70 Chapter 9: An Overview of the National and International Economies
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
10. See the text chapter for an example of the circular flow diagram. If the households face higher
taxes, they would consume less, resulting in lower saving and, thus, investment. This decrease in
the amount of investment spending by business firms combined with reduced consumption
spending by households will decrease the total expenditures. As a result, total output and income
will also decline.
ACTIVE LEARNING EXERCISE
This exercise will allow students to analyze the impact of government taxes on the behavior of suppliers
as well as that of consumers. Students will also get an opportunity to review the basic principles of
supply and demand covered in the earlier chapters.
The market under consideration is the fish market. Each demander wants at least one fish. Each fish
seller has costs of $5 a day, whether or not he or she sells any fish. A fish seller will have either one or
two fish to sell. There are three market sessions.
Divide the class so that there are more buyers than sellers. Prepare value sheets for buyers so that equal
numbers have each value. On 3 x 5 cards or pieces of paper indicate the value the buyer places on a
fish. Equal numbers of buyers value the fish at each of five different values: 30, 25, 20, 15, or 10.
Prepare seller cards indicating whether the fish seller has one or two fish to sell.
Materials needed:
• Green and red tickets
• Buyer value sheets noting buyer values of 30, 25, 20, 15, or 10
• Seller sheets indicating whether each fish seller has one or two fish to sell
Buyers and sellers hold tickets aloft (red for seller, green for buyer) and begin trading. Once a price is
agreed on, the names of the traders and the price are recorded. If the seller has two fish, then the seller
returns to the market for another trade. The profit of the seller is the difference between the price
received on one or both fish and $5. The profit for the buyers is the difference between the value and
the price paid.
Once the data are recorded, redistribute the materials, and carry out the trading session again.
Once the data for the second session are recorded, redistribute the materials, and inform everyone that
the government has decided to impose a sales tax of $10 per fish that is paid by the fish seller. This
means that the fish seller’s profits will be the price paid by buyers less the fixed cost of $5 less the $10
tax on each fish sold. Then carry out the trading again. Record the data.
For the final trading session, indicate that the $10 tax will be paid by the buyer so that the buyer profit
will be value of the buyer less the price paid and the $10.
Draw the demand and supply curves for each session. Compare the outcomes.