Which price belongs in the calculation?

H1 Economics - syllabus 8843, 2026

Original teaching notes

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Follow the payment before multiplying.

Consumer expenditure uses what buyers pay per unit. Producer receipts use what sellers retain after a per-unit tax or receive including a per-unit subsidy. Multiply by units actually traded. Government revenue or spending closes the gap. None of these totals is profit: production costs must still be considered.

Buyers
Consumer expenditure is buyers' spending: buyer price x actual quantity traded.
Sellers
Seller receipts are money received before production costs. With a seller tax, subtract tax from the buyer price; with a producer subsidy, add subsidy to it. Then multiply by units sold.
Profit
Profit = seller receipts after the policy payment minus relevant production costs. Receipts alone do not reveal profit.
Common model: dollars per unit, units per day
PolicyBuyer priceSeller price after policy paymentTraded QBuyer spendingSeller receiptsGovernment account
None66804804800
Tax 275 net of tax60420300Collects 120
Subsidy 257 including subsidy100500700Spends 200
Ceiling 444401601600
Floor 8; no procurement88403203200
Quota 40; free licences88403203200

Worked example: Account for one subsidised market

Buyers pay $8 each, sellers receive a $2 subsidy per unit, and 75 units trade.

  1. Buyer spending is 8x 75=$600.
  2. Government subsidy spending is 2x 75=$150.
  3. Seller receipts including subsidy are(8+2)x 75=$750. The accounts reconcile:600+150=750.
  4. If total production costs are $680, profit is 750-680=$70. Without cost information, receipts alone do not reveal profit.

Watch out for this

Consumer expenditure always equals what producers retain.

They coincide in a simple market without a tax, subsidy or other payment. A government payment or deduction separates them.

Check your understanding

Buyers spend $720 in a taxed market and government receives $120 from those sales. What can be concluded?

  1. Producer profit is $600.
  2. Producers retain $600 before other costs.
  3. Producers retain $840 before other costs.

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