Abstract
In a world without taxes, how consumers and producers are assumed to behave in a perfectly competitive economy is addressed in this chapter. Consumers express their demands for products in the marketplace reflected in their ‘utility functions’. Producers use engineering technology and associated costs to construct factories and warehouses that comprise their fixed cost for their production structure. They also use machinery, raw materials and labour and obtain their input prices from the market. They combine fixed cost with the variable costs, the former remaining constant and the latter varying with the quantity they choose to produce. In turn, that determines their supply in the market revealing how much they will supply at each price faced by their product. Thus, all consumers combine to generate varying market demands at different market prices and all suppliers combine to generate changing market supplies at different market prices. An equilibrium price–quantity combination occurs where the schedules or curves of market demand and supply of a commodity intersect. At the equilibrium, the ‘marginal rates of substitution’ among consumers equal the ‘marginal rates of transformation’ among producers. These foundational concepts of market equilibrium are elaborated through figures and explanations in this chapter.
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Notes
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Note that the term price always refers to a price per unit of supply.
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There are other resources such as land and modern economics has used others such as technology. Here we refrain from including them since we are using a simple framework to understand the basics of a market economy based on which we will be able to proceed to taxation.
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Income tax is one that taxes returns to labour and capital as well as other income sources such as land. We will go into further details in Chap. 15.
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See Henderson and Quandt (1980), op. cit., for detailed illustration of this concept.
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References
Hadar, Josef. 1974. Elementary Theory of Microeconomic Behavior. 2nd ed. Boston: Addison-Wesley Publishing Company.
Henderson, James M., and Richard E. Quandt. 1980. Microeconomic Theory: Mathematical Approach. 3rd ed. New York: McGraw Hill Book Co.
Pindyck, Robert S., and Daniel L. Rubinfeld. 2013. Microeconomic Theory and Application. 8th ed. Upper Saddle River: Pearson Education.
Varian, Hal R. 2010. Intermediate Microeconomics: A Modern Approach. 8th ed. New York: W Norton & Co.
Watson, Donald Stevenson, and Malcolm Getz. 1993. Price Theory and Its Uses. 5th ed. Lanham, Maryland: University Press of America.
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Shome, P. (2021). Market Behaviour of Consumers and Producers. In: Taxation History, Theory, Law and Administration. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-68214-9_7
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