ECON 110 Lecture 14 Outline of Last Lecture - TaxesI. Showing a tax graphicallyII. Tax affectsIII. Deadweight lossOutline of Current Lecture I. Parts of a tax grapha. Tax revenueb. Deadweight lossc. Consumer/producer burdend. Consumer/producer surplusII. Deadweight Loss ContinuedIII. International Tradea. Comparative advantage: exports vs. importsb. World pricec. Trade affectsCurrent Lecture – Deadweight Loss and International TradeFor the next test, you should be able to identify all the parts in a tax graph. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. In this diagram, you can see all the parts.1. Tax revenue equals the tax multiplied by the quantity sold, graphically represented by the rectangle between the price paid by the consumer and the price earned by the supplier. 2. Deadweight loss is represented by the triangle between the quantity sold and the equilibrium point. It is calculated by the area of the triangle, ½ X Base X Height.3. The consumer and producer burdens are represented by the parts of their surplus that is taken away by the tax, respectively.4. Consumer surplus is the triangle above the tax revenue rectangle; producer surplus is the square below the tax revenue.Deadweight lossUnder what circumstances is there no deadweight loss? Naturally we would assume perfectly inelastic demand would cause a lack of deadweight loss, however, this does not actually happen. Most products that are close to perfect inelasticity are products that we would not tax such as cancer medication or insulin. We could tax something everyone needs, such as food, however that tax would disproportionately affect the poor, since they spend a higher percentage of their money on food than do the wealthy. International trade- All about comparative advantageo If a country has comparative advantage in the production of a good, it will export it.o If a country does not have comparative advantage in the production of a good, they will import it.- There is a world price for each good; we can compare this price to the domestic price of a country that does not trade.- Let's call PD the domestic price; PW is the price in the world market. o Ps < Pw implies that the country has comparative advantage in the good; under free trade, they will export the good. o Ps > Pw implies that country does not have comparative advantage, and therefore they have incentive to import the good.A country's economy is a price taker because it is small, relative to the world market, and it therefore will not affect the world price. PW is the only relevant price, because no seller would sell for less than the world price, and no buyer has reason to pay more than the world price. With a world market, surpluses are exported, and shortages are fixed by importing.Therefore, trade increases overall surplus.  With exports (PD < PW ,) consumer surplus falls, producer surplus rises, and total surplus rises. With imports (PD > PW ,) consumer surplus rises, producer surplus falls, and total surplus rises. NOTE: Whether importing or exporting, trade creates winners and