SYED MAHMUDUL MUDDASSIR SADNAN SHOUMIK ISLAM

SYEDA FATEMA TUZ ZOHRA NABILA FAROOQUE

The Case Problem
 Equilibrium price and quantity
 Price support & New equilibrium
 Government purchase & cost to Govt.
 Who actually pays for the government purchase
 Loss/gain to consumers and producers, change in social welfare
 Price ($)

SS

Demand equation: P = 225 – 15Qd

2.25
Supply equation: P = 25 + 35Qs

1.65 E
Equilibrium Quantity:
4 million Litres

Equilibrium Price:
DDc
165 cents or $1.65 0.25

0 Quantity Traded
4 mil.
 Price ($)

SS

 Govt. guarantees a price above 2.25

equilibrium
 New Market Price: $2.00 $ 2.00 E’

1.65 E
 New Qd = 1.67 million litres

 New Qs = 5 million litres

DDc+g
 Govt purchase shifts Demand
DDc
curve to DDc+g 0.25

0 1.67 mil. 4 mil. 5 mil. Quantity Traded

 Price ($)

Surplus
after DDc SS
3.33 mil.
 Qd from consumers:
2.25
1.67 mil. litres/month
 New Qs: $ 2.00 E’
5 mil. litres/month

 Govt. Purchase:
3.33 mil. litres/month DDc+g
Cost to Govt.
 Cost to Govt.: 6.66 million DDc
$6.66 million/month 0.25

0 1.67 mil. 5 mil. Quantity Traded

 Price ($)

Surplus
after DDc SS
3.33 mil.
 Govt. Purchase:
2.25
3.33 mil. litres/month
 Cost to Govt.: $ 2.00 E’
$6.66 million/month

 Govt. Revenue Stream:

DDc+g
 Direct Tax
Cost to Govt.
(Income Tax, Corporate Tax) 6.66 million DDc
0.25
 Indirect Tax
0 1.67 mil. 5 mil. Quantity Traded
 Price ($)

Before Price Support: SS

 CS = 1 + 2 + 4
2.25
 PS = 3 + 5
1
2.00 E’
After Price Support: 2
9
4
 CS’ = 1 1.65 E
 PS’ = 2 + 3 + 4 + 5 + 6
5
3 DDc+g
Social Gain & Loss:
 Consumers = - 2 - 4 DDc
0.25
 Producers = 2 + 4 + 6
0 1.67 mil. 4 mil. 5 mil. Quantity Traded
 Price ($)

SS

 Consumer Loss:
2.25

1
2.00 E’
2
9
 Producer Gain: 4
1.65 E
5
3 DDc+g
 DWL:
DWL
DDc
0.25

0 1.67 mil. 4 mil. 5 mil. Quantity Traded