BACHELOR OF MANAGEMENT WITH HONOURS

SEPTEMBER / 2022

BBEK 1103

PRINCIPLES OF MICROECONOMICS
Table of Content
INTRODUCTION.............................................................................................1.

Definition of ‘Elasticity’.................................................................................1.

DESCRIPTION OF TAXATION....................................................................3.

I. Decision of taxation..................................................................................4.

II. Types and features of tax......................................................................4.

EXPLANATION OF RELATIONSHIP BETWEEN TAX BURDEN AND

ELASTICITY...................................................................................................10.

I. Tax Burden.............................................................................................10.

II. Elasticity...............................................................................................10.

CONCLUSION................................................................................................12.

REFERENCES................................................................................................13.
PART I

1. Definition of “elasticity” and discussion on the various types of elasticities

Elastic could be a term utilized in social science to explain a modification within the behavior
of patrons and sellers in response to a change in value for an honest or service.
In alternative words, demand physical property or physical property for a product or good is
decided by what proportion demand for the product changes because the price will
increase or decreases.

Various varieties of elasticities are:

1) value-elasticity of demand

Price elasticity of demand demonstrates however a change in price affects the

amount demanded. it's computed as the proportion change in quantity demanded
over the proportion modification in value, and it'll unremarkably lead to a
negative physical property thanks to the law of demand.

Price physical property = (% modification in amount Demanded) / (% modification in

price)

2) Cross-Price physical property of Demand

The cross-price elasticity of demand measures however the demand for

one smart is wedged by a change within the price of another
good. it's calculated because the percentage change of amount A divided by the
percentage change in the price of the other.

Cross-Price physical property = (% modification in amount Demanded of excellent A)

/ (% modification in value of excellent B)

3) financial gain physical property of Demand

The income elasticity of demand is outlined because the live of the proportion change
of the amount demanded of an honest in relevancy changes within the consumer’s
income. hard the income elasticity of demand permits economists to

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 spot traditional and inferior goods, further as however responsive quantity demanded
is to changes in income.

Income physical property of Demand = (% modification in amount Demanded) /

(% modification in income)

In a market the the tax burden of a trade goods is typically shared between the
producer and also the consumer. thus what determines however the burden of a tax is shared
between shoppers and producers. the solution is that the relative burden of a tax on
consumers versus producers corresponds to the relative value physical property of demand
versus price elasticity of offer. the price of a tax can fall additional on consumers than
producers once supply is more elastic than demand. Producers will bear third of the tax
burden, and consumers will suffer common fraction of the tax burden, for instance,
if offer is double as elastic as demand. The burden of a tax can fall additional on producers
than on shoppers once demand is more elastic than supply. shoppers will share third of the
tax burden and producers will suffer common fraction of the tax burden, for instance, if
demand is twice as elastic as supply.

In context of the Malaysian economy, its tax dependence on the oil and gas sectors for
revenue reached a 41% high of gross domestic product in 2009, before subsiding to 14% with
the introduction of GST/SST. The long-term physical property of tax burden is -0.25, which
suggests that gross domestic product growth are going to be reduced by 0.25% for each 1%
increase in tax burden, compared with -0.27 for OECD countries. In general, taxes are
negatively correlative with economic growth, even when taking into consideration the
various varieties of taxes. The structure of taxation showed that GST is most sensitive
to economic process and has the best impact.

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2. Description of taxation (eg. Introduction to taxation, types and features of tax,
purpose and advantages of taxes)

Taxation, imposition of obligatory levies on people or entities by governments. Taxes are

levied in virtually each country of the world, primarily to lift revenue for
presidency expenditures, though they serve alternative functions as well.

This article is bothered with taxation in general, its principles, its objectives, and its
effects; specifically, the article discusses the character and purposes of taxation, whether or
not taxes ought to be classified as direct or indirect, the history of taxation, canons
and criteria of taxation, and economic effects of taxation, as well as shifting and incidence
(identifying who bears the last word burden of taxes once that burden is passed from the
person or entity deemed lawfully liable for it to another). For more discussion of taxation’s
role in fiscal policy, see government economic policy. In addition, see international
trade for data on tariffs.

