Market Equilibrium Determination and Tax Implementation

The assignment is about market equilibrium determination from demand and supply functions, consumer surplus, producer surplus, and deadweight loss. The impact of tax implementation on Alcops (alcoholic beverages) is also discussed, highlighting the inefficiencies in reducing consumption and increasing revenue.

Running head: MICROECNOMICS
MICROECONOMICS
Name of the Student
Name of the University
Authors Note

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Table of Contents
Introduction......................................................................................................................................3
Part 2................................................................................................................................................3
Part 3................................................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
The assignment highlights on the market equilibrium determination from the demand as well as
supply function. The estimation of consumer surplus, producer surplus and deadweight loss at
different market price is also discussed in this study. This study also analyzes on the outcome of
tax implementation on alcohol products.
Part 2
c) The demand function for Widgets is given as:
QD=100-5P
The supply function of Widget is given as:
QS=5P
Equilibrium in the market is achieved if the quantity demanded becomes equivalent to the
quantity supplied. Graphically, market equilibrium is attained at the intersection point of the
demand as well as supply curve. Therefore,
QD=QS
100-5P=5P
100=5P+5P
100=10P
P=100/10=10

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However, the quantity demanded for widgets is QD=100-5*10=50
Quantity supplied for Widgets=5*10=50
d) Consumer surplus indicates measurement of consumer benefits that is evaluated by
examining the difference between the quantity the consumer’s desires to pay for the product in
relation with market price and the quantity that they basically pays for the product (Bauer 2014).
This concept is based on the marginal utility theory and arises when the customers pay higher
price for the product than the prevailing market price. Graphically it is shown by the area of the
triangle above the equilibrium price and below the demand curve.
Consumer surplus= area of the triangle= ½*base*height
Height Qd
Consumer
Surplus
20 50 250
10
Producer surplus signifies producer welfare measurement. It is estimated as the
divergence between the total amount that the manufacturers receive and the amount they desire
to accept for that commodity (Nicholson and Snyder 2014). Therefore, producer surplus level
varies according to the change in market price for the product. It is evaluated same like the
consumer surplus. Therefore, it is indicated by the area of the triangle below the equilibrium
price and on top of supply curve.
Producer surplus= ½* base *height
Height Qd
Producer
Surplus
10 50 250

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0
Total surplus refers to the total area of the consumer as well as the producer surplus. It is
also known as economic surplus (Rios et al. 2013)
TS=CS+PS= 250+250=500
e) When the market price is $15 and the quantity sold is 25 units-
Consumer surplus=
Height Qd
Consumer
surplus
20 25 62.5
15
Producer surplus=
Height Qd
15 25 187.5
0
Deadweight loss also termed as allocative inefficiency can arise when equilibrium for the
commodity is not attained. Therefore, deadweight loss is evaluated as- ½*(p2-p1)*(q1-q2)
Deadweight loss=125
Likewise , if the price of the product is set at $5 and the same amount of product is sold in the
market, then-
Consumer surplus=

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Height Qd
Consumer
surplus
20 25 187.5
5
Producer surplus=
Height Qd
Producer
surplus
5 25 62.5
0
Deadweight loss=132.5
f) Using equations 1 and 2, the demand and supply curve is drawn which is shown below:
0 20 40 60 80 100 120
0
5
10
15
20
25 MARKET EQUILIBRIUM
Qunatity demanded
Quantity supplied
Quantity
Price
Figure 1: Market equilibrium
Source: (Authors creation)

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When market price is set at $15 and maximum quantity sold at 25 units, the consumer
surplus, producer surplus and deadweight loss is shown with the help of diagram-
0 20 40 60 80 100 120
0
5
10
15
20
25
CS,PS AND DWL
Qunatity demanded
Quantity supplied
Quantity
Price
25 50
Figure 2: Consumer surplus , producer surplus and deadweight loss a price $15
Source: (Authors creation)
If the market price is $5 and quantity sold is 25 units , the consumer and producer surplus as well
as deadweight loss is shown in the diagram below:

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0 20 40 60 80 100 120
0
5
10
15
20
25
CS,PS AND DWL
Qunatity demanded
Quantity supplied
Quantity
Price
CS
P
S
DWL
Figure 3: Consumer and producer surplus and deadweight loss at price 5
Source: (Authors creation)
Part 3
a) The outcome of the tax imposed by the Australian government on Alcops for reducing
teenage binge drinking was astounding. Alcops is a kind of alcoholic beverages resembling
sweet drinks that appeals teenagers. This drink is the main contributing factor of teenage binge
drinking. The Australian government imposes higher tax on these alcoholic beverages for
dissuading the teenagers from binge drinking and reducing alcohol related harm (Baumol and
Blinder 2015). The government also imposed this policy in order to increase tax revenue. After
few years of imposition of tax, it has been seen that the health injuries owing Alcops did not
reduce and tax revenue also did not increased as predicted. Thus it reflects that targeting
particular drinks is not the substitute for reducing binge drinking. However, demand for this

Alcops quantity
Price of Alcops
S
D
P
Q
P* Price Flooring
S
D
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commodity decreases due to implementation of this tax and this results to excess supply.
Moreover, decline in Alcops demand was replaced by consumption of other alcoholic product.
As a result, the tax revenue attained declined as the overall demand for alcoholic drink did not
reduce.
Figure4: Demand and supply framework of Alcops
Source: (Authors creation)
b) The retailers bears huge tax burden as the demand for high priced drinks was less
purchased as compared to cheaper ones (Rader 2014). Hence, they attained less profit with
respect cost of production. The result was not tax efficient, as the consumption behavior was not
driven by responses to changes in tax system.

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c) Instead of implementing tax on Alcops, the Australian government must impose ban on
alcohol promotions in social media, reducing supply of Alcops, education and advice approach,
counter measurement of drink –driving etc.
Conclusion
The above assignment concludes that market equilibrium facilitates in determining the
equilibrium price and quantity. In addition, implementation of tax on commodity is not always
efficient in reducing consumption and gaining higher revenue.

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References
Bauer, M.J.R., 2014. Principles of microeconomics.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage
Learning.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.