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Microeconomics Review: Notes on Market Equilibrium & Taxes

Updated on December 9, 2011

This article is part of my review guide for Principles of Microeconomics. It is an organized version of concepts from notes I have taken during reading and lectures. It is not meant to be your first introduction to the topic, but instead, should be a clarification of things you are already familiar with. It is a REVIEW tool used to brush up before an exam.

Parts of the Basic Market Graph

Supply Curve: What producers are willing to produce at a given price. It has a positive (+) slope because as the price of what they produce increases, they want to make more of it to earn a larger amount of money.

Demand Curve: Consumer desire for a product at its price. It always has negative (-) slope because as the price of a product decrease, people will buy more of it.

Equilibrium: Where the two curves meet. This is the natural price and quantity that will be produced and consumed.

Calculating Equilibrium Price & Quantity

Calculating Equilibrium: To find where two curves/lines meet on a graph, you set their equations equal to each other.

Given: P = 24 - 2Q , P = 4Q (The first equation is the demand curve. We know because of the (-) slope.)

24 - 2Q = 4Q Find Quantity by setting them equal.

Q = 4

P = 4(4) Now find Price by substitution. It was easier to plug Q into the Supply Curve.

P = $16 =======> Equilibrium is 4 units produced, sold at $16 each.

Adding a Tax to the Equation

Using the Same numbers from the previous example, a $12 tax is added. From the government's perspective, it is easier to enforce a tax on a firm rather than on individual consumers. This is why you'll always add the tax to the Supply Curve.

Supply curve was P = 4Q, so with the tax it becomes P = 12 + 4Q

Find the Equilibrium with the tax:

24 - 2Q = 12 + 4Q

Q = 2

P = 12 + 4(2)

P = $20 =======> New Equilibrium is 2 units produced, sold at $20 each.

Government revenue is the quantity sold (2) multiplied by the tax amount of $12. So 2 x 12 = $24

Elasticity of the demand and supply curves determine who carries more of the tax burden. Lower elasticity means more burden.

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