Answer to Question #116832 in Microeconomics for fizzah

Question

Q.2 Under the demand and supply analysis, let us assume that the price of Hard wood is $50 per unit. Now the government has imposed 5 % tax to the seller which increased the cost of production. Explain the following with the help of diagram.
i. Do the cost of production affects Demand and Supply? (explain with the reference of necessities and
Non-essential goods)
ii. Will there be a shift or movement along the supply curve? (explain with the reference of necessities
and non-essential goods)
iii. In order to maintain the same profit as before imposition of tax, how much price the seller should
increase presuming that the a) demand for the product is perfectly inelastic and
b) demand of the product is perfectly elastic
iv. What are the determinants of demand and supply of any product

Answer 1

I. The cost of production affects demand and supply

 

Demand for essential commodities: such as flour, milk, tissue paper is characterized by very low price elasticity.

Price elasticity is the measure of change in price or a change in the quantity supplied on the demand for a product or service.

Demand is inelastic; demand does not change with rising prices

The supply of essential goods grows with an increase in their price or remains unchanged

           

II. The supply of essential goods grows with an increase in their price or remains unchanged. Similarly for non-essential goods

III. To maintain same profit before tax imposition,the seller should increase the price to:

a)   demand for product is perfectly inelastic

    50 × 0.05 = 52.5

a)   demand for product is perfectly elastic

    50 × 0.05 = 52.5

Demand depends on:

1. Use of advertising
2. Consumer expectations
3. Availability of goods
4. Utility stuff
5. Income values
6. Number of people
7. Prices set for interchangeable goods
8. Changes in environmental preferences
9. Fashion and tastes.

IV. determinants of demand and supply of any product are;

1. changes in production costs as a result of technical innovations, changes in resource sources, changes related to tax policy, as well as characteristics that affect the information of the cost of factors of production.
2. Entering the market of new firms.
3. Changes in prices for other products that lead to the departure of the company from the industry.
4. Natural disaster
5. Political actions and wars
6. Forward-looking economic expectations
7. Firms engaged in the industry, when the price increases, use reserve or quickly introduced new capacity, which automatically leads to an increase in supply.
8. If the price continues to increase other producers will rush into this industry, which will further increase production and an increase in supply.