Overview
Elasticity and tax incidence are crucial concepts in economics that help us understand how changes in price affect consumer and producer behavior. Elasticity measures the responsiveness of demand and supply to price changes, while tax incidence analyzes who ultimately bears the burden of a tax. Unde...
Key Terms
Example: If the price of a product increases by 10% and demand decreases by 20%, the elasticity is -2.
Example: A price elasticity of -1.5 means a 1% increase in price leads to a 1.5% decrease in quantity demanded.
Example: If