1.2.9 Taxes and Subsidies

Question 1

what is excess supply/ surplus?

Answer 1

the gap between supply and demand at a given price
* producers will decrease their prices to get eliminate excess supply
* (when price is above equalibrium price)

Question 2

when is there equilibrium?

Answer 2

quantity supplied = quantity demanded

supply and demand meet

Question 3

what is the excess supply/demand at
* 90p
* 40p
* 50p

Answer 3

Question 4

what happens when there is excess demand/shortage?

Answer 4

(when price is below equilibrium price)
* consumers bid up their price
* only those who can pay high prices can afford

eliminating excess demand

Question 5

what is direct tax?

Answer 5

tax paid directly to the government.
Levi dead directly on an individual or organisation
* income tax
* corporation tax

Question 6

what is income tax

Answer 6

tax on earnings

Question 7

What is indirect tax?

Answer 7

tax on goods and services
* VAT

Question 8

what are the two types of indirect tax?

Answer 8

• specific tax
• ad velorum tax

both are paid by producers

Question 9

what is specific tax

Answer 9

a fixed amount of tax paid on each unit sold
fixed tax of £4 per item, if 5 units sold then £20, if 100 items sold then £400

affects producers

Question 10

how specific tax impact graph

Answer 10

impacts supply curve as producers are the ones that have to pay.
* Shift vertically upwatds creating new line S tax
* difference between original line and S tax is the specific tax applied
* because peoducers require higher prices to make up for the tax

Question 11

what will the new price equalibrium be after the £4 specific tax?

Answer 11

as price increases, the quantity demanded also decreases

Question 12

what is the tax revenue that the goverment recieves in total?

Answer 12

sixe of speciic tax × quantity sold (of new equailibrium)

Question 13

what is the incidence of tax on consumers?

Answer 13

how much the consumers pay on the total tax revenue
differnec between selling prices × quanitity sold

top box

Question 14

what is the incidence of tax on producers?

Answer 14

how much of the total tax revenue the producers have to pay

Question 15

draw a speific tax diagram

Answer 15

Question 16

what is ad velorum tax?

Answer 16

a percentage of the price of a good/serive
eg: VAT

Question 17

draw an ad valoreum diagram?

Answer 17

Question 18

what are the two purposes of tax?

Answer 18

• discourage production and consumption of harmful goods
• increase goverment revenue

Question 19

how do goverments spenf their tax reveue?

Answer 19

• encouraging the production and consumption of goods that are good to society

Question 20

what is a subsidy?

Answer 20

a grant from the goverment to a firm to increase production/ consumption of a good by lowering prices

grant for every unit of output

Question 21

what is the effect of subsidies on the supply demand diagram

Answer 21

subsidy moves supply line vertically down. The differnce between the two lines is the size of the subsidy. Increase im supply as producers get an inective to make more

Question 22

what is the new price after a 400 £ subsidy?

Answer 22

£5,800

Question 23

what is the goverment spending/ total cost of subsidy?

Answer 23

size of subsidy × quantity sold

Question 24

what is the
* total cost of subsidy
* consumer benfit
* producer benefit

Answer 24

Question 25

Draw a subsidy diagram

Answer 25

Question 26

define VAT

Answer 26

An indirect tax set as a percentage of the price of a good

Question 27

What are the analysis points of subsidies ?

Answer 27

Reduce production costs —> increase supply
Lower prices—> encouraging people to buy more

Question 28

subsidy chain of analysis (job creation)

Answer 28

1. subsidy shifts supply from S1 to S2 increasing producer’s benefit by area P
2. farmers can employ more local workers
3. who will spend into the local economy , helping local firms grow and stay afloat
4. increase in government corporation and income tax revenue
5. can further reinvest into …

Question 29

subsidy chains of analysis (extra income )

Answer 29

1. extra income from the subsidy used an investment into more effficent technology (application)
2. increasing output, increasing sales, revenue and profits
3. expand and hiring more workers

Question 30

subsidy (chains of analysis) - dependancy culture

evaluation points

Answer 30

1. firms learn to reply on the subsidy
2. become lazy and ineffiecent
3. reduction in quality and quantity they produce
4. consumers recives goods at lower quality, reducing living standards

Question 31

subsidy (chains of analysis )- opportunity costs

evaluation points

Answer 31

1. cost of subsisy (£) creates an opportunity cost
2. diverting funds from the education and healthcare, reducing external benefits
3. also worsening government budget deficit

Question 32

explaining the subsidy diagram:

Answer 32

1. subsidy reduces the price of “ “ goods
2. subsidy shifts supply from S1 to S2, decreasing price
3. consumers can afford more goods/ services, improving living standards
4. (only works for raw materials ) this has external benefits because supermarkets will be able to purchase food more cheaply, increasing their profits, enabling them to expand and hire more workers

always mark size of subsidy- consumer/producer benefit