 Then, we will see what is the impact of tax on price and quantity. In this case, we will take the case of the unit tax, which is generally the tax per unit of output sold and we will see how it generally affects the price and quantity. And whenever there is a imposition of tax, who generally takes the tax burden, whether it is the buyers, whether it is the seller that will analyze or that will see through the graphical representation. So, in this case specifically we are talking about the unit tax, which is that is tax per unit of output sold. So, now let us see different cases and different scenario, how the tax burden gets shared between the supplier and the buyer. D0 is the demand curve, S0 is the supply curve. There is imposition of tax and the imposition of tax will represent through the decrease in the supply and that leads to decrease in the supply from S0 to S1. Now, this is the equilibrium quantity, this is the equilibrium price. Now, there is imposition of tax and that leads to change in the supply from S0 to S1 and here we are representing the amount of tax through the change in the supply. So, this is the total amount of tax being imposed. When the supply moves from S0 to S1, the equilibrium point change from E1 to E2. In this case also the price and quantity changes, quantity is Q1 and price is P1. What is the total amount of tax? This is the total amount of tax. So, in this case, now who share the taxes over here? Initially, demand curve is D0, supply curve is S0, equilibrium quantity is Q0, equilibrium price is P0. Imposition of tax that leads to shift of the supply curve from S0 to S1 and the difference between two supply curve gives us the tax which is equal to P0 t. Now, this P0 t, who is paying how much of this P0 t? Due to change in the supply, now the producer has increased the price from P0 to P1. So, this P1 and P0 is paid by the consumer in term of increase in the price and the rest of the amount of tax that is P1 by t that has to paid by the supplier because this part of tax is not being covered by increase in the price, so a supplier or seller. So, imposition of tax is there that leads to shift in the S that is decreasing the quantity increasing the price, but the increase in the price is not equal to the amount of tax being imposed. So, there is some more amount left from the tax amount that is P1 by P1 and t. So, this tax is the tax burden is shared by both the consumer and the producer. P0 P1 is paid by the consumer in term of increase in the price and P1 t is paid by the buyer paid by the seller or paid by the supplier because partly it has to be shared for both the producer and the consumer. So, in case of unit tax imposed if the both the demand and supply curve they are maintaining their original slope in this case or the original relationship in this case the partly it has been paid by the consumer in term of increase in the price and partly it has been paid by the producer. Now, we will introduce the concept of elasticity of demand and elasticity of supply to this supply and demand curve and then we will see how the tax gets shared between the consumer and the supplier. What happens when there is a perfectly inelastic demand curve? What happens when there is a perfectly inelastic supply curve? What happens when there is a perfectly elastic and perfectly elastic demand curve and perfectly elastic supply curve? So, first we will take a case of a perfectly elastic demand curve. Now, what is the shape of a perfectly elastic demand curve? It is parallel to the horizontal axis. So, this is the demand curve. Now, this is the supply curve, this is the quantity. Now, there is a imposition of tax that leads to shift in the supply curve curve from S 0 to S 1. Now, what is the amount of tax? The amount of tax is this much. Now, who is paying the tax over here? It is not that because price remain constant or very small change in the price, the quantity demanded changes. So, there is if you look at there is no change in the quantity demanded and if there is no change in the quantity demanded, the tax amount cannot be or may be if there is a possibility to increase the price that is not possible here. And that is the reason if you look at even if the quantity demanded is changing, what is the change in the price? May be the change in the price is this much. So, now, who is paying the tax over here? Whatever may be the price because any small change in the price that leads to change in the greater change in the quantity demanded. And that is the reason the in this case the entire tax is paid by the supplier. So, in case of perfectly elastic demand curve, the entire tax is paid by supplier because for any small change in the price, the quantity demanded generally changes in a very quantity demanded changes drastically because this is the case of a perfectly elastic demand curve. The consumer is more sensitive in this case that is the reason the entire tax burden is paid by supplier because they are not able to transfer the tax burden in term of increase in the price. Because if they will increase the price that will lead to shift in the quantity demanded and in term of that also they are going to lose profit if there is no sale of the product or if the quantity demanded decreases. Then we will see the second case that is the perfectly elastic demand curve. So, in case of perfectly in elastic demand curve, demand curve takes a shape which is parallel to price axis. So, this is your demand curve. Now, this is Q 0, this is S 0, this is P 0, P 0 is equilibrium