Question

If the government of India levies excise duty on wheat, in which direction will the supply curve of wheat shift? Explain with the help of a diagram.

Answer 1

When the Government of India levies an excise duty on wheat, the supply curve of wheat will shift to the left (backward shift).

Excise duty is a tax levied on the production or sale of goods. It acts as an additional cost of production for suppliers, directly influencing market behaviour.

When the Government of India levies an excise duty on wheat, the supply curve changes to the left (backward shift) from S1, S1, S2, and S2. An excise duty is a production tax that adds to the producer's costs. This tax hike directly boosts the entire cost of production for farmers and suppliers, hence shrinking their profit margins at the prevailing market price (P1). Because production has become less profitable, suppliers are less motivated to produce and sell the same amount of wheat. As a result, the amount supplied falls from Q1 to Q2 at each price level, causing the entire supply curve to move backwards to the left.