Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
    1. The impact of taxation
    2. Tax revenue
    3. Tax incidence
    4. Calculating effects of a specific tax
    5. Calculating impact of a tax - example
    6. The impact of subsidies
    7. Calculating effects of a subsidy
    8. Calculating effect of a subsidy - example
    9. Price controls
    10. Price ceilings
    11. Calculate effects of price ceiling
    12. Calculating effect of a price ceiling - example
    13. Price floors
    14. Calculate effects of price floor
    15. Calculating effect of a price ceiling - example
    16. Intervention in agricultural markets
    17. Common Agricultural Policy
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

The impact of taxation

Ad-valorem and specific taxes will have different effects on the supply curve. First the specific tax. We know that this is a fixed amount which is why Chancellors / Treasury Ministers tend to increase these each year - if they did not they would be losing out. Since it is a fixed amount whatever the price of the good, it will shift the supply curve parallel upwards as shown in Figure 1.

Figure 1 Specific (or unit) tax

However, the ad-valorem tax is a percentage of the selling price. This means that at low prices the tax will be relatively little (10% of $1 is just 10c), but at higher prices the tax levied will be higher (10% of $10 is $1). This means that the supply curve shifts to the left and outwards as price increases. This is shown in Figure 2.

Figure 2 Ad-valorem tax