law of demand states that as price falls, demand extends and as price rises, demand contracts, other things being equal.
other things being equal means that all factors other than price influencing the demand are assumed constant(no change) like prices of related goods, income of consumer, future expectations regarding price and income etc.
Curve of Law of Demand PRICE QUANTITY 5 10 4 20 3 30 2 40 1 50
law of supply states that as price rises, supply rises and as price falls, supply falls, other things being equal.
other things being equal means that all factors other than price influencing supply are assumed as constant(no change) like prices of factors of production, goal of the firm, govt. policy, future expectations regarding price etc.
Curve of Law of Supply PRICE QUANTITY 5 50 4 40 3 30 2 20 1 10
In economics, an equilibrium is a situation in which:
quantity demanded equals quantity supplied.
refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.
Now a sales tax is imposed. The tax is charged to the seller. For every $1.00 of sales, assume that the seller must pay $0.07 to the government. (Notice that consumers do not pay sales taxes. You have not paid any sales tax money to any government agency. The store pays the sales tax to the government.)
From the point of view of the seller, this is an additional cost of production. In addition to all other costs, the seller must also pay the sales tax.
Do costs of production affect demand or supply?
Will there be a shift or movement along supply?
Since the change is caused by something other than the price of the product, the answer is a shift.
Since costs of production are increasing, the good is less profitable, causing supply to decrease.
we can say that the seller would like to, raise the price to $1.07. Then, the seller could pay the $0.07 in tax and still have the same $1.00 that was earned before the sales tax was imposed.
However, due to the law of demand, the seller cannot raise the price to $1.07. If the seller raises the price, the quantity demanded will fall.
In this case, equilibrium occurs with the new price at $1.04. At any higher price, there would be a surplus. We say that $0.04 is the incidence of the tax on the buyer because the buyer must pay a $0.04 higher price.
We say that the other $0.03 is the incidence of the tax on the seller because the seller earns $0.03 less that was earned before the sales tax was imposed ($1.04 - $0.07 = $0.97).