Indirect tax and elasticity

• Indirect tax is..

  An indirect tax (or sales tax) is a tax on a product or service, collected by producers (e.g GST/excise duties)
• Consumer surplus

  The utility (benefit) gained by a consumer in consuming a product over and above what they paid for it which is measured by the difference between the price the consumer is willing to pay at and the actual price the consumer pays.
• How to find Consumer Surplus

  1. Find the Price Line
  2. Find the Demand Curve
  3. Consumer Surplus is the Gap between the Demand Curve and the Price Line
• Producer Surplus is..

  Is the difference between the total revenue earned by firms and the total costs of producing the product
• How to find Producer Surplus

  1. Find the Price Line
  2. Find the Supply Curve
  3. Producer Surplus is the gap between Supply Curve and Price Line
• Allocative Efficiency

  Means when consumer and producer surplus is maximised

  if CS (consumer surplus) is getting bigger - Consumers gain

  if PS (Producer surplus) is getting bigger - Producers gain

  and vice versa
• consumer equlibrium 


  The point where demand curve and supply curve meets
• If CS is getting bigger 


  Consumers gain
• If CS is getting smaller

  Consumers loss
• If PS getting bigger


  Producers gain
• If PS getting smaller


  producer loss
• Indirect tax and inelastic curve

  • consumer pays more indirect tax because the demand is not sensetive to change in price
• Indirect tax and elastic curve

  Producer pays for indirect tax as the demand is more sensitive to change in price
• Consumer spending

  Price *quantity - if the consumers spending less, the consumer are good. If consumer spending more than before they worse off
• Producer revenue

  Price * quantity

  for new one it is price they will receive after tax times the changed quantity
• Key words

  Incidence

  impact
• Must have

  Consumer surplus

  consumer spending

  impact on consumers

  producer surplus

  producer revenue

  impact on producer

  incidence tax on consumer, producer and government
• DWL


  Dead weight loss