In the sense, an indirect taxes is a tax on expenditure which the incidence is likely to fall on both consumer and producer. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.
If the reduction in the rate of VAT from 17.5% to 15%, there will appear some impact on supply and demand of consumer goods. The most obvious is that will lead to a reduction in the price of a product. The consumers will get lower price to buy the product in the same value even to attract much more consumers. It will also advance the consumption during the market. In the other case, the lower price could mean higher demand. The new consumers will bring extra demand than before which they have enough to purchase a given product. Most of consumers like to buy more of the good in this situation. These higher demands will also increased supply as well. The firms likely to expand production to take enough profit and the quantity supplied will rise because of the higher demand. This relationship between demand and supply on the price will keep a violent competition market which improves the quality of the goods.
On the other hand, the incomes of consumers have remained the same when the VAT has decreased. It will improve the purchasing power of each consumer. Some buyer will snap up the products which will lead to a shortage of product on the market. In this model, the manufacturer will try to increase supply even increase the costs. The manufacturer has to increase the input and improve the quantity of the products in a available value. However, if the costs of production increase at any given level of output, manufacturers will attempt to pass on these increases in the form of higher price. Otherwise, it hard to satisfied between them and consumers. The higher price of goods will result in lower demand and the purchasing power by consumers will decreased. The inflation will be happen if the supply more...