Elasticity+of+Demand+(Tax+Incidence)

=**Elasticity of Demand (Tax Incidence)**= What is Elasticity? A basic definition of elasticity of demand is it is how consumers respond to and change their demand due to a change in price. It shows how the price of a product affects consumers' behavior.
 * Definitions and understanding concepts**

TAX INCIDENCE is who pays the tax, the buyer or the seller, generally both pay but who pays more is dependent on the elasticity of demand.

ELASTICITY OF DEMAND is the percentage change in demand in response to a one percent change in the price of a product

ELASTIC means that if the price changes the demand will change also

INELASTIC means that if the price of the good changes, the demand for it won't.

The tax division depends on elasticity of demand.when the demand curve is less elastic then than supply curve, then buyers pay a larger amount of tax than sellers. If the supply curve is less elastic than the demand curve then the seller pays more of the tax then the buyer. Buyers pay all taxes if the demand curve is perfectly inelastic or the supply curve is perfectly elastic. Sellers pay if the supply curve is perfectly inelastic or if the demand curve is perfectly elastic.

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The price of elasticity demanded measures how a change in the price of a good affects the quantity demanded of that good, or how demand will change given a price change. This shows how price-sensitive consumers are because it shows how in a given market price will affect demand. In markets where there are many substitutes for a good, a small price change will cause a greater change in demand because if the price of good A increases and there is a close substitute of good B whose price stays constant, consumers will shift to buy good B because it is less expensive than good A.

If demand is elastic: then quantity demanded increases by a greater percent than the price falls, and revenue increases.

If demand is inelastic: then quantity demanded decreases by a smaller percent than the price falls, and revenue decreases.

If demand is unit elastic: then quantity demanded increases by the same percent that the price decreases, and there is no change in revenue.



With elastic goods, the price stays the same no matter what the quantity demanded is.
 * Perfectly Elastic Demand Curve:**

With inelastic goods, the quantity demanded stays the same no matter what the price is. The price of an inelastic good can be raised without affecting sales.
 * Perfectly Inelastic Demand Curve:**

What Factors Affect the Price Elasticity of Demand? 1. Availability of Substitute goods: The more substitutes that are available for a product, the more elastic the demand will be. 2. The Necessity of a product: The more needed a product is, the less inelasticity there is. This is why most luxury goods have more elasticity because they aren't as necessary. 3. Proportion of Income needed to buy Good: Goods that cost a larger proportion of one incomes have greater elasticity. 4. Time Period Considered: Over time, elasticity is greater because consumers have more time to adjust to price changes.

How to Calculate Price Elasticity of Demand for a Product:

E = (% Change in quantity demanded) / (% Change in price) = (Change in quantity demanded / Quantity demanded) / (Change in price / Price). Price Elasticity of Demand generally has a negative value, yet economists usually drop the negative sign and refer to it as a positive value since demand curves already have negative slope because of the inverse relationship between price of a good and quantity demanded. A good with a Price Elasticity of Demand of less than one is generally referred to as inelastic, while good with Price Elasticity of Demand greater than one are considered to be elastic.

Price Elasticity of Demand in the News
[|World Food Prices Soar!] A production shortfall of 5% in the world's wheat production has led to prices doubling. Why is this? Because demand for food is growing faster than the population, such as in China. The problem is that "the demand for grain is highly price-inelastic: it takes big price rises to induce people to consume less, yet collectively that's what they must do given the shortfall in production" (Krugman). The USDA has estimated that the price elasticity of demand for breads and cereals is 0.04. This means that in order for consumption to fall by 1%, the price of breads and cereals would have to rise by 25%. In other words, people aren't shifting their behavior a great deal because of the price changes, and this is most likely because grain is such a necessary food item all around the world.

[|Price Elasticity]
Some companies are beginning to raise the price on goods to fight decreases in profitability due to high costs of resources, especially oil. Many are not able to raise prices because this would cause a decrease in demand for their product, but some companies, like Tate & Lyle, a British sugar company, are able to increase prices without encountering a decrease in demand because their goods are nearly inelastic. Sugar is a relatively inelastic good, meaning that its price has very little effect on its demand, so raising its price is highly unlikely to cause sales to suffer.


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Demand Supply Equilibrium Unit 2

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