How do taxes affect a supply curve?

  • Taxation shifts a supply curve to the left.

    At a given level of demand, taxation’s reduction of incentives will result in a decrease in the production of goods or services. As shown above, the equilibrium price will rise and the equilibrium quantity will fall.

    If we instituted a tax on cars equivalent to 80% of the profit from selling that car, fewer resources would be allocated to car production. The raw materials needed would be diverted to the production of more profitable goods. General taxation works the same way, just with a depression of total output rather than specific good production.

    Okay, if you’re in economics class and you’re looking for a one word answer, it moves it to the left.

    What that means is that with the introduction of more taxes, potential business owners have less incentive to go through the hell of starting a business. Very few large business owners do it because they love it, far more do it because they make a lot of money.

    Think about it this way: If your income tax for a 9–5 job was at 50%, but the tax for starting a business was 5%, would you want to start a business? Of course, because you keep almost twice the amount of money you made. However, when business and corporate tax rates get higher than income tax, it leads to less people starting businesses because the risk isn’t worth the potential of making a little more.

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    Half of the taxes are envisaged to price make supply and the other demand from their inelasticity separation of supply to demand, if any, for supply’s demand(s) of other markets. This middleman nature of taxes that are for supply of other free rider immutable services like being free to plaintiff might not righteously be despondent from maximum qoutput and consumption including inventory. Certainly, however, taxes are price making, and the dead weight imposes itself no matter the individual product revenue, yet if the supply and demand are complementary to sinking fixed cost investment machine rent propensity, the supply curve might alone shift up to accommodate the dead-weight free rider mutable taxes.

    Taxes can be on the consumer side, which effects demand. Or taxes can be on the business side, which impacts supply. So when business taxes are adjusted, it will impact the supply side. And just like with consumers, businesses would prefer or enjoy taxes. So reducing business taxes will lower the costs of doing business, which will increase supply. And raising business taxes will increase the cost of doing business, which would lower supply. Thus, we have an inverse relationship between business taxes and supply.

    Here is a graphical illustration I put together to show what would happen. If business taxes were increased, the supply curve would shift inward from S2 to S1. And if business taxes were cut, the supply curve would shift outward from S1 to S2.

    To answer this question, we have to look back at how suppliers behave in a market.

    First of all, we start off by defining the term profit.

    Profit = Revenue – Costs

    Firms basically want to maximize their profits. We know, from a calculus POV, that if profits are maximized, then the derivative of the profits with respect to quantity produced must be zero.

    The derivative of the revenue with respect to the quantity of production is the price. The derivative of the cost is the marginal cost.

    0 = Unit Price – Marginal Cost

    Thus, we obtain the relation that the price is equal to the marginal cost.

    Now, the marginal cost curve gives us the relationship between the quantity produced and the marginal cost of production. However, since marginal cost is the same as price, thus, the marginal cost curve can easily be interpreted as being nothing but the supply curve.

    Any taxes or government subsidies will naturally impact the cost function, and if it’s not constant, the marginal cost will be affected as well. Thus, the impact of a tax on a supply curve can be observed by looking into how the tax affects marginal costs.

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    None. Supply and demand is fixed by the total economy. Nobody can predict what each consumer will spend their money on. Less money translates into lower cost products and services. The demand curve remains the same.

    Since most of the taxes introduced by the government are paid by both consumers and producers it will shift it upward.

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    Suppose the demand curve is q=Qd(p)

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    q=Qd(p)

    and supply curve is q=Qs(p)

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    q=Qs(p)

    . Now suppose the sales tax at the rate of t

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    t

    per unit is imposed.

    1. If the seller is responsible for paying the taxes, then the new supply curve will be q=Qs(pt)

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      q=Qs(pt)

      . This is because out of p

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      p

      price paid by the consumer, the pt

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      pt

      is received by the producer. This will result in the leftward shift of supply curve and the equilibrium price p

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      p

      (post-tax) and quantity q

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      q

      can be obtained by solving the system of equations: q=Qs(pt)

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      q=Qs(pt)

      and q=Qd(p)

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      q=Qd(p)

    2. If the buyer is responsible for paying the taxes, then the new demand curve will be q=Qd(p+t)

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      q=Qd(p+t)

      . This is because when the producer demands p

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      p

      then the buyer pays p

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      p

      to him and t

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      t

      to the government. This will result in the leftward shift of demand curve and the equilibrium price p

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      p

      (pre-tax) and quantity q

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      q

      can be obtained by solving the system of equations: q=Qs(p)

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      q=Qs(p)

      and q=Qd(p+t)

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      q=Qd(p+t)

    Regardless of who pays the taxes, there will be no difference in the equilibrium quantity and prices i.e. p

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    p

    and q

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    q

    are the equilibrium post-tax price and quantity of situation (1) if and only if pt

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    pt

    and q

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    q

    are the equilibrium pre-tax price and quantity of situation (2). Proof is immediate:

    q=Qs(pt) and q=Qd(p)q=Qs(pt) and q=Qd(pt+t)

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    q=Qs(pt) and q=Qd(p)q=Qs(pt) and q=Qd(pt+t)

    Added later (As suggested by Don Sillers): Consequently, it can also be concluded that the welfare impact (burden) of the tax is also the same on both buyer and seller in the two situations. The share of the burden of tax that the buyer has to bear will, however, depend on the sensitivity of the demand and supply to price change i.e. demand and supply elasticities. Higher the elasticity of demand, the lower will be the burden on buyer.

    Standing inventory is taxed annually. The more quickly supply to end buyer is replenished without overstock, the lower the price a consumer pays due to the markup businesses would have needed to collect to cover taxes they would owe seeing how selling price is where businesses get the money the govt takes. Consumers pay it all. But many are fooled into believing politicians who say otherwise.

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