8/15/15

The effect of taxes on supply and demand


One form of government intervention is the introduction of taxes. Taxes are typically introduced to increase government revenue, but they also have the effect of raising the cost of goods and services to the consumer. Because of the increased cost, we generally see a reduction in the quantity of goods and services produced and consumed after the introduction of taxes. A common form of tax is a sales tax, which is added on to the price of a product and paid by the consumer. Another common type of tax is a VAT (value added tax) which is paid by the producer along their production chain.



The sales tax on the consumer shifts the demand curve to the left, symbolizing a reduction in demand for the product because of the higher price. While demand for the product has not changed (all of the determinants of demand are the same), consumers are required to pay a higher price, which is why we see the new equilibrium point occurring at a higher price and lower quantity. The magnitude of the shift in the demand curve will be equal to the amount of the tax. This makes sense, because the change in demand is going to be equal to the change in price that is caused by the tax.
Taxes on supply and demand

The VAT on the suppliers will shift the supply curve to the left, symbolizing a reduction in supply (similar to firms facing higher input costs). While supply for the product has not changed (all of the determinants of supply are the same), producers incur higher cost, which is why we will see a new equilibrium point further up the demand curve at a higher price and lower quantity. Once again, the magnitude of the shift in the supply curve will be equal to the amount of the tax introduced by the government. Essentially, the firms are passing on the tax to the consumers in the same way they would pass on higher input costs.

Another type of tax is a labor tax. This increases the price of labor to firms (because they have to pay the wage AND the tax) which will decrease employment and wages.


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1 comments:

top essay writing service on November 29, 2016 at 3:07 AM said...

Impose powers as a rule require either the purchaser or the vender to be lawfully in charge of installment of the duty. Impose occurrence is the path in which the weight of an expense is shared among the market members ("who bears the cost?"). Charges will ordinarily constitute a more prominent weight for whichever party has a more inelastic bend – e.g., if supply is inelastic and request is versatile, the weight will be more noteworthy on the makers. An appropriation moves either the request or supply bend to one side, contingent on whether the purchaser or merchant gets the endowment. On the off chance that it is the purchaser getting the sponsorship, the request bend moves right, prompting to an expansion in the amount requested and the harmony cost. In the event that the merchant gets the sponsorship, the supply bend moves right and the amount requested will increment, while the balance value diminishes.

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