Assignment Lesson 4: Analyzing Supply, Demand, and Elasticity | Microeconomics | Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

1. How can you use the theory of "Supply, Demand- and elasticity " to explain the case (by using graphs)?
In this case, the assumption is that the demand for these luxury items was inelastic
- The gap between a and b in the demand curve is the 10% of tax
- The supply curve shifted up with a much smaller rise in equilibrium price. As the demand is
assumed to be inelastic, the demand curve is steep, which leads to the large rise in equilibrium price and
the relatively small fall in equilibrium quantity
- The rich do not have response dramatically when there is a change in price would not pay most of the
tax. The costumer burden is greater than the producer burden
- However, the demand for these luxury goods is reasonable elastic, then the flatness of the demand
curve and the upward shift and the supply curve leads to rise in equilibrium and fall in equilibrium quantity ~~~~~ -
The gap between a and b in the demand curve is 10% tax -
The rich do not have response when there is a change in price would pay most of tax. Producer
burden is greater than consumer burden -
According to the theory of supply, demand and elasticity, the buyer response very dramatically
when there is a change in price of these luxury goods as they moved to buy substitute products
to avoid paying tax. The burden of tax actually ended up falling on the workers and retailers who
manufacture, sell these luxury goods -> purpose of the tax has failed .
2. What is implication for the Government in the tax policy ?
- The fact pints that the assumption of the elasticity of the demand for these luxury goods is not
correct. To some extent, it also shows that the government’s tax policy is not appropriate.
- The congress adopted a 10% ‘ luxury tax ‘ which is an inappropriate tax. This leads to the loss of
money in the government and the fall of the supply quantity -> making this kind of policy detrimental to entire economy.
- The congress should have put lower tax (4-5%) or put 10% tax in some states as a trial and
analysis the result to make next move
---- In addition, there is some measures to avoid the negative effect of the taxation.
1, Raising the import duty to prevent consumers from buying the substitution products with lowers or no taxes.
2, Setting import quota on certain luxury goods to benefit the local producers and workers.