price, Q 0 is equilibrium quantity. Now, imposition of tax S 1, this is the total amount of tax, this is the new price P 1. Now, what is the situation over here? Demand curve is perfectly in elastic, whatever may be the change in the price it is not going to change the quantity demanded that gives us the flexibility for the producer to shift the entire tax burden to the consumer. So, this is the total amount of tax and if you look at the increase in the price is just equal to the increase in the tax that is P 1, P 0 is equal to the total tax. So, in this case the producer has shifted the entire tax burden to the consumer in term of increase in the price and we can interpret here is that in case of in elastic demand, perfectly in elastic demand the consumer pays the entire tax burden because there is no change in the quantity demanded even if there is a change in the price and that gives the liberty to producer to shift the entire tax burden to the consumer. So, in case of perfectly elastic supply the entire tax burden paid by the perfectly elastic demand, the entire tax burden is paid by the supplier. In case of in elastic demand, the perfectly in elastic demand, the entire tax burden is paid by the consumer. Now, we will see what happens in case of perfectly elastic supply and perfectly in elastic supply. Q 0, P 0, P perfectly elastic supply, perfectly elastic supply. Imposition of tax moves S 0 to S 1 and there is a same imposition of increase in the price that is P 0 by P 1. So, in this case the amount of tax is getting transferred to the consumer in term of increase in price because P 1, P 0 is just equal to the tax and the entire tax burden is paid by the buyers because the tax total tax amount is shifted to consumer in term of increase in price. So, perfectly elastic supply curve the tax is paid by the buyers. Then we will see the case of the perfectly inelastic supply curve. So, in case of perfectly inelastic supply curve, supply curve takes a value that is parallel to the price axis. It means whatever may be the change in the supply it is not going to, whatever may be the change in the price it is not going to change the quantity supply. So, in this case no effect on perfectly inelastic supply. There is no effect on price and quantity because imposition of tax will not lead to any change in the supply curve. Rather, but when there is a imposition of tax generally that reduces the profit of the seller. So, in case of inelastic supply curve there is no effect on price and quantity demanded that is the reason the consumer is not getting affected, but there is some influence on the seller that is in term of change in the price or in term of may be change reduce quantity and that leads to reduce profit for the seller. So, when there is a imposition of tax that leads to the fact that the tax burden get equally share between the buyers and seller, but when we introduce the concept of elasticity, if the buyer is more sensitive then it is the tax burden is more on seller, if the buyer is less sensitive tax burden is more on buyer. Similarly, if the supplier is more sensitive tax burden is more on consumer, if the supplier is less sensitive generally that reduces the profit of the seller. Now, we will say that specific two cases like sell tax and excise tax how that leads to change in the price or quantity demanded or how it affects generally the sellers and consumer. So, if you summarize the previous analysis of imposition of unit tax, if the demand curve is perfectly elastic price increases by the full amount of the tax and supplier remain unchanged the entire tax is borne by the consumer, if the supply curve is perfectly inelastic there will be no increase in the price or decrease in the supply the whole of the tax is borne by the supplier, if the demand curve is perfectly elastic the price does not rise at all and the whole tax is borne by the seller, if the supply curve is perfectly elastic the price rise by the full amount of tax and the entire tax borne by the consumer. But given the supply schedule the greater the elasticity of demand for the good less will be the tax burden on the consumer, given the demand schedule the greater is the elasticity of supply the greater will be the tax burden borne by the buyer. Then we will introduce two new taxes sell tax and excise tax in order to understand what is the impact on price and quantity. So, sell tax is the tax imposed on consumer paid directly to the government does not affect the price consumers pay price plus sales taxes. So, tax is not the part of the price less desirable to buy the tax good or service at every given price demand shift downward and to the left because there is a decrease in the demand when there is a imposition of tax. So, this is the effect of sell tax on demand, suppose a new law require 0.25 dollar sell tax per cup of coffee. So, if you look at the demand schedule on the left hand side of the graph when the price is changing by 0.50 to 0.75 to 1 if you look at there is a difference in the quantity before tax and after tax that leads to shift in the demand curve from D to D to D dash. So, it means the effect of sell tax reduces the demand. Then the government imposes tax on producer in case of excise tax the government imposes tax on producer. Producer pay the tax directly to the government price does not change, but the cost changes because they are paying a tax to E less desirable to produce taxed good or service at every given price supply shift to the left and upward. So, if you look at due to imposition