Economics for Managers: Assignment 1 - Tax, Subsidy and Policy

This economics assignment explores the elasticity of demand for various food categories, highlighting the implications of taxes and subsidies on consumer behavior and public health. The analysis reveals that unhealthy foods exhibit inelastic demand, suggesting that taxes can effectively reduce their consumption, while subsidies on healthy foods can promote better eating habits. The assignment also examines Keynesian economics, emphasizing the role of demand-side interventions, such as fiscal and monetary policies, in addressing economic downturns and recessions. It discusses the use of government expenditure, interest rate adjustments, and tax policies to stimulate demand, stabilize the economy, and manage budget deficits. The document further contrasts fiscal and monetary policies, highlighting the advantages of monetary policy in terms of quicker response times and reduced political influence.

Running head: ECNOMICS FOR MANAGER
ECNOMICS FOR MANAGER
Name of Student:
Name of University:
Author Note:

1ECNOMICS FOR MANAGER: ASSIGNMENT
ANSWER-1:
The elasticity of different food category clearly reveals that people crave for unhealthy
foods like sweets and sugar based snacks as they have lower elasticity reflecting inelastic
demand. That is for one unit change in price the amount change in demand would be less than
one unit. This kind of demand creates more burden on consumers when the goods are taxed
(Stiglitz and Rosengard 2015). Hence imposition of tax can be good way to reduce consumption
of this food category that contributes to diabetes, obesity and associated heart diseases and
cancer. The subsidy on the other hand makes the per unit price of the product lesser as the
consumers now pay lesser and government pays part of the price. The data reveals that high
calorific fruits and vegetables are more elastic, which further means for one unit fall in price,
demand for that would rise by more than one unit. This suggests that government should go for a
policy mix that not only imposes tax on the unhealthy food categories but also provide subsidy
on the healthy food category. This would discourage the consumers and make the consumers
shift toward good habit of food dropping the junks.

2ECNOMICS FOR MANAGER: ASSIGNMENT
Consumers’
Burden
Sellers’ Price
Subsidy
P
Q Q
P
E
E
S
D
D
S
Tax Vs Subsidy
Producers’ Burden
Tax
imposed
S1
S1
Inelastic Demand Elastic Demand
(Source: Author)
ANSWER-2:
a) The simple idea here refers to the fact that when an economy fall sunder the trap of
economic downturn, expanding the demand of the economy is best short run solution as
suggested by J.M. Keynes. Demand side economy is under the focus compared to the
supply side of it as explained by classical economists. Expansion in demand can be
brought through two channels. One is increase in the government expenditure and other is
decrease in rate of interest operative through expansionary fiscal and monetary policy.

3ECNOMICS FOR MANAGER: ASSIGNMENT
Combination of both of these boosts the depressed spending level in economy while
increasing demand made the economy come out of depression (Bibow 2013).
b) In times of recession, government loses it revenue due automatic changes in form of
decreasing income tax, corporate profit tax that reduces government revenue. But it has
to make more expenses even than before through enactment of countercyclical policy if it
decides to take the economy out from the shackles of downturn caused by recession. This
happens without any pre decided policymaking and under the effect of changing
economic condition (Rios and Brue 2013). Thus its called automatic stabilization which
often leads to budget deficit in the fiscal position. Discretionary changes in the fiscal
policies take place when government wants to act stringently over the existing polices. It
may adopt reducing tax rates and increase spending by making new rule backed by
legislation. The expansionary fiscal policy taken in face of recession always worsens the
budget leading it toward deficit. However, less tax on the other hand enhances disposable
income and consumption further to boost the aggregate demand and consequently rising
level of price and output.
c) Fiscal contraction takes place when government reduces its expenditure and
increases tax rates. From the NI accounting equation one can say that T>G and that leads
to surplus budget situation. Even though greater T reduces disposable income and hence
consumption consequently, the less G leads to less debt burden of the government that
leads to higher national savings in form of greater public savings (Hyman 2014). The
more savings make the nation invest more on its growth and depend less on others in

4ECNOMICS FOR MANAGER: ASSIGNMENT
MS
MS1
MD
Rate of interest
Output
Money Market Equilibrium
terms of loan. This also reduces the interest payments making the country gain self reliant
and less debt burden allowing it to enhance macroeconomic performance.
In times of recession or economic downturn role of expansionary monetary policy is huge
as it focuses on increased money supply in the money market. Through open market operation
government buys out bond from people and allow them to hold more money in hand than on
stocks or bonds. Greater money supply leads to fall in interest rate makes saving unattractive.
Speculative demand for money falls. Borrowing, investment become cheaper that allow the
business to expand and induces consumption to increase (Taylor 2012.) More consumption,
investment leads to more aggregate demand boosting economic output.
(Source: Author)
Monetary policy is always better than fiscal as the latter consumes mor etime to be
operative and evident due to strong political influence and lagging procedures of

5ECNOMICS FOR MANAGER: ASSIGNMENT
implementations. Issue of budget deficit another negative side of it compared to which
monetary policies initiate quick response in the market through signals sent in money
market.

6ECNOMICS FOR MANAGER: ASSIGNMENT
REFERENCE
Baum, M.A., Poplawski-Ribeiro, M.M. and Weber, A., 2012. Fiscal Multipliers and the State of
the Economy (No. 12-286). International Monetary Fund. (Baum, Poplawski-Ribeiro and Weber
2012)
Bibow, J., 2013. Keynes on monetary policy, finance and uncertainty: Liquidity preference
theory and the global financial crisis. Routledge
Hyman, D.N., 2014. Public finance: A contemporary application of theory to policy. Cengage
Learning.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw- Hill.
Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International
Student Edition. WW Norton & Company.
Taylor, J.B., 2012. Monetary policy rules work and discretion doesn’t: A tale of two
eras. Journal of Money, Credit and Banking, 44(6), pp.1017-1032.