Imports and Tariffs

Determinants of Supply and Demand

Tax and Elasticity

In determining who shares the burden of taxation, we have to take into account elasticity.  If the demand curve is elastic, the producer will share more of the tax burden; a perfectly elastic demand curve will require the producer to take 100% of the burden.  If the demand curve is inelastic, the consumers will share more of the tax burden; a perfectly inelastic demand curve will result in the consumer taking100% of the tax burden.  The same is also true for the supply curves. 

Price, Income, and Cross Price Elasticity of Demand

Price Elasticity of Demand = Percentage change in quantity demanded / Percentage change in price

• Ignore the sign
• If the number is less than one, the good is inelastic
• If the number is more than one, the good is elastic
• If the number is equal to one, the good is unit elastic

Price Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price

Income Elasticity of Supply = Percentage change in quantity demanded / Percentage change in income

• If the sign is +, it is a normal good
• If the sign is -, it is a inferior good

Cross Price Elasticity of Demand = Percentage change in quantity demanded for product A / Percentage change in price of product B

• If the sign is +, it is a substitute
• If the sign is -, it is a complement

Elasticity

Consumer and Producer Surplus with Dead Weight Loss

Market Equilibrium and Disequilibrium