of excise tax that leads to decrease in the supply and that lead to shift in the supply curve from S to S dash. So, if you look at in this case suppose there is excise tax of 0.25 per cup of coffee that leads to change in the quantity supply that is imposition of tax before and after and that leads to decrease in the quantity supply and graphically the change in the quantity supply is represented from the movement from S to S dash. So, irrespective of whether it is sell tax whether it is excise tax it generally reduces the demand and supply in case of sell tax that reduces the demand in case of excise tax that reduces the supply. So, what is the effect of sell tax? Sell tax suppose this XC power item cause equilibrium price to fall by the same amount less than XC power item. Price to supply are not same as price to the demander because price plus sell tax is the price to the buyers. And what is the effect of excise tax? Excise tax per item curges the equilibrium price to increase by some amount less than XC power item. Price to the supplier that is price minus excise tax is not same as the price to the demand. So, in case of sell tax the price to the consumer is on a higher side and in case of excise tax the price generally what is part of the cost also in the due course of time generally they shift it to the consumer, but initially when they are paying the excise tax whatever the price for them that is cost of production for tax that is not equal to the market price what the consumer they pay for it. So, generally in case of imposition of sell tax reduces the equilibrium price, but in case of imposition of excise tax it reduces the equilibrium price. So, when you compare two cases maybe there are two type of incidents one is economic incident second one is the legal incident. The division of a tax burden according to who actually pay the tax that is on the basis of the economic incident and legal incident is the division of tax burden according to the according to who is required under the law to pay the tax. So, one is legally and another is the actually who is paying more. So, the economic incidents of tax independent of its legal incident. Now, this is the graphical representation of sales tax and the excise tax how it affects the demand. So, initially if you look at the first graph left hand top graph the imposition of tax leads to leads to decrease in the demand from D to D des that leads to increase in the price from P F to P G. So, the price to supplier is P F whereas, the price to consumer is P C which includes the price plus the tax and in the right hand side if you look at the top one then imposition of excise tax leads to shift the or decrease the supply from S to S test and that leads to two type of price one is the price to supplier and second one is the price to demand. So, in this both in both the cases if you look at the price is changing. So, in the left hand side if you look at that may be the graph which is just below may be a less clutter version of the panel A. In this case the new supply the new demand and may be the original supply gives us the change in the price and similarly in the right hand panel the lower graph if you look at its again the change in the supply and change in the demand and exactly whatever the change in the price. So, excise tax influence the producers and generally sale tax influence the buying behavior of the consumer whereas, excise tax influence the selling behavior of the producer. Then we will discuss about two specific case where the price is decided by the government where the price is decided by legally in case of the imbalances and what happens to the situation. So, consumer if you look at always like the prices to be lower than the actual equilibrium price and when the outcomes of the unregulated market act against the interest of the public people seek legislation that allow the government authority to control the existing price structure of the market. Then it happens that they form the collude they make a joint collusion and they decide the price. In this case generally the interest of public generally the government comes into picture and they fix up a price. This type of interference on the part of government with the help of laws of supply and demand is totally different from the case of the imposition of tax. This is not the case of taxes and government control of price inevitably prevent the market system from performing its function of rationing goods and services. So, two type of cases one is price ceiling and it is a type of price ceiling that government authority sometimes use for rental housing and the specific case here is the rent control. Prevent housing market for reaching equilibrium only when the rents are set below the market equilibrium rent and the typical example is the after the end of World War II when there was a sharp increase in the price of the rent or the serve increase in the housing price or the demand for the housing many cities instituted the rent control to prevent the spectacular increase in the rent that were anticipated because there was a increase in the demand and that also leads to the increase in the rent and many cases they practice this rent control. Generally, how this can be applicable in case of in case of controlling the rent to a level which is below the equilibrium rate. So, typically rent control limit increase in the monthly rental rates or the established rule used to determine the fair monthly rent for housing of varying kind of quality rent generally lower than that