Consider the market for commercial fans. The following graph shows the demand and supply for commercial fans before the government imposes any taxes. Explanation: The equilibrium price and quantity occur at the intersection of the demand and supply curves. Therefore, $90 per fan represents the equilibrium price, and 40 commercial fans represents the equilibrium quantity.Consumer… Continue reading Taxes and Welfare
For a given supply curve, more inelastic demand results in higher tax revenues and lower deadweight loss associated with a tax increase. A relatively less elastic demand implies that consumers are not highly responsive to changes in price; a tax on the good does not lead to a large change in quantity demanded. This implies that the equilibrium quantity after imposition of a tax is only slightly less than the equilibrium quantity before the tax, entailing minimal deadweight loss since the lost gains from trade are relatively small.
Every individual confronts economic issues daily. This is especially true of business owners, who spend their time thinking of economic issues such as how to handle changes in the price of goods, how to allocate their time, and whether to buy or produce goods in order to efficiently allocate their scarce resources.