Question 1
It is considered an assumption in the real world because there is no “perfect market” hence this cannot be said to be efficient. The reason is that the factors that determine demand and supply cannot be held constant throughout to get the preferred perfect market equilibrium. The factors affect the prices and quantity demanded and supplied to either go downwards or upwards, leading to movement or shift in both demand and supply curves.
The above diagram depicts the equilibrium price, P e, and equilibrium quantity Q e . The point in which the demand and supply curves meet is the market equilibrium point.
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Question 2
In the diagram, the consumer surplus is represented by “A” and the producer surplus is marked by “B”. The two areas, A and B, are set from the basis of the equilibrium point, M 0 . The introduction of tax lowers the income for suppliers from P e to P s and increases the price of the consumer from Pe to Pc. The difference between the two gives the tax. Taking the product of tax and the quantity, Q t , tax revenue is generated. Deadweight loss occurs when there is no consumption or production of a good or service due to the introduction of the tax by the government.
Question 3
The objective will be better achieved using elastic demand. In elastic demand, changes in price lead to a significant change in quantity demanded and supplied. Increase in prices leads to a decrease in demand and an increase in supply and vice versa.
If the government only cared about increasing the tax revenue, the answer will change and be inelastic demand. The reason is that in inelastic demand, any significant change in price does not affect the quantity demanded or supplied proportionately.
Holding other factors of demand and supply like product similarity, increase in consumer disposable income, and others in favor of the market, a more substantial tax revenue will be achieved by the government.
