Impact of Tax on price and quantity

Before taxation the equilibrium price was p0 and quantity Q0.A tax of
p0T was imposed and as tax imposed the supply curve shift left
implying reduction of supply. As a result of this a new equilibrium
is established at E1 and the new equilibrium price P01,ie,out of
p0T tax p0p1 amount is shifted to the price and that much burden
will be borne by the consumer and P1pT amount of tax would be
borne by the seller. This graph explain the tax sharing.

How tax is shifted? When tax shifting is possible?

*If supply remains unchanged, demand is perfectly inelastic the full

tax amount is shifted to the consumer

• If demand is considered as given, and supply curve is perfectly

inelastic ,the entire tax would be born by the seller.
• If the demand curve is perfectly elastic, the price cannot be shifted,
the entire tax is borne by the seller.
• If the supply curve is perfectly elastic, the tax is fully shifted to the
price-consumer..
 • Relatively inelastic demand causes shifting more tax on consumer
and less on the producer.
• Given the demand schedule, greater the elasticity of supply for the
product, the greater would be the tax burden borne by the buyer.
Module .3

CONSUMER BEHAVIOUR – CONSUMER EQUILIBRIUM

There are two approaches to the demand theory or consumer behaviour

-Cardinal and ordinal .
1) Cardinal Measurement of utility.
In the cardinal measurement of utility the Marshallian utility
approach is very popular.It contains The Law of Diminishing
Marginal Utility and The Law of equi -marginal utility.

Assumptions of this theory Law of diminishing marginal utility.

a) Utility is cardinally measurable- ie,can be measured in

numerical terms.

b) Utilities are independent of one commodity from another.

c) Constant marginal utility of money.
d) Introspection-from one’s own experience it is possible to draw
inference about another person. “
Marshall States the law of DMU thus,The additional benefit
which a person derives from a given increase of his stock of a
thing diminishes with every increase in stock that he already
has.”