Tutor profile: Ritwik D.
Explain the factors that govern the shifting of tax incidence.
Tax Incidence indicates the overall burden of tax of any direct or indirect tax that is imposed on different sections of the society. Tax incidence essentially includes the welfare consequences of a taxation system that are distributed among the various sections of the society in different proportions. Factors governing shifting of tax incidence: The type of tax: Generally, taxes in most countries can be classified as or divided into direct and indirect. Direct taxes are those usually imposed on individual incomes from various employment sources or profits earned from business or any kind of self-conducted economic activity. Some of the examples include income taxes, corporate profit tax, business tax and so forth. Alternatively,indirect taxes are levied on production and sale or exchange of commodities such as sales tax, excise or customs tax. Tax incidence of both direct and indirect taxes is evidently different. With regard to direct taxes, the tax incidence is usually constant or uniformly distributed in society but in the case of indirect taxes, the welfare impacts are much more variable. Market Structure: Market structure can be described as the nature or type of the market which is most commonly classified as perfect competition, monopoly, monopolistic competition, oligopoly and so on. The variations or fluctuations of tax incidence can be influenced by the structure or nature of the market. For example, in a perfectly competitive market structure, producers have limited control over the market supply and prices resulting in limited ability to shift the tax incidence. However, in monopoly, producers have absolute control over the supply level and prices, which gives them the power to shift the tax incidence to their best advantage. Hence, as market competition increases, the market power/control of the produces falls hindering their ability to manipulate tax incidence in their favor. Elasticity of Demand and Supply: Elasticity of demand refers to the responsiveness of the demand to a change in the price of a commodity or service. Elasticity of supply measures the responsiveness of supply of any product or service to its price change. If the elasticity of supply is higher than the elasticity of demand, the tax incidence or burden will be relatively higher for buyers or consumers than the producers. On the other hand, when the elasticity of demand is greater than the elasticity of supply, the producers have to bear the higher tax incidence or burden compared to the buyers or consumers. In the first instance, as the consumers are more reactive to a price change than the producers, an increase in indirect tax rates such as sales tax would reduce consumer demand significantly resulting in reduced tax burden for consumers and more on other sections of the society such as producers. In the latter case, the suppliers are responsiveness to a price change than the consumers implying that a price hike due to an increase in sales tax would impose a higher tax burden on consumers.
In detail, state the difference between Economic Growth and Economic Development.
Economic growth and economic development are fundamental as well as two of the most pivotal concepts in Macroeconomics. These two terms are often used interchangeably without much regard to the implicative differences that they exhibit in the real world. Some of these differences are explained below. Difference between economic growth and development:- Conceptually, economic growth is reflected by the increase in the real GDP or National Output of a country. It customarily refers to the expansion of the overall production level and employment in the economy. Now, such macroeconomic improvements can be attributed to qualitative changes in economic resources or factors of production such as machinery, raw material, human capital, education level, the skill level of the employees, technological advancement in the field of production and so on. Economic growth can also be achieved through favorable economic policies such as expansionary fiscal policy meaning increased government spending to stimulate the economy and enhance GDP level or suitable monetary policies by the central bank to attain the same objective. On the other hand, economic development is a broader concept compared to economic growth. It evaluates economic progress and prosperity from a much more comprehensive viewpoint by measuring various socio-economic indicators such as overall living standards of people, poverty estimation, human index development points, health and medical facilities, education system, employment opportunities and growth, conservation of natural resources, environmental conditions and so forth. Hence, both economic growth and economic development explain similar phenomena but by incorporating different parameters of measurement. The latter is a broader concept relative to the former and defines economic progress or prosperity by going beyond the real GDP or National Income growth, which is the cardinal basis of economic growth concept.
State Law of Demand. Thoroughly explain the assumptions of the Law of Demand.
According to the Law of Demand, as the price of any normal good increases, the demand for that good among the buyers or consumers decreases. Therefore, most importantly, the law of demand essentially documents the relationship between price and demand of a good. Assumptions of the law of demand:- One of the foremost assumptions of law of demand is that the prices of substitute and complement goods must remain constant. Substitute goods mean goods that are similar in nature or quality and if the price of one of the substitute good goes up, the demand for the other increases, as it becomes relatively cheaper now. In contrast, as the price of any good falls, the demand for its complement good will increase. The law of demand assumes that the income of the consumers is constant. As mentioned earlier, the law of demand represents only the relationship between price and demand of a product. Hence, any simultaneous change in the consumer income along with the price of the product can contradict the expected or customary price-demand relationship. For example, an increase in the price of a product will expectedly lower the demand for that particular product but a simultaneous increase in the consumer income indicates higher purchasing power which may induce higher consumption despite the price increase. Another basic assumption of the law states that personal tastes and preferences of the consumers must also remain constant. Any personal choices, preferences or inclinations of consumers towards various characteristics, qualities, features, etc. of a product can affect or invalidate the usual price demand relationship. As an example, a consumer may prefer an expensive/luxury product or good just based on its physical and qualitative characteristics in spite of its high market value thereby, contradicting the law of demand. Any consumer expectations about future prices or price changes is also held constant under the law of demand. Any future expectations regarding future product prices can change consumer behavior in present. For example, if the consumer expectation is that the price of a commodity will increase in the future, his or her present demand for the product and its consumption will increase. This again contradicts the law of demand. The overall population size of the country is held constant according to the law. Any change in the current population level of the country will expectedly influence the overall demand for goods and services in the economy regardless of their existing prices. For example, an unexpected rise in the population size will lead to a potential hike in demand for goods and services and vise versa even if the prices are high consequently negating the law of demand.
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