In fashionable economies taxes are the foremost vital supply of governmental

revenue. Taxes take issue from alternative sources of revenue in this they're obligatory levies
and are unrequited—i.e., they are typically not paid in exchange for a few specific
thing, cherish a selected public service, the sale of public property, or the provision of public
debt. whereas taxes are presumptively collected for the welfare of taxpayers as a whole, the
individual taxpayer’s liability is freelance of any specific benefit received. There are,
however, vital exceptions: payroll taxes, for example, are usually levied on labour income so
as to finance retirement advantages, medical payments, and other social security programs—
all of that are seemingly to learn the taxpayer. due to the likely link between taxes paid and
benefits received, payroll taxes are generally known as “contributions” (as in the United
States). Nevertheless, the payments are commonly compulsory, and also the link to benefits is
sometimes quite weak. Another example of a tax that is connected to advantages received,
if solely loosely, is that the use of taxes on motor fuels to finance the construction and
maintenance of roads and highways, whose services may be enjoyed only
by consuming taxed motor fuels.

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Classes of taxes

 ·Direct and indirect taxes

In the literature of public finance, taxes are classified in varied {ways|waysthat|ways

in that} consistent with who pays for them, who bears the final burden of them, the
extent to which the burden can be shifted, and varied other criteria. Taxes are most
typically classified as either direct or indirect, associate example of the
previous kind being the income tax and of the latter the sales tax. there's a lot
of disagreement among economists on the factors for distinctive between direct
and revenue enhancements, and it's unclear into that class sure taxes, such
as corporate financial gain tax or property tax, ought
to fall. it's sometimes aforementioned that a direct tax is one that can not be shifted by
the remunerator to somebody else, whereas an indirect tax will be.

 ·Direct taxes

Direct taxes are primarily taxes on natural persons (e.g., individuals), and that
they are generally supported the remunerator’s ability to pay as measured by financial
gain, consumption, or internet wealth. What follows may be a description of the
most styles of direct taxes. Individual income taxes are usually levied on total
personal net income of the taxpayer (which could {also be|is also} an individual, a
couple, or a family) in more than some stipulated minimum. they're also commonly
adjusted to require into consideration the circumstances influencing the flexibility to
pay, cherish family status, variety and age of children,
and money burdens ensuing from illness. The taxes are often levied at graduated
rates, which means that the rates rise as financial gain rises. Personal exemptions for
the remunerator and family will produce a variety of income that's subject to a charge
per unit of zero.

Taxes on net value are levied on the total internet worth of a person—that
is, the worth of his assets minus his liabilities. like the income tax, the non-
public circumstances of the taxpayer may be taken into consideration. Personal or
direct taxes on consumption (also identified as expenditure taxes or spending taxes)
are primarily levied on all financial gain that's not channeled into savings.
In distinction to indirect taxes on outlay, cherish the sales tax, a direct consumption
tax can be adjusted to associate individual’s ability to pay by giving married status,

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 age, variety of dependents, then on. though long enticing to theorists, this type of tax
has been utilized in solely 2 countries, India and Sri Lanka; each instances
were temporary and unsuccessful. close to the tip of the twentieth century, the “flat
tax”—which achieves economic effects similar to those of the direct consumption tax
by exempting most financial gain from capital—came to be viewed favorably by tax
experts. No country has adopted a tax with the bottom of the flat
tax, though several have income taxes with just one rate.

Taxes at death take 2 forms: the inheritance tax, wherever the subject object is
that the bequest received by the person inheriting, and the estate tax, where the item is
the total estate left by the deceased. Inheritance taxes generally take into
consideration the non-public circumstances of the taxpayer, cherish the taxpayer’s
relationship to the donor and his internet value before receiving the bequest. Estate
taxes, however, are typically graduated consistent with the dimensions of the
estate, associated in some countries they supply untaxed transfers to the spousal
equivalent and create an allowance for the amount of heirs involved. so
as to forestall the death duties from being circumvented through an exchange of
property before death, tax systems could embody a tax on gifts on top of a
certain threshold made between living persons (see gift tax). Taxes on
transfers don't usually yield a lot of revenue, if solely as a result of giant tax
payments may be simply avoided through estate planning.

