supply and demand with tax

Summary

This video explains how taxes impact market equilibrium within a supply and demand framework. It begins with the calculation of equilibrium price and quantity without taxes, where buyers pay $40 for 10 units. The introduction of a $6 tax on sellers alters this dynamic, raising the price to $42 for buyers while sellers receive only $36 after tax. The new equilibrium quantity drops to 8 units. The analysis highlights the distribution of the tax burden, with buyers absorbing one-third and sellers two-thirds of the tax, demonstrating the nuanced effects of taxation on market behavior.

Takeaways

• 😀 The market equilibrium without taxes is determined by the intersection of demand and supply equations.
• 😀 The demand equation is represented as Q_d = 50 - P, where P is the price consumers pay.
• 😀 The supply equation is Q_s = -10 + 0.5P, indicating that higher prices incentivize more supply from sellers.
• 😀 The equilibrium price without taxes is calculated to be $40, with an equilibrium quantity of 10 units.
• 😀 Introducing a $6 tax on sellers creates a price wedge between what buyers pay and what sellers receive.
• 😀 After the tax is imposed, buyers pay $42, while sellers effectively receive $36 after paying the tax.
• 😀 The new equilibrium quantity in the market drops to 8 units due to the tax's impact on demand and supply.
• 😀 Buyers bear a portion of the tax burden by paying $2 more, while sellers bear $4 due to reduced effective prices.
• 😀 The tax burden is shared: buyers pay one-third and sellers pay two-thirds of the total tax burden.
• 😀 This analysis illustrates the influence of taxes on market dynamics, affecting both prices and quantities.

Q & A

What is the equilibrium price and quantity without any taxes?

The equilibrium price without taxes is $40, and the equilibrium quantity is 10 units.

How does the demand equation reflect consumer behavior regarding price changes?

The demand equation (QD = 50 - P) shows that as the price increases, the quantity demanded decreases, indicating an inverse relationship between price and quantity demanded.

What happens to the supply equation when a tax is imposed on sellers?

When a tax is imposed, the supply equation adjusts to reflect the net price received by sellers, which is the price buyers pay minus the tax amount.

How is the price that buyers pay affected by a tax on sellers?

With a $6 tax imposed on sellers, the price that buyers pay increases from $40 to $42.

What is the effect of the tax on the equilibrium quantity in the market?

The equilibrium quantity decreases from 10 units to 8 units when the tax is introduced.

How is the tax burden shared between buyers and sellers?

The tax burden is shared such that buyers pay $2 of the tax (1/3 of the total tax), while sellers bear the remaining $4 (2/3 of the total tax).

What calculations are performed to find the new equilibrium price and quantity after the tax is imposed?

To find the new equilibrium, we set the adjusted quantity demanded equal to the adjusted quantity supplied and solve for the price, leading to a new price of $42 for buyers and a quantity of 8 units.

What does the term 'wedge' refer to in the context of taxation in this market?

The 'wedge' refers to the difference between the price buyers pay and the net price sellers receive after the tax is deducted.

Why do sellers receive a lower effective price after the tax is implemented?

Sellers receive a lower effective price because the tax amount is deducted from the price paid by buyers, resulting in a lower net price for sellers.

What is the significance of setting quantity demanded equal to quantity supplied?

Setting quantity demanded equal to quantity supplied is essential to finding the market equilibrium, where the forces of supply and demand balance each other.