would prevail in the equilibrium in the competitive market. Many supporter of rent control believes that this control benefit lower income people would otherwise have to pay higher percentage as their as of their income as rent. Now, how it works generally if you look at this is the supply of housing this is the demand for housing price is nothing, but the rent suppose this price in this case is 1000 rupees and the quantity is may be suppose 8000 unit. Now, if the rent looks higher generally the public seeks the legislation from the government to charge a lower price. So, in this case if the government fix up a rent which is equal to rupees 500 now what would be the outcome the demand would be more and the supply would be less. So, suppose this is 10000 units because of decrease in the rent that leads to increase in the demand for housing to 1000 unit, but the supply of housing will reduces to 6000 unit. So, this leads to shortage. So, whenever there is a rent control and the rent is set much below the equilibrium rent in this case the demand for housing is more than supply of housing which leads to shortage. Then in this case what is the way out because rent was on a higher side that is the reason the public comes to the government support to fix up the rent. And if the rent is lower than the equilibrium rent generally people they prefer a high demand for housing and the supply is there reduces the supply. So, in this case may be one possible solution is to follow a non rationing rent control and what is the non rationing rent control or non rationing or the non price may be a solution the non price solution is to that first come first serve basis. So, at a specific price even if it is 6000 or even if the rent is 500 only people will up to 8000 they will be entertained not more beyond 10000. So, the in this case the surplus can be captured on the basis of the first come first serve. So, it is only the 8000 units of housing available at a price of 500 and they should the supplier will only there is binding on the supplier also to supply at least 8000 unit of the housing at the rent of 500. The second case what will deal here is the opposite of price ceiling is price floor. So, now what is price floor? So, this effect of rent control is if selling on rent is below the market equilibrium rent this inevitably result in the shortage of the rental housing what we checked in the previous graph. Rent control do not make rentor house less expensive to the tenant landlord respond to the reduction in the possible gain by decreasing the quantity and often the quality of the rental houses supplied. Results is shortage of housing and then we will take the second case that is price floor opposite to the price ceiling this the minimum price that has to be given or that has to be given by the supplier. Now, what is the typical example here? The typical example is the minimum wage the producer has to pay wage which is at least minimum that is set by the law. So, to commonly use price floor are minimum wages and the agricultural price support minimum wages prohibit employees from paying less than the stipulated wage and agricultural price support generally guarantee farmers a minimum price of their crops when price floor are set above the market equilibrium price and generally this results in the surplus on the market. So, let us see a graphical example of this minimum wage. So, we have a demand curve we have a supply curve this is the equilibrium quantity this is the equilibrium price. Now, what is the equilibrium price here? This is nothing but the wage. So, suppose this is 50 rupees is the wage and this is the 30 laborers this is the labor day. Now, if the minimum wage is set at 40. So, just if the minimum wage is set at 60 which is as a higher than the equilibrium in this case what would be the outcome? The demand would be more suppose 60 laborer will ready to work when the wage is 60, but the supplier is ready to only give the employment to 20 laborer when the minimum wage is fixed by legally and that is 60. So, in this case what is the outcome? The outcome is surplus. So, in case of minimum wage if the minimum wage is set above the equilibrium wage that is equilibrium wage is 50 and the minimum wage is 60 it means it is binding on the supplier to pay the wages equal to 60. In this case generally the demand for the labor or the demand for the employment will be more that is 60 unit, but whatever the supply of labor the producer is only ready to give employment to 20 laborer if the wage is set at 60. They plead to surplus in the market and again it is a non-priced control will come the first comfort services this 20 laborer who are ready to work they will come first 20 units will be entertained. So, in this case if you look at the real problem again leads to something else when the price is goes on a higher side or the wage is going on a higher side that leads to less employment. So, two cases one is price ceiling which is the price fixed by the government and second one is the price floor this is also price fixed by the government and this is the minimum price and may be in the first case that was the maximum price that has to be followed in the market. So, with this we completed our second module that is on theory of demand or demand analysis and we will start our third module that is theory of production and cost from the next session onwards and these are the session references that is being followed or few books few study material that is being followed for preparing this specific session.