LS11 - Taxes and Subsidies

Question 1

Direct Tax

Answer 1

Tax levied on organisations or individuals. Example is income tax

Question 2

Indirect Tax

Answer 2

A tax levied on goods or services. Example is VAT
The person paying is the consumer

Question 3

Specific Tax

Answer 3

It causes a parallel shift in the supply curve. The tax does not vary and is fixed

Question 4

Ad Valorem Tax

Answer 4

Causes a Non-Parallel shift in the supply curve. The tax increases as the amount sold rises.

Question 5

The two Indirect taxes both affect the…

Answer 5

Supply curve.

Specific tax causes a parallel shift in the supply curve

Ad Valorem tax causes a non parallel shift in the supply curve

Question 6

Why does the government use taxes?

Answer 6

For government revenue and to prevent certain economic activities. An example could be a tax on smoking which is used to discourage that practice.

Question 7

Subsidies

Answer 7

Subsidies are grants given by the government to reduce the cost of production.

Question 8

Movements on the Supply Curve

Answer 8

Changes in price level cause movements on the supply curve
Extensions on the Supply curve are caused by - An increase in the price of a good which leads to an increase in the supply of that good
Contractions on the supply curve are caused by - A decrease in the price of a good which leads to an decrease in supply of that good

Question 9

Changes in the price of a good or service and how it affects supply and demand

Answer 9

An increase in the price of a good or service leads to - An increase in supply, a decrease in demand
A decrease in the price of a good or service leads to - A decrease in supply, an increase in demand

Question 10

Shifts in the Supply Curve are caused by

Answer 10

Non Price Factors

P - Productivity - Increased productivity means that there is a decrease in cost of production and therefore more supply
I - Indirect Tax - The higher the indirect tax, the lower the supply because the cost of production is higher
N - Number of firms - The more firms that there are, the more supply that there is
T - Technology - Advances in technology can lead to an increase in supply and decrease the cost of production
S - Subsidies - Government grants can lead to an decrease in the cost of production and therefore the supply increases

Question 11

The two types of Indirect tax are…

Answer 11

Ad Valorem Tax and Specific Tax

Question 12

Why does the indirect tax affect the supply curve

Answer 12

Because the indirect taxes increase the cost of production

Question 13

Where is producer and consumer burden on an indirect tax diagram

Answer 13

Consumer burden is a rectangle which starts at P1P2 to the equilibrium, A and the P1 line

Producer burden is the rectangle below it which starts at P1 and stretches out to the equilibrium point of the S2 line. Down to S1 and then back to the Y axis.

Question 14

The incidence of tax

Answer 14

The tax burden on the tax payer. This can be either the producer or consumer

Question 15

The incidence of tax when demand is perfectly elastic or supply is perfectly inelastic

Answer 15

If demand is perfectly elastic, it is shown through a horizontal demand line.

If supply is perfectly inelastic, it is shown through a vertical demand line.

When demand is elastic or supply is inelastic, it means that more of the tax burden is on the producer

Question 16

How do subsidies impact suppliers

Answer 16

By reducing the cost of production, it allows more of a good or service to be produced

Question 17

Subsidies and the producer gain and the consumer gain

Answer 17

This is shown through a graph in which the producer gain is the top rectangle and consumer gain is the smaller rectangle.