How does change in per unit tax influence the supply of goods by a firm? Explain.
How does change in per unit tax influence the supply of goods by a firm? Explain.
Change in supply refers to increase or decrease in supply of a commodity caused by change in factors other than the own price of the commodity.
When the government imposes a tax on the production of goods, marginal and average cost of the production tend to rise. Other things remaining constant, it causes a cut in profits. Accordingly, producers will supply less of the good at the existing price, or they will sell the same quantity only at a higher price. This implies a backward or leftward shift in supply curve or decrease in supply as shown in Fig. S1 is the initial supply curve. When the government imposes tax, supply curve will shift inwards from S1 to S2.
Change in supply refers to increase or decrease in supply of a commodity caused by change in factors other than the own price of the commodity.
When the government imposes a tax on the production of goods, marginal and average cost of the production tend to rise. Other things remaining constant, it causes a cut in profits. Accordingly, producers will supply less of the good at the existing price, or they will sell the same quantity only at a higher price. This implies a backward or leftward shift in supply curve or decrease in supply as shown in Fig. S1 is the initial supply curve. When the government imposes tax, supply curve will shift inwards from S1 to S2.
