Essential Mathematics for Economics and Business, 4 th Edition 1

CHAPTER 3: SIMULTANEOUS EQUATIONS

Worked Example 3.12

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John Wiley
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and Sons
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2013
 Chapter 3: Simultaneous Equations

Worked Example 3.12, Figure 3.8

Effect of a per unit tax on the supply function

Distribution of Tax

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 Recall: Worked Example 3.7
Calculate the equilibrium price and quantity

Demand function: P = 100 - 0.5Q (1)

and

Supply function: P = 10 + 0.5Q (2)

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 Market Equilibrium: no tax.

Pd = Ps at equilibrium

100 0.5Q = 10 + 0.5Q Qe = 90

90 = Q
Equilibrium
Q = 90
Substitute Q = 90 into either (1) or (2) and solve for Q P = 55
P = 100 - 0.5Q (1) Demand function
P = 100 - 0.5(90)
= 100 - 45 Pe = 55
= 55

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 Equilibrium: no tax
Graphically, equilibrium is at the point of intersection of Demand and Supply
Record the values of P and Q at the point of intersection

Equilibrium:
P Qe = 90
100
Pe =55
P = 10 + 0.5Q

P = 55

P = 100 - 0.5Q
10
Q
- 20 0 Q = 90 200

Figure 3.5 Goods market equilibrium

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 Worked Example 3.12
Taxes and their distribution
When a tax of 6 per unit is imposed the producer receives (P - 6) per

unit:

The equation of the original supply function P = 10 + 0.5Q

To adjust for tax, replace P in the riginal supply function by (P - 6)

The equation of the new supply function is (P - 6) = 10 + 0.5Q

The tax-adjusted supply function is P =16 + 0.5Q

Construction of Figure 3.8 Goods market equilibrium and taxes

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 Worked Example 3.12
The plot of the original supply function and the tax-adjusted supply function
The equation of the supply function adjusted for tax is: P =16 + 0.5Q

The graph of the tax-adjusted supply function is

tax adjusted P = 16 + 0.5Q

parallel to the original
P
P = 10 + 0.5Q

translated vertically
upwards by 6 units

16 See figure 3.8

10
0 Q
0 200

Construction of Figure 3.8 Goods market equilibrium and taxes

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Find the new equilibrium price and quantity
Demand: P = 100 - 0.5Qd
Supply: P = 16 + 0.5Q adjusted for tax.

Equate prices Equilibrium:

Qd = Qs
Pd = Ps Pd = Ps

100 0.5Q = 16 + 0.5Q

100 16 = 0.5Q + 0.5Q rearranging to solve for Q

84 = Q .this is the new equilibrium quantity

next solve for P, the new equilibrium price

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 Market Equilibrium with tax.
Now we know the new equilibrium quantity

Qe = 84
Substitute Q = 84 into either (1) or (3) and solve for Q

P = 100 - 0.5Q (1) Demand function

P = 100 - 0.5(84)
= 100 - 42
= 58 Pe = 58

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 Worked Example 3.12
Graphically, the effect of a per unit tax on the supply function
The equation of the supply function adjusted for tax is: P =16 + 0.5Q

The graph of the tax adjusted supply function is

tax adjusted P = 16 + 0.5Q

parallel to the original
P
P = 10 + 0.5Q

translated vertically
upwards by 6 units

16 See figure 3.8

10
0 Q
0 200

Construction of Figure 3.8 Goods market equilibrium and taxes

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 Equilibrium with tax and without tax
Recall: equilibrium values of P and Q with no tax Equilibrium, no tax:
Q = 90, P = 55
Now, the new equilibrium values of P and Q with tax

P = 10 + 0.5Q
Equilibrium, with
P with tax tax:
100 Q = 84, P = 58
P = 10 + 0.5Q

P = 58
P = 55

P = 100 - 0.5Q
10
Q
- 20 0 200
Q = 84 Q = 90

Figure 3.5 Goods market equilibrium

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 Worked Example 3.12
With the tax, the equilibrium price and quantity change to: P = 58; Q = 84
The consumer pays the new market equilibrium price: P = 58

with tax P = 16 + 0.5 Q

P
P = 10 + 0.5Q

E1
58
55 E0

P = 100 - 0.5Q
16
10

0 Q
0 84 90 200

Figure 3.8 Goods market equilibrium and taxes

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 Worked Example 3.12

With the tax, the new equilibrium price and quantity are P = 58; Q = 84

With tax the supplier receives the new equilibrium price, less tax

with tax P = 16 + 0.5Q

P
P = 10 + 0.5Q

E1
58 The supplier receives
55 E0
Producer/Supplier price 52 (Pe tax) = (58 6) = 52

P = 100 - 0.5Q

0 Q
0 84 90 200

Figure 3.8 Goods market equilibrium and taxes

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 Before the imposition After the imposition of After the imposition of
of tax the consumer tax the consumer pays tax the price the
pays the equilibrium the new equilibrium consumer pays
price of 55 per unit: price of 58 per unit: increases by 3 per unit:

P
The tax is 6 per unit. with tax : P = 16 + 0.5Q
So the consumer pays 110

P = 10 + 0.5Q

E1
After tax: consumer price 58
55 E0
52
No tax: consumer price

P = 100 - 0.5Q

0 Q
0 84 90 200
Figure 3.8 Goods market equilibrium and taxes

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Before tax the
producer/supplier
receives the equilibrium
price of 55 per unit:
The tax is 6 per unit.
So the
After tax the
After tax the price the
producer/supplier
producer/supplier
receives 52: the new
receives falls by 3 per
equilibrium price less
unit:
the 6 tax. :
P
with tax : P = 16 + 0.5Q
110

producer/supplier pays P = 10 + 0.5Q

E1
58
No tax: producer price 55 E0
52

With tax: producer price

P = 100 - 0.5Q

0 Q
0 84 90 200
Figure 3.8 Goods market equilibrium and taxes

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