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Applying Demand Functions Imposing a Tax Price Consumers Pay S P o D Q o Q A tax $t is levied on sales of a product Imposing a Tax Price Consumers Pay S P o D Q o Q The supply curve shifts up by $t. Why? The price suppliers get is $t less than consumers pay Imposing a Tax

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applying demand functions

Applying Demand Functions

Lectures in Microeconomics-Charles W. Upton

imposing a tax
Imposing a Tax

Price Consumers Pay

S

Po

D

Qo

Q

Applying Demand Functions

imposing a tax3
A tax $t is levied on sales of a productImposing a Tax

Price Consumers Pay

S

Po

D

Qo

Q

Applying Demand Functions

imposing a tax4
The supply curve shifts up by $t.

Why? The price suppliers get is $t less than consumers pay

Imposing a Tax

Price Consumers Pay

$t

S

Po

D

Qo

Q

Applying Demand Functions

what happens
Quantity sold dropsWhat Happens

Price Consumers Pay

S

$t

P1

Po

P1-$t

D

Q1

Qo

Q

Applying Demand Functions

what happens6
Quantity sold drops

The price suppliers gets decreases.

What Happens

Price Consumers Pay

S

$t

P1

Po

P1-$t

D

Q1

Qo

Q

Applying Demand Functions

what happens7
Quantity sold drops

The price suppliers gets decreases.

The price consumers pay, tax included, rises.

What Happens

Price Consumers Pay

S

$t

P1

Po

P1-$t

D

Q1

Qo

Q

Applying Demand Functions

suppose consumers pay
A tax $t is levied on purchases of a productSuppose Consumers Pay

Price Consumers Pay

S

Po

D

Qo

Q

Applying Demand Functions

suppose consumers pay9
A tax $t is levied on purchases

The curve shifts down by $t.

The price consumers pay is $t more, tax included

Suppose Consumers Pay

Price Consumers Pay

S

Po

D

$t

Qo

Q

Applying Demand Functions

suppose consumers pay10
A tax $t is levied on purchases

The quantity sold drops.

Suppose Consumers Pay

Price Consumers Pay

S

P1+$t

Po

P1

D

$t

Q1

Qo

Q

Applying Demand Functions

suppose consumers pay11
A tax $t is levied on purchases

The quantity sold drops.

The price suppliers get decreases

Suppose Consumers Pay

Price Consumers Pay

S

P1+$t

Po

P1

D

$t

Q1

Qo

Q

Applying Demand Functions

suppose consumers pay12
A tax $t is levied on purchases

The quantity sold drops.

The price suppliers get decreases

Suppose Consumers Pay

Price Consumers Pay

S

The price consumers pay, tax included, increases

P1+$t

Po

P1

D

$t

Q1

Qo

Q

Applying Demand Functions

compare the two cases
Does it make a difference?Compare the two cases

Price Consumers Pay

S

S

Pc

Po

Ps

D

$t

Q1

Qo

Q

Applying Demand Functions

compare the two cases14
Does it make a difference?

Lets combine the two effects

Compare the two cases

Price Consumers Pay

S

S

Pc

Po

Ps

D

$t

Q1

Qo

Q

Applying Demand Functions

compare the two cases15
Does it make a difference?

Lets combine the two effects

Compare the two cases

Price Consumers Pay

S

S

Pc

Po

Shift in supply and demand curves is the same, $t

Ps

D

$t

Q1

Qo

Q

Applying Demand Functions

compare the two cases16
Does it make a difference?

Lets combine the two effects

Compare the two cases

Price Consumers Pay

S

S

Pc

Po

Ps

Quantity Sold is the Same

D

$t

Q1

Qo

Q

Applying Demand Functions

compare the two cases17
Does it make a difference?

Lets combine the two effects

Compare the two cases

Price Consumers Pay

S

S

Pc

Po

Ps

Net price to suppliers is the same

D

$t

Q1

Qo

Q

Applying Demand Functions

compare the two cases18
Does it make a difference?

Lets combine the two effects

Compare the two cases

Price Consumers Pay

S

S

Pc

Po

Ps

Price to consumers is the same

D

$t

Q1

Qo

Q

Applying Demand Functions

conclusion
Conclusion
  • The incidence of a tax is independent of who actually pays the tax.
  • The actual split between demanders and suppliers depends on the slope of the supply and demand curves, not the legalities.

Applying Demand Functions

an old problem
An Old Problem
  • The City of Kent is planning a tax on automobile sales.
  • One plan would levy the tax on dealers, the other on customers.
  • Which will have the greater effect on sales?

Applying Demand Functions

an old problem21
An Old Problem
  • The City of Kent is planning a tax on automobile sales.
  • One plan would levy the tax on dealers, the other on customers.
  • Which will have the greater effect on sales?

There is a difference? (Actually No)

Applying Demand Functions

slide22
End

©2004 Charles W. Upton

Applying Demand Functions