 Indirect taxes

Indirect taxes are levied on the assembly or consumption of products and

services or on transactions, as well as imports and exports. Examples embody general
and selective sales taxes, value-added taxes (VAT), taxes on any facet of producing or
production, taxes on legal transactions, and customs or import duties.

General sales taxes are levies that are applied to a substantial portion
of shopper expenditures. identical charge per unit may be applied to all or
any taxed things, or completely different items (such as food or clothing) can be
subject to different rates. Single-stage taxes can be collected at the retail
level, because the U.S. states do, or they may be collected at a pre-retail
(i.e., producing or wholesale) level, as happens in some developing countries. time
period taxes are applied at every stage within the production-distribution process.

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The VAT, that increased in quality throughout the last half of the twentieth century, is
often collected by permitting the remunerator to deduct a credit for tax paid on
purchases from liability on sales. The VAT has mostly replaced the turnover tax—a
tax on each stage of the assembly and distribution chain, with no relief for tax paid at
previous stages. The cumulative effect of the turnover tax, usually referred to as tax
cascading, distorts economic decisions.

Although they're typically applied to a good vary of products, sales

taxes generally exempt wants to cut back the tax burden of low-income households.
By comparison, excises are levied only on explicit commodities or
services. whereas some countries impose excises and customs duties
on virtually everything—from necessities cherish bread, meat, and salt, to
nonessentials such as cigarettes, wine, liquor, coffee, and tea, to luxuries such as
jewels and furs—taxes on a restricted group of products—alcoholic beverages,
tobacco products, and motor fuel—yield the bulk of excise revenues for
many countries. In earlier centuries, taxes on consumer goods were applied to luxury
commodities cherish pianos, saddle horses, carriages, and table
game tables. nowadays a main luxury tax object is that the automobile, mostly as a
result of registration requirements facilitate administration of the tax. Some countries
tax gambling, and state-run lotteries have effects similar to excises, with the
government’s “take” being, in effect, a tax on gambling. Some countries impose taxes
on raw materials, intermediate goods (e.g., mineral oil, alcohol), and machinery.

Some excises and customs duties are specific—i.e., they're levied on the
idea of number, weight, length, volume, or alternative specific characteristics of the
great or service being taxed. alternative excises, like sales taxes, are ad valorem—
levied on the worth of the products as measured by the price. Taxes on
legal transactions are levied on the difficulty of shares, on the sale (or transfer) of
homes and land, and on stock exchange transactions. For body reasons, they
often take the shape of stamp duties; that is, the legal or papers is sealed to
denote payment of the tax. several tax analysts regard stamp taxes as nuisance
taxes; they're most frequently found in less-developed countries and often weigh
down the transactions to that they are applied.

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Proportional, progressive, and regressive taxes

Taxes may be distinguished by the impact they need on the distribution of financial
gain and wealth. A proportional tax is one that imposes identical relative burden on all
taxpayers—i.e., wherever tax liability and income grow in equal proportion. A progressive
tax is characterised by a over proportional rise within the liabilities relative to the rise in
income, and a regressive tax is characterised by a lower than proportional rise within
the relative burden. Thus, progressive taxes are seen as reducing inequalities in financial
gain distribution, whereas regressive taxes will have the impact of accelerating these
inequalities.

The taxes that are typically thought of progressive embody individual income
taxes and estate taxes. financial gain taxes that are nominally progressive,
however, could abate therefore in the upper-income categories—especially if a remunerator is
allowed to cut back his assets by declaring deductions or by
excluding sure income parts from his subject income. Proportional tax rates that are applied
to lower-income classes also will be additional progressive if personal exemptions are
declared. Income lived over the course of a given year doesn't essentially give the
simplest measure of non-exempt ability. For example, ephemeral will increase in financial
gain could be saved, and through temporary declines in income
a remunerator may select to finance consumption by reducing savings. Thus, if taxation is
compared with “permanent income,” it'll be less regressive (or more progressive) than
if it's compared with annual income.

Sales taxes and excises (except those on luxuries) tend to be regressive, because the
share of private financial gain consumed or spent on a particular smart declines because
the level of personal income rises. Poll taxes (also referred to as head taxes), levied as a
set quantity per capita, clearly are regressive. it's troublesome to classify company income
taxes and taxes on business as progressive, regressive, or proportionate, due
to uncertainty concerning the flexibility of businesses to shift their tax expenses (see
below Shifting and incidence). This issue of determinative who bears the tax burden depends
crucially on whether or not a national or a subnational (that is, provincial or state) tax is being
considered.

