(a) The Law of Supply states that other things being equal, quantity’ supplied increases with increase in price and decreases with decrease in price of commodity. 

The factors determining supply in the market are : 

(i) Goal of the Firm : If goal of the firm is to maximise profits, more quantity of the commodity will be offered at a higher price. On the other hand, if goal of the firm is to maximise sales (or maximise output or employment) more will be supplied even at the same price. 

(ii) Expected Future Price : If the producer expects price of the commodity to rise in the near future, current supply of the commodity will reduce. If, on the other hand, fall in the price is expected, current supply will increase. 

(iii) Change in Techonolgy : Change in technology also affects supply of the commodity. Improvement in the techniques of production reduces cost of production. Consequently, more of the commodity is supplied at its existing price. 

(b)

 (i) Impact : The term impact is used to express the immediate result of or original imposition of the tax. The impact of a tax is on the person on whom it is imposed first. Thus, the person who is liable to pay the tax to the government bears its impact. 

(ii) Shifting: The burden of the tax can be transferred to others through a process of shifting. It may be noted that the whole burden of the tax may not be shifted to others. It may be that a part of the tax may be shifted to others and a part be borne by the one who initially pays the tax. 

(iii) Incidence : The incidence of a tax refers to the money burden of a tax on the person who ultimately pays it. The impact and the incidence of tax is on the same person. He cannot shift or transfer the burden on some other person, he has to pay it himself. These terms are relevant to direct tax. 

Merit of direct tax : 

Equitable : A direct tax is an equitable tax. It is equitable in the sense that, it is levied according to the taxable capacity of the people. The rates of direct taxes, like the income tax, can be fixed in such a way that the higher the income of a man, the greater is the rate at which he has to pay the tax. Such a system is known as progressive taxation. 

Demerits of direct tax: 

1. Inconvenient: The greatest drawback of direct taxes is that they put the tax-payer to a lot of botheration and inconvenience. Sometimes, the tax-payer is called to pay the entire tax in one installment. Besides, the tax-payers have to maintain elaborate accounts for the satisfaction of the tax officials. 

2. Evadable : By submitting false returns of income, some people evade the tax. That is why a direct tax is “A Tax on Honesty”.