Microeconomics Assignment: Analyzing Market Dynamics and Taxation

This microeconomics assignment delves into fundamental economic principles. It begins by analyzing supply and demand functions, determining equilibrium price and quantity, and calculating consumer and producer surplus. The assignment then explores the impact of government taxation, specifically focusing on the Alcopops market. It examines the effects of taxes on both sellers and buyers, considering the elasticity of demand and supply. The analysis includes graphical representations to illustrate the effects of taxation, such as shifts in supply and demand curves, and the resulting deadweight loss. Furthermore, the assignment discusses the burden of taxation and its implications, including the efficiency of tax policies and alternative strategies to reduce consumption and its negative consequences.

Running Head: INTRODUCTION TO MICROECONOMICS
Introduction to Microeconomics
Name of the Student
Name of the University
Author note

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INTRODUCTION TO MICROECONOMICS
Table of Contents
Answer 3..........................................................................................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................2
Answer c......................................................................................................................................3
Answer d......................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer a......................................................................................................................................5
Answer b......................................................................................................................................8
Answer c......................................................................................................................................8
References........................................................................................................................................9

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Answer 3
Answer a
The demand function is given as
QD = 200 – 2P
Inverse demand function=200−QD
2
¿ 100−0.5QD
The supply function is given as
QS = -10 + P
Inverse supply function=10+QS
Answer b

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Answer c
Equilibrium price and quantity are obtained by equalizing supply and demand (Rader,
2014).
100−0.5Q=10+Q(at equlibrium , QD =QS =Q)
¿ , 1.5 Q=90
¿ , Q=60
Price=100−0.5 QD
¿ 100−(0.5∗60)
¿ 100−30
¿ 70
Equilibrium Quantity = 60kg of oranges
Equilibrium price = $70

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Answer d
Consumer surplus is indicated as area of the triangle below demand curve and above the
equilibrium price.
The maximum price that consumers willing to pay is 100.
Consumer surplus= 1
2∗( 100−70 )∗60
¿ 1
2∗30∗6 0
¿ 900
Producer surplus is the benefit received by the seller. It is obtained as area of the triangle
above the supply curve and below the equilibrium price (Cowen& Tabarrok, 2015). The
minimum price that supplier charges is 10.
Producer Surplus= 1
2∗( 70−10 )∗60
¿ 1
2∗60∗60
¿ 1800
Total Surplus=Consumer surplus+ Producer surplus
¿ 900+1800
¿ 2700

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Answer 4
Answer a
Government imposes a tax to restrict activity that are harmful for the society. Drinking
Alcopops is harmful for health. As it contains alcohol this becomes more of an addiction rather
than just a soft drink. Addiction among the teenagers is not a good sign for society’s future.
Therefore, Australia government imposes a tax on Alcopops to reduce teenage binge drinking
and alcohol related harm. While imposing tax government can tax either buyers or tax sellers.
The effect on tax on both groups are discussed below.

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Tax on seller
Figure 1: Effect of Alcopops tax on sellers
(Source: as created by Author)
The figure above depicts the scenario in Alcopops market. As Alcopops consumption is a
kind of an addiction, the demand curve is relatively inelastic. DD show the demand curve. The
supply of Alcopops is indicated by SS curve. The pre-tax price and quantity in the market is P*
and Q* respectively. Now, government imposes a tax on sellers. This shifts the supply curve to
the left from SS to S1S1. Now, price that buyer pay is different from the price that sellers receive
(Currie, Peel & Peters, 2016). Because of tax, buyers now pay a high price P1 while sellers
receive a low price P2. The quantity of alcopops sold in the market is to be Q1. The tax revenue to
the government is given as P1E1FP2. Triangle EE1F is the dead weight loss of taxation.

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Tax on buyers
Figure 1: Effect of Alcopops tax on buyers
(Source: as created by Author)
Another alternative to the government is to tax the buyers of alcopops. Consider the
effect of same tax on buyers. Now, the tax will shift the demand curve leftward (Baumol &
Blinder, 2015). The demand curve shifts from DD to D1D1. The price tax buyers pay after tax
rises from P1 to PA while the price receives by the sellers reduces from P1 to PB. The quantity in
the market is reduced to QT.
The outcome obtained at the end of the financial year is however surprising. There is no
recorded reduction in teenage binge drinking and alcohol related harm. If there is no actual
reduction in drinking then it implies a perfectly inelastic demand curve for consumption. Now, in
case of perfectly inelastic demand curve government should receive maximum revenue.

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However, here despite no reduction is drinking or alcohol related harm, government still
received revenue less than that predicted which is quite surprising.
Answer b
The burden of taxation depends on relative elasticity of demand and supply. Greater the
elasticity lower is the burden. For Alcopops, the demand curve is relatively inelastic. This means,
even an increase in price after imposition of tax buyers cannot reduce the demand much (Frank,
2014). As a consequence, in case of alcohol or other alcohol related beverages like alcopops a
buyers bear greater tax burden.
The efficiency of tax depend on a number of factors. A smaller area of deadweight loss
implies low distortion and hence a greater efficiency. As the demand curve is relatively inelastic,
the area of deadweight loss is small (Fine, 2016). However, the government fail to obtain the
intended tax revenue. Additionally, buyers bore a greater tax burden. Government objective is
fulfill when both the buyer and sellers are equally affected from tax.
Answer c
Taxation is not very effective way in reducing Alcopops consumption and hence reducing
the related consequences. Government should spread awareness about the harmful consequences
of Alcopops. Awareness program can be arranged at every level of society. People should
actively participate in these programs. Parents should guide their children properly. No single
policy can achieve the target of reducing consumption. Participation of each and every people is
required to get rid of this addiction.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
Currie, D., Peel, D., & Peters, W. (Eds.). (2016). Microeconomic Analysis (Routledge Revivals):
Essays in Microeconomics and Economic Development. Routledge.
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.
Frank, R. (2014). Microeconomics and behavior. McGraw-Hill Higher Education.
Rader, T. (2014). Theory of microeconomics. Academic Press.