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 In considering the economic effects of taxation, it's vital to
differentiate between many ideas of tax rates. The statutory rates are those laid out in the
law; usually these are marginal rates, however generally they're average rates.
Marginal income tax rates indicate the fraction of incremental income that's taken by
taxation once financial gain rises by one dollar. Thus, if tax liability rises by forty five cents
when income rises by one dollar, the marginal tax rate is 45 percent. revenue
enhancement statutes commonly contain graduated marginal rates—i.e., rates that rise as
income rises. Careful analysis of marginal tax rates should contemplate provisions then
again the formal statutory rate structure. If, for example, a selected tax credit (reduction in
tax) falls by twenty cents for every one-dollar rise in financial gain, the marginal rate is
20 share points over indicated by the statutory rates. Since marginal rates
indicate however after-tax income changes in response to changes in before-tax
income, they're the relevant ones for critical incentive effects of taxation. it's even harder to
grasp the marginal effective charge per unit applied to income from business and capital,
since it should rely on such issues because the structure of depreciation allowances, the
deductibility of interest, and also the provisions for inflation adjustment. A basic economic
theorem holds that the marginal effective charge per unit in financial gain from capital is
zero underneath a consumption-based tax.

Average revenue enhancement rates indicate the fraction of total income that's paid in
taxation. The pattern of average rates is that the one that is relevant for critical the
distributional equity of taxation. underneath a progressive income tax the typical income tax
rate rises with income. Average income tax rates usually rise with financial
gain, each because personal allowances are provided for the remunerator and dependents and
since marginal tax rates are graduated; on the opposite hand, advantageous treatment of
income received preponderantly by high-income households could swamp these
effects, manufacturing regressivity, as indicated by average tax rates that fall as income rises.

Purposes of taxation

During the nineteenth century the prevailing plan was that taxes ought
to serve primarily to finance the government. In earlier times, and again today, governments
have utilised taxation for then again just business purposes. One helpful thanks to read the
aim of taxation, due to yank economist Richard A. Musgrave, is to differentiate between
objectives of resource allocation, financial gain redistribution, and economic stability.

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(Economic growth or development and international aggressiveness are generally listed as
separate goals, however they can typically be subsumed underneath the
opposite three.) within the absence of a robust reason for interference, cherish the necessity to
reduce pollution, the primary objective, resource allocation, is furthered
if programme doesn't interfere with market-determined allocations. The second objective,
income redistribution, is supposed to lessen inequalities in the distribution of financial
gain and wealth. the target of stabilization—implemented through tax policy, government
expenditure policy, monetary policy, and debt management—is that of maintaining high
employment and price stability.

There are seemingly to be conflicts among these 3 objectives. For example, resource
allocation would possibly need changes within the level or composition (or both) of
taxes, however those changes might bear heavily on low-income families—
thus displeasing redistributive goals. As another example, taxes that
are extremely redistributive may conflict with the efficient allocation of resources required to
attain the goal of economic neutrality.

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3. Explanation of relationship between tax burden and elasticity

The burden of a tax is mostly shared by the producers and shoppers during a market.
In different words, the worth that the shopper pays as a results of the tax (inclusive of the
tax) is beyond what would exist within the market while not the tax, however not by the
whole quantity of the tax. In addition, the price that the producer receives as a result of
the tax (net of the tax) is below what would exist in the market without the tax, but not by
the entire amount of the tax. (Exceptions to the current occur once either provide or
demand is utterly elastic or perfectly inelastic.)

This observation leads naturally to the question of what determines however the
burden of a tax is shared between shoppers and producers. The answer is that the relative
burden of a tax on consumers versus producers corresponds to the
relative value elasticity of demand versus price snap of supply.

When supply is additional elastic than demand, consumers can bear more of the burden of
a tax than producers will. For example, if supply is double as elastic as demand,
producers can bear simple fraction of the tax burden and consumers will bear common
fraction of the tax burden.

