Download Price Controls - Gore High School

DIRECT TAXES
Tax on income and earnings. E.g. Income tax.
If direct taxes are increased this will reduce people’s disposable income
shifting the demand curve to the left.
Price
($)
S
P1
P2
D1
D2
Q2 Q1
Quantity (units)
INDIRECT TAXES
A tax on consumption or spending. E.g. GST.
An indirect tax will affect the supply curve
S2
Price
($)
S1
P2
P1
D
Q2
Q1
Quantity (units)
Remember that GST is added on top of the price the seller
will receive therefore will shift the supply curve UP
(vertically) to reach this new price.
At the new price the difference between the original and new supply
curves should reflect the tax, not the difference between the original
and new equilibrium points (tax=$20, (70 -50) NOT $10).
Price
($)
S1
S2
The amount
of the tax.
70
60
50
D
40 45 Quantity (units)
SALES TAXES ( INDIRECT TAXES)
Indirect tax = A tax on consumption or spending e.g. GST ( Goods
and Services Tax)
Sales tax will affect supply as the tax effectively increases the producers
costs of production. Therefore producers are willing to supply less which will
cause supply curve to shift UP (vertically) to reach this new price
Example – Government places a $4 tax on Cigarettes
22
Price ($)
S with Tax
S
20
18
Pe1
16
Pe
14
Pp
12
0
$4 tax
2
4
6
Qe1
8
Qe
10
D
12
Quantity ( 000s)
SALES TAX
The distance between the old and new supply curves is exactly the same amount of the tax
Part of the sales tax has been passed on to the consumer through the increase in
equilibrium price and part of the tax has been taken on by the producer.
22
Price ($)
S with Tax
S
20
18
Pe1
16
Pe
14
Pp
12
0
$4 tax
2
4
6
Qe1
8
Qe
10
D
12
Before the tax
After the tax
Consumers Paid =$14 ( Old Equilibrium
price, Pe)
Producers received= $14 ( Old Equilibrium
price, Pe)
Quantity sold = 8000 ( Old equilibrium
Quantity, Qe)
Consumers Pay = $16 ( New Equilibrium price,
Pe1)
Producers receive = $12 ( consumers price –
tax, Pp)
Quantity sold = 6000 ( New Equilibrium
Quantity, Qe1)
Government Revenue = 24000 ( New Equilibrium
quantity x tax amount)
22
Price ($)
S with Tax
S
20
18
Pe1
16
Pe
14
Pp
12
0
$4 tax
2
4
6
Qe1
8
Qe
10
D
12
Quantity ( 000s)