Supply costs and Macroeconomic Policy Analysis PDF
Added on 2021-06-14
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Running Head: Sugar TaxDemand and Supply, Costs and Macroeconomic Policy AnalysisBy (Name)(Tutor)(University)(Date)
Sugar Tax2Demand and Supply, Costs and Macroeconomic Policy AnalysisQuestion 11617181920212223242500.10.20.30.40.50.60.70.80.9Demand and Supply of water in AustraliaQuantity (Million liters per day)Price(per1000liters)Part aFrom the graph above, it can be noted that the market is not at equilibrium at the maximum water supply level of 22.50 million liters in a day. The corresponding price level to this supply level is $0.6 per 1000 liters. The corresponding demand is 23.25 Million liters per day. This clearly shows that this market is not at equilibrium. If the residential demand rises while the supply level remains constant, the demand curve will shift rightwards causing an increase in both price and equilibrium quantity.Part bThe nature of water is such that it’s a necessity and this explain why it is inelastic at high prices. As water prices increase, the demand keeps falling. At high prices the consumers have already reduced their demand to the minimum level they can, thus, any other increase in price will have no impact on demand. Income is another key influence, since water is a commodity mostly in high use, the income level determines its elasticity, people with higher income tends to
Sugar Tax3spend more water regardless of the price level. Thus, their demand for residential water is inelastic. For those with low income, their demand is inelastic only when the price charged are too low, when price rise to some greater extent, their demand becomes relatively elastic. Water issubject to habitual consumption and thus inelastic at most price levels.Part cFig: Impacts of tax on water demand and supplyPriceSupply2Supply10.67Tax0.650.60Current market levelShortageDemand022.50 23.25Quantity 23.00The initial equilibrium price is $0.67 and the quantity is 23.00. However, the market is not operating at equilibrium; its operation is below the equilibrium where demand is greater than supply at the market price of $ 0.60. This shortage is equal to 23.25 – 22.50 = 0.75 million liters. Due to the inelastic nature of water demand, it’s expected that the whole tax burden will be shifted to the consumers. Therefore, we assume that price rises from $0.60 to $0.65 at the currentsupply level. Since supply is inelastic also, it’s expected that it will shift leftwards to accommodate the price rise. The shortage will reduce because the demand level will fall from 23.25 to a value in between 23.00 and 23.25 as represented by the arrow. Thus, the tax will help reduce the shortage. The new equilibrium level in the water market will be at a higher price levelbut at a lower quantity level.
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