ECON 2P23 Tutorial One
Introduction
Dana Marei
Email: dm06wy@[Link]
Office: PL 420
Office Hours: Monday 15.00-16.00
Tuesday 9.30-10.30
or by appointment
Tutorials
• Go over the material covered in the
lecture by Professors
• Clarify concepts and demonstrate their
practical application by solving problems
• Prepare for the weekly quizzes and tests
• Distribute the quizzes written the week
prior to the tutorial
Tutorials
[Link]
What can you find at the website?
•Tutorial Materials
•Additional Problems for Practice
Tutorial One
• Demand and Supply
• Taxes
– Graphical Solution
– Numerical Example
• Subsidies
– Graphical Solution
– Numerical Example
Demand and Supply
Things to Remember:
•Demand vs. Quantity Demanded
•Law of Demand:
– Why do you purchase more when Price for the
good decreases?
• Substitution Effect
• Income Effect
Taxes: Numerical Example
Health Canada has decided that smoking is bad
for your health. Accordingly, Health Canada is
proposing a $20 per unit tax on cigarettes. What
are the economic effects of such a tax?
The demand and supply equations are given
below:
120 P
QD
3 3
QS 20 P
Taxes: Numerical Example
Step 1: Make sure that the equations are in a
normal equation form
***starts with P
P 120 3QD
P 20 QS
Taxes: Numerical Example
Step 2: Find the original price and quantity by
equating the functions together
120 3Q D 20 QS
120 20 4Q
Q 25
P 20 QS 20 25 $45
Taxes: Numerical Example
Step 3: Now Analyze
•Is the tax imposed on buyers or on suppliers?
– If the tax is imposed on suppliers – shift the supply
curve to the left (add tax to the original supply
equation)
– If the tax is imposed on buyers – shift the demand
curve downwards (deduct tax from the original
demand equation)
– If not specified in the problem – do any method you
prefer (supply is usually easier)
REMEMBER: The result is the same!!!
Taxes: Numerical Example
Step 3 (continued):
•Let’s assume that tax was imposed on suppliers
•The new supply equation is:
P 20 QS Tax 20 QS 20 40 QS
Original Supply
Equation
Taxes: Numerical Example
ALTERNATIVE
Step 3 (continued):
•What if the tax is imposed on buyers?
•The new demand equation is:
P 120 3QD Tax 120 3QD 20 100 3QD
Original Demand
Equation
Taxes: Numerical Example
Step 4 (continue with supply equation): Equate
the new supply equation to the old demand
equation to find the new quantity
40 QS 120 3QD
120 40 4Q
Q 20
Step 5: Substitute the new quantity into either
the original demand equation or the new supply
equation to determine the new price
P 40 QS 40 20 $60
Taxes: Numerical Example
Step 6: What amount of tax does the consumer
pay? And what amount of tax does the supplier
pay?
Buyer _ Pays : 60 45 $15 New Price – Original Price=Tax Paid by Buyer
Supplier _ Pays : 20 15 $5 Tax– Tax paid by Buyer=Tax Paid by Supplier
OR
Qn 20
sub _ in _ original _ S : P 20 QS 20 20 40
Supplier _ Pays : 45 40 $5
Taxes: Numerical Example
Step 7: How much revenue does the
government receive from the tax?
Tax * Quantity _ Sold $20 * 20units $400
Fill out the information for the following:
Original Price Burden of the tax on Consumer
Original Quantity Burden of the tax on the Supplier
New Price Government Revenue
New Quantity
Subsidies: Numerical Example
Health Canada decided that students do not
obtain enough calcium in their diets.
Accordingly, Health Canada is proposing that a
$20 per bottle subsidy be given to students who
purchase milk. What are the economic effects of
such a subsidy?
The demand and supply equations are given
below: P 110 3Q D
P 30 QS
Subsidies: Numerical Example
Step 1: Make sure that the equations are in a
normal equation form
Step 2: Find the original price and quantity by
setting the two functions equal to each other
110 3QD 30 QS
Q 20
P 30 QS 30 20 $50
Subsidies: Numerical Example
Step 3: Analyze
•Is the subsidy given to buyers or to suppliers?
– If the subsidy is given to the suppliers – shift the
supply curve to the right (deduct the subsidy from the
original supply equation)
– If the subsidy is given to the buyers – shift the
demand curve upwards (add subsidy to the original
demand equation)
– If not specified in the problem – do any method you
prefer (supply is usually easier)
REMEMBER: The result is the same!!!
Subsidies: Numerical Example
Step 3 (continued):
Let’s assume that subsidy is given to the
suppliers
The new supply equation is:
P 30 QS Subsidy 30 QS 20 10 QS
If subsidy is given to the buyers, then the new
demand equation is:
P 110 3QD Subsidy 110 3QD 20 130 3QD
Subsidies: Numerical Example
Step 4 (Subsidy is given to the suppliers): Equate
the new supply equation to the original demand
equation to find the new quantity
10 QS 110 3QD
Q 25
Step 5: Now substitute the new quantity into either
the original demand equation or new supply
equation to determine the new price
P 10 QS 10 25 $35
Subsidies: Numerical Example
Step 6: Find the amount of subsidy that a
consumer gets and the amount of a subsidy that
a producer receives
Buyer _ Re ceives : 50 35 $15
Supplier _ Re ceives : 20 15 $5
Step 7: How much does it cost the government
to pay this subsidy?
Cost Subsidy * Quantity $20 * 25 $500
Next Week
• Quiz Results
• Economic Effects of Import Supply
• Economic Effects of Export Demand
Don’t forget to practice and do extra
problems on the website!
Good Luck on Your Quiz!