The demand can be defined as willingness and ability of consumers to pay and supply can be defined as the willingness and ability to sell. Besides, a tax is a type of measurement for the government to regulate the market and it can get a revenue from that. In fact, a tax will make both supply and demand decrease because buyers should pay a higher price and sellers will spend cost more money to supply. The diagram of tax on sellers will be shown following.
As shown in diagram (a), the previous equilibrium price of supply a can of cola is $5.00 and we suppose that tax equals to $3.00, which leads to the S1 curve shifts upward and get a higher equilibrium price at $8.00. Additionally, the blue frame in the diagram is government revenue, …show more content…
The price elasticity of demand can be calculated as the percentage change in quantity demanded divide percentage change in price.
There are various reasons that will cause the change of price elasticity of demand. For example, the substitution between two goods such as Cola and Fanta because when the price of cola increase, the demand of Fanta will increase. Besides, how much the consumer will spend on high in sugar content may depend on the income. If his income decreases than before, he will choose to buy other necessaries. Furthermore, the elapsed since the change of price can also influence the price elasticity of the product. If a consumer is used to buy high in sugar content that helps to a price change more elastic demand for the good.
The size of burden relies on price elasticity. The following two diagrams will show how price elasticity of demand will play a role in determining the size of the burden on …show more content…
And we can see that when demand curve is elastic, the consumer burden is 1x70=70 but when demand is inelastic, the consumer burden is 2x90=180. Therefore, the conclusion can be made that when demand curve is steeper, the consumer burden will increase.
Allocative efficiency is a state of the economy in which production represents consumer preferences. The following diagram will show the allocative efficiency.
On the basis of this diagram, when demand curve is vertical which is to say that when the price elasticity of elastic is perfectly inelastic, there is no deadweight loss and l assume that the tax=$0.5. From the diagram, the total surplus is maximizing and marginal social cost equals the marginal social cost.
The indifference curve is a line that shows combinations of goods among which a consumer is indifferent. Because Good H and Good G are close substitute，The diagram is consists of three concave curve, and the following diagram shows Pablo 's indifference curve. And l assume that an MRS is 1.
As shown in the diagram, the points M, N, and K are the situation that MRS equals 1 for the perfect substitution. But the Good H and GOOD G are a very close substitute, the IC1 IC2 IC3 are very close to the perfect substitution