Commentary Micro Economics

Word limit – 750

Structure
1. Introduction of the theory/Concepts
2. Link to the theory
3. Application and analysis (Diagrams)
4. Evaluation

LPG price hiked for second time in November.

Introduction:-
indirect tax increases the firm's costs of production. Therefore, as there is a change in the
determinants of supply, the market supply curve shifts to the left. This results in a new
equilibrium at a lower quantity and a higher price than the initial equilibrium. This reduction Commented [H1]: Is the price increased due to increase in
demand ?
in quantity and increase in price leads to a loss of welfare within the economy as consumers
and producers are worse off than before the tax was introduced to the market. Commented [H2]: Why producers [their producer surplus
increased]consumer surplus is reduced
Indirect Tax is one imposed upon the expenditure it is placed upon the selling price of a Commented [H3]: Correctly identified
product, so it rises the firms cost and shifts the supply curve for the product vertically
upwards by the amount of the tax, because of this shift less product will be supplied at every
price.
There are two types of Indirect taxes:- Commented [H4]: Correctly identified

1. specific Tax – This is a fixed specific amount of tax that is imposed upon a product.
2. Percentage Tax or Ad Valorem Tax :-This is where the tax is a percentage of the
selling price.

Inelastic means that a 1 percent change in the price of a good or service has less than Commented [H5]: Relatively inelastic
a 1 percent change in the quantity demanded or supplied. Inelastic goods have fewer
substitutes and price change doesn't affect quantity demanded as much.
Increase In the price of LPG was lead because of it’s and inelastic product and they might
have increase in the transportation cost which lead to an increase in Price because as is an
inelastic product so increase on the price will not affect much the demand, and continue the
sale of LPG
Diagram -3
Shows the shifts and movements in the diagram which are caused by imposing of indirect tax
on inelastic product as an increase in the price is not having much effect on demand because
its for inelastic from which doesn’t have substitutes so increase or decrease in the price will
not have that much impact on the demand.
Diagram -4
Shows the shifts and movements in the diagram which are caused by imposing of indirect tax
on elastic product as an small increase or decrease in the price is affecting the demand for the
product, as an small increase in the price has lead an huge decrease in the demand for the
product because as its an elastic product it has substitutes and alternatives of it and neither its
and necessity goods so why people will pay higher for it they will make an choice and apply
the opportunity cost concept and will prefer the which will be better and cheaper and giving
the best value for money.

Commented [H6]: No need for these diagrams

Diagram A Commented [H7]: You can explain price elastic and inelastic
products in the introduction ,you may remove this
Its shows the perfectly Elastic demand which isa perfectly elastic demand curve is
represented by a straight horizontal line and shows that the market demand for a product is
directly tied to the price. In fact, the demand is infinite at a specific price. Thus, a change in
price would eliminate all demand for the product
Diagram B
Its shows the Perfectly inelastic demand means that the quantity demanded doesn't change
with a change in price. It’s ansituation in which the price of a product will have no effect on
the supply. In a perfectly inelastic situation regardless of the amount of a product on the
market, the price of the product remains the same.

Evaluation Commented [H8]: Good attempt ,can you evaluate the affect of
tax on all the stake holders who is gaining and who is losing
This diagram shows the effect of indirect
tax imposed on inelastic product as LPG
from point P to P1 it’s the burden on
consumer as now consumer has to pay
higher prices and all the green shaded area
is the burden on producer and whole part
shaded green and cream colour is the
government owning from indirect taxes as Commented [H9]: Its earnings
its and increase in government revenue
because of indirect taxes imposed .