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Applying Supply And Demand Model to Determine Market Equilibrium

Applying Supply And Demand Model to Determine Market Equilibrium

Demand is the quantity of a good that consumers are willing to buy within a given price and within a specified period of time like several months of even a year, while all other factors that affect buying are held constant. On the other hand, supply is the amount of the available goods that the firm is willing to sell within a given period of time, while all other factors affecting firm supplying decisions are held constant. Market equilibrium is the point where the amount supplied and the amount demanded are equal  (Mankiw, 2011) This results to the demand and supply curve intersecting at the centre. The figure below shows intersection at point t.

diagram showing equilibrium of demand and supply

What is tax incidence?

Tax incidence is an economic term referring to the division of a tax burden between the buyers and the sellers. The concept of tax incidence is much related to the price elasticity of demand and supply rather than where the revenue is collected. It appears to be more elastic in demand that in supply. Tax incidence shows which group will pay the price of tax, be it consumers of producers. (Jain, 2010)

What determines the tax incidence?

Determinants of tax incident are;

Nature of tax

Tax can be direct or indirect. Direct taxes fall on the producers while the indirect tax fall on the consumers.

Form of market

In perfect competition markets, neither producer nor consumer affects the price thus there is no shift in of tax. Under monopoly markets, the producer is in a position to influence price and hence shifting of tax.

Cost

Tax always raises the costs of goods and supplies and hence reduces the demand which leads to lower output.

Price

Shifting of tax burden only takes place through change of price, therefore, then prices remain constant, tax too do not shift.

Elasticity

In elasticity of demand and supply, if the demand of a good is elastic, tax shifts to the producer while inelastic demand goes to the consumer. In supply, the buyer will face the burden when supply is inelastic

Diagram showing tax burden to consumers

References

Jain, T. (2010). Micro-economics and Basic Mathematics. Market Equilibrium , 28.

Mankiw, N. (2011). Economics. Microeconomics Supply and Demand Curve , 12-31.

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