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Applying Demand Functions

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

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  1. Applying Demand Functions Lectures in Microeconomics-Charles W. Upton

  2. Imposing a Tax Price Consumers Pay S Po D Qo Q Applying Demand Functions

  3. A tax $t is levied on sales of a product Imposing a Tax Price Consumers Pay S Po D Qo Q Applying Demand Functions

  4. 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

  5. Quantity sold drops What Happens Price Consumers Pay S $t P1 Po P1-$t D Q1 Qo Q Applying Demand Functions

  6. 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

  7. 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

  8. A tax $t is levied on purchases of a product Suppose Consumers Pay Price Consumers Pay S Po D Qo Q Applying Demand Functions

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. End ©2004 Charles W. Upton Applying Demand Functions

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