Supply and Demand

Supply and Demand

Questions

Problem 1

The U.S. business tax rate is one of the world’s highest. Many argue that a lower tax rate is needed because it would lead to: (1) higher employment and (2) lower consumer prices. Using the concepts of “market equilibrium” and “supply shifters,” explain why a lower business tax rate would likely produce these two beneficial outcomes. Prepare generic market demand and market supply curves (for any market) to illustrate your answer.

Market Equilibrium is when supply meets demand. There will be no excess demand or supply.

Supply shifters is a change in the supply, whether it be because of availability, taxes or subsidies, this will alter the supply curve to the left or right.

To explain the effect of market equilibrium and supply shifters, below are two basic graphs to illustrate causes of a price change.

Supply shifts to the right

Supply shifts to the right

Price

Price

S

S

S1

S1

P

P1

P

P1

D

D

Q1

Q1

Q

Q

Quantity

Quantity

An increase in supply shifts the supply curve to the right, which reduces price and increases output.

Supply shifts to the left

Price

Quantity

P

P1

Supply shifts to the left

Price

Quantity

P

P1

S1

S1

S

S

D

D

Q1

Q1

Q

Q

A decrease in supply shifts the supply curve to the left, which raises price but reduces output.

A lower tax rate is needed in the U.S. to encourage employment and decreased consumer prices. Having a sales tax on supply and demand increases the price of consumer goods. If a business is required to put more cost into purchasing the equipment and machinery needed, then this causes them to increase the prices for their new products. A rising price would cause the supply curve to shift inwards so reductions to supply correspond to existing prices. This identifies that business can generate less for the same amount of money. The equilibrium price is when the producer’s supply matches demand at a stable price....