![]() The buyer bears a greater portion of the tax burden when either demand is inelastic or supply is elastic, as depicted in diagrams # 1 and # 4, respectively. How is the burden of the tax shared between buyers and sellers buyers bear?īut how the tax incidence, or tax burden, is shared between buyer and seller depends on the elasticity of both demand and supply. With the tax, producers receive a price of $7 per pack, and then pay the $3.00 tax to the government. ![]() The price producers receive after paying the tax is the after-tax market price minus the tax. For more articles in the Economics for Beginners series, click here.What price do producers receive after paying the tax? However, the amount of welfare gained from selling/purchasing a good can vary due to the PED and PES of the good.įeel free to ask any questions and sign up below for the latest updates. Overall, consumer and producer surplus shows the welfare gained by the consumer and producers. This is beneficial for the producer because although they are willing to supply good for a lot less (P1), they sell it for much more (Pe), therefore the welfare gain for the producer is high. Figure 4.Īs shown by Figure 4, if a good or service has elastic demand and inelastic supply then most of the surplus will fall on the producer. This is beneficial for the consumer because although they are willing to pay a lot more for the good (P2), they pay much less for the good (Pe), therefore the welfare gain for the consumer high. ![]() Figure 3.Īs shown by Figure 3, if a good or service has inelastic demand and elastic supply then most of the surplus will fall on the consumer. This is important to understand because a change in the PED and PES influences the size of the producer and consumer surplus as shown below in Figure 3. However, it is likely that the price elasticity of demand and price elasticity of supply will not equal -1 and 1, respectively. In theory, if the price elasticity of demand is equal to -1 and the price elasticity of supply is equal to 1, the consumer surplus and producer surplus would be the same. THE INCIDENCE OF CONSUMER AND PRODUCER SURPLUS In order to develop your understanding, it is good practise to draw out these changes. On the other hand, if there is an inward shift in the demand or supply curves then it will cause the consumer and producer surpluses to be reduced. ![]() Similarly, if there is an outward shift in the supply curve of a good then it will cause an increase in the consumer and producer surplus. However, this assumes all other factors including the supply of the good remains the same. Similarly, for producer surplus if the base is taken to be Qe and the height to be the difference between Pe and P1 then to formula to find producer surplus would be: EFFECTS OF A CHANGE IN DEMAND AND SUPPLYĪn outward shift in the demand curve will cause and increase in both consumer and producer surplus. Therefore, for consumer surplus if the base is Qe and the height to be the difference between P2 and Pe then the formula to find consumer surplus would be: The area of a right-angled triangle is (base x height) ÷ 2. P1 is the y-intercept of the supply curve.Īs shown by Figure 1, the areas of consumer and producer surplus are right-angled triangles.P2 is the y-intercept of the demand curve.when supply is equal to demand).įrom Figure 1 the following formula can be derived for consumer and producer surplus: Pe is the equilibrium price and Qe is the equilibrium quantity of the supply and demand of the good (i.e. In Figure 1, the areas of consumer and producer surplus are shown on a simple supply and demand diagram. ![]()
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