Surpluses and indirect tax and subsidies Flashcards
consumer surplus
difference between the equilibrium price and the price the consumer is prepared to pay
producer surplus
difference between the equilibrium price for a good and the price the producer is prepared to sell at.
how can supply and demand changes affect consumer and producer surplus
shifts in the supply and demand curves can cause the equilibrium price to change so becomes closer or further away from the willing price of the producer or consumer
subsidy graph who is on the bottom and top
bottom - consumer
top - producer
Indirect taxes graph who is on the bottom and top
bottom - producer
top - consumer
why does a subsidy shift the supply curve to the right
encourages increases in production and falls in costs so price falls which leads to demand increasing
who gains more from a subsidy or tax to a good with inelastic demand
consumer
who gains more from a subsidy or tax to a good with elastic demand
producer
why do taxes shift the supply curve to the left
increases the price of a good leading to reduction in demand.
Indirect tax
tax on expenditure like VAT which increases as a proportion and specific tax or excise duty which increases with amount of the good bought
Impacts of an indirect tax
- Producer sees a rise in costs and a fall in output which damages profits
- Consumer sees higher prices
- Government gains tax revenue
What is the size of an indirect tax on a graph
The whole shaded area both burdens
Why does VAT tax make supply curve more inelastic
Because it is a proportion of the price so grows with price
What is the incidence of tax
The burden on the taxpayer
Who pays the tax if PED is elastic and PES inelastic
Producer
