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.
| Policy | Buyer price | Seller price after policy payment | Traded Q | Buyer spending | Seller receipts | Government account |
|---|---|---|---|---|---|---|
| None | 6 | 6 | 80 | 480 | 480 | 0 |
| Tax 2 | 7 | 5 net of tax | 60 | 420 | 300 | Collects 120 |
| Subsidy 2 | 5 | 7 including subsidy | 100 | 500 | 700 | Spends 200 |
| Ceiling 4 | 4 | 4 | 40 | 160 | 160 | 0 |
| Floor 8; no procurement | 8 | 8 | 40 | 320 | 320 | 0 |
| Quota 40; free licences | 8 | 8 | 40 | 320 | 320 | 0 |
Worked example: Account for one subsidised market
Buyers pay $8 each, sellers receive a $2 subsidy per unit, and 75 units trade.
- Buyer spending is 8x 75=$600.
- Government subsidy spending is 2x 75=$150.
- Seller receipts including subsidy are(8+2)x 75=$750. The accounts reconcile:600+150=750.
- 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?
- Producer profit is $600.
- Producers retain $600 before other costs.
- Producers retain $840 before other costs.