Using a demand and supply diagram, explain how an increase in taxes on domestic fuel will affect the domestic fuel market

(draw demand and supply diagram showing a shift to the left of the supply curve and a new equilibrium)
explanation:indirect tax increases the cost to the producer this means they can no longer sell the same quantity (Q1) of the fuel at that price (P1)there is a shift in the supply curve to the left and the vertical distance between the two supply curve is the tax increase per unitthe demand curve is the maximum consumers are willing to pay for the each unit. If the producers were to continuing selling at q1 they would have to raise the price to P3 to get minimum acceptable profit. at this price there would be an excess in supply as less people are willing to pay now. this leads to a contraction in demand and a new equilibrium Q2P2here, the price of the product increases from P1 to P2 and the quantity has fallen from Q1 to Q2. consumer surplus has reduced (show on diagram)

Answered by Sarah R. Economics tutor

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