Question

a) Using supply and demand curve diagrams, show how the equilibrium price and quantity are affected by an increase in tax on suppliers.

(b) What other factors might be responsible for a rise in the equilibrium price of a product?

Answer 1

(a)

In following graph, D0 & S0 are initial demand and supply curves intersecting at point E with price P0 and quantity Q0.

A tax shifts supply curve leftward to S1, which intersects D0 at point F with higher price Pc (Price paid by buyers and market price) and lower quantity Q1. Price received by sellers is Ps (Where Pc - Ps = Unit tax).

(b)

Price may rise if:

1. Demand increases, ceteris paribus, due to

- Higher price of substitute

- Lower price of complement

- Increase (decrease) in consumer income for a normal (inferior) good

- Tastes shifting toward the good

2. Supply decreases, ceteris paribus, due to

- Higher price of inputs

- Destruction of resources

- Technological obsolescence causing a fall in productivity