-on effects will occur: |
-producers will lower price to clear excess stock |
-this price drop causes quantity supplied to decrease and quantity demanded to increase. equilibrium decreases QE-->Q1. |
The effect on the producer revenue depends on the size of the changes in price and quantity. |
The decrease in price means producers earn less from selling each unit, however they are selling more units. |
If the price change in proportionally bigger then revenue decreases. |
If the quantity increase in proportionally bigger then revenue increases. |
____ has become more/less affordable as the price has increased while incomes are unchanged.
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Market Equilibrium
Supply |
the sum of all individual consumers' demand at each price |
Demand |
the sum of all individual producers' supply at each price |
Market Equilibrium |
relates to the price and quantity at which market demand and market supply are equal. |
Maximum and Minimum Price
-Government may decide to set a maximum price on a good (price ceiling) usually to ensure a good remains affordable for consumers. |
This means producers cannot legally charge more than the maximum price for this good. |
For example, public transport may have a price maximum set so it is accessible for everyone. |
-Government may decide to set a minimum price on a good (price floor) to reduce consumption of a good. |
This means producers cannot legally charge less than the minimum price for this good. |
For example, cigarettes may have a price minimum set to reduce the number of smokers by making smoking very expensive. |
When referring the changed values proceeding a price max/min, include how much consumer spending/producer revenue has increased/decreased by.
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