When demand is additional elastic than supply, producers will bear more of the
burden of a tax than consumers will. For example, if demand is double as elastic as
supply, consumers will bear one-third of the tax burden and producers will bear two-
thirds of the tax burden.

It's a common mistake to assume that customers and producers share the burden of a
tax equally, however this can be not essentially the case. In fact,
this solely happens once the worth snap of demand is that the same because
the value elasticity of provide. That said, it usually feels like the tax burden is shared
equally because supply and demand curves are thus often drawn with equal elasticities

Though not typical, it's attainable for either shoppers or producers up-to-date the
whole burden of a tax. If supply is utterly elastic or demand is perfectly inelastic,
consumers can bear the entire burden of a tax. Conversely, if demand is perfectly elastic
or supply is perfectly inelastic, producers will bear the entire burden of a tax.

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SUMMARY
Elastic is a term used in economics to describe a change in the behavior of buyers and sellers
in response to a change in price for a good or service. It is computed as the percentage change
in quantity demanded over the percentage change in price, and it will commonly result in a
negative elasticity because of the law of demand. Price Elasticity = (% Change in Quantity
Demanded) / (% Change in price) The cross-price elasticity of demand measures how the
demand for one good is impacted by a change in the price of another good. Cross-Price
Elasticity = (% Change in Quantity Demanded of Good A) / (% Change in price of Good B)
The income elasticity of demand is defined as the measure of the percentage change of the
quantity demanded of a good in reference to changes in the consumer`s income.
Calculating the income elasticity of demand allows economists to identify normal and
inferior goods, as well as how responsive quantity demanded is to changes in income. Income
Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in income) The
answer is that the relative burden of a tax on consumers versus producers corresponds to the
relative price elasticity of demand versus price elasticity of supply. The cost of a tax will fall
more on consumers than producers when supply is more elastic than demand. Producers will
bear one-third of the tax burden, and consumers will suffer two-thirds of the tax burden, for
instance, if supply is twice as elastic as demand.
The burden of a tax will fall more on producers than on consumers when demand is more
elastic than supply. Consumers will share one-third of the tax burden and producers will
suffer two-thirds of the tax burden, for instance, if demand is twice as elastic as supply. This
article is concerned with taxation in general, its principles, its objectives, and its effects;
specifically, the article discusses the nature and purposes of taxation, whether taxes should be
classified as direct or indirect, the history of taxation, canons and criteria of taxation, and
economic effects of taxation, including shifting and incidence (identifying who bears the
ultimate burden of taxes when that burden is passed from the person or entity deemed legally
responsible for it to another). Taxes differ from other sources of revenue in that they are
compulsory levies and are unrequited—i.e. , they are generally not paid in exchange for some
specific thing, such as a particular public service, the sale of public property, or the issuance
of public debt. There are, however, important exceptions: payroll taxes, for example, are
commonly levied on labour income in order to finance retirement benefits, medical payments,
and other social security programs—all of which are likely to benefit the taxpayer. Taxes are
most commonly classified as either direct or indirect, an example of the former type being the

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income tax and of the latter the sales tax.It is usually said that a direct tax is one that cannot
be shifted by the taxpayer to someone else, whereas an indirect tax can be.
.
(3894 WORDS)

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REFERENCES

1. “Elasticity and Tax Burden.” ThoughtCo, 5 Mar. 2019,

www.thoughtco.com/elasticity-and-tax-incidence-1147952.
2. “Elasticity and Tax Revenue (Article) | Khan Academy.” Khan Academy,
www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-
tutorial/price-elasticity-tutorial/a/elasticity-and-tax-incidence. Accessed 14 Nov.
2022.Bergman, Margo. “Elasticity and Taxes – Microeconomics for Managers.”
Elasticity and Taxes – Microeconomics for Managers,
uw.pressbooks.pub/microman/chapter/3-6-elasticity-and-taxes. Accessed 14 Nov.
2022.
3. “Taxation | Definition, Purpose, Importance, and Types.” Encyclopedia Britannica,
www.britannica.com/topic/taxation. Accessed 14 Nov. 2022.

4. Kagan, J. (2022, September 27). Tax incidence: Definition, example, and how it
works. Investopedia. Retrieved November 14, 2022, from
https://www.investopedia.com/terms/t/tax_incidence.asp

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