Lectures in Microeconomics-Charles W. Upton Applying Demand Functions D S Price Consum ers Pay Q P o Q o $t P 1 P 1 -$t Q 1
Lectures in Microeconomics-Charles W. Upton Applying Demand Functions.
Dec 19, 2015
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Lectures in Microeconomics-Charles W. Upton
Applying Demand Functions
D
SPrice Consumers
Pay
Q
Po
Qo
$t
P1
P1-$t
Q1
Applying Demand Functions
Imposing a Tax
D
SPrice Consumers
Pay
Q
Po
Qo
Applying Demand Functions
Imposing a Tax
• A tax $t is levied on sales of a product
D
SPrice Consumers
Pay
Q
Po
Qo
Applying Demand Functions
Imposing a Tax
• The supply curve shifts up by $t.
– Why? The price suppliers get is $t less than consumers pay D
SPrice Consumers
Pay
Q
Po
Qo
$t
Applying Demand Functions
What Happens
• Quantity sold drops
D
SPrice Consumers
Pay
Q
Po
Qo
$t
P1
P1-$t
Q1
Applying Demand Functions
What Happens
• Quantity sold drops
• The price suppliers gets decreases.
D
SPrice Consumers
Pay
Q
Po
Qo
$t
P1
P1-$t
Q1
Applying Demand Functions
What Happens
• Quantity sold drops
• The price suppliers gets decreases.
• The price consumers pay, tax included, rises.
D
SPrice Consumers
Pay
Q
Po
Qo
$t
P1
P1-$t
Q1
Applying Demand Functions
Suppose Consumers Pay
• A tax $t is levied on purchases of a product
D
Price Consumers Pay
Q
Po
Qo
S
Applying Demand Functions
Suppose Consumers Pay
• A tax $t is levied on purchases
• The curve shifts down by $t. – The price
consumers pay is $t more, tax included
D
Price Consumers Pay
Q
Po
Qo
S
$t
Applying Demand Functions
Suppose Consumers Pay
• A tax $t is levied on purchases
• The quantity sold drops.
D
Price Consumers Pay
Q
Po
Qo
S
$t
Q1
P1+$t
P1
Applying Demand Functions
Suppose Consumers Pay
• A tax $t is levied on purchases
• The quantity sold drops.
• The price suppliers
get decreases
D
Price Consumers Pay
Q
Po
Qo
S
$t
Q1
P1+$t
P1
Applying Demand Functions
Suppose Consumers Pay
• A tax $t is levied on purchases
• The quantity sold drops.
• The price suppliers
get decreases
D
Price Consumers Pay
Q
Po
Qo
S
$t
Q1
P1+$t
P1
The price consumers pay,
tax included, increases
Applying Demand Functions
Compare the two cases
• Does it make a difference?
D
SPrice Consumers Pay
Q
Po
Qo
S
$t
Q1
Pc
Ps
Applying Demand Functions
Compare the two cases
• Does it make a difference?
• Lets combine the two effects
D
SPrice Consumers Pay
Q
Po
Qo
S
$t
Q1
Pc
Ps
Applying Demand Functions
Compare the two cases
• Does it make a difference?
• Lets combine the two effects
D
SPrice Consumers Pay
Q
Po
Qo
S
$t
Q1
Pc
Ps
Shift in supply and demand curves is the
same, $t
Applying Demand Functions
Compare the two cases
• Does it make a difference?
• Lets combine the two effects
D
SPrice Consumers Pay
Q
Po
Qo
S
$t
Q1
Pc
PsQuantity Sold is the Same
Applying Demand Functions
Compare the two cases
• Does it make a difference?
• Lets combine the two effects
D
SPrice Consumers Pay
Q
Po
Qo
S
$t
Q1
Pc
PsNet price to suppliers is
the same
Applying Demand Functions
Compare the two cases
• Does it make a difference?
• Lets combine the two effects
D
SPrice Consumers Pay
Q
Po
Qo
S
$t
Q1
Pc
PsPrice to consumers is
the same
Applying Demand Functions
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
• 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 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
End
©2004 Charles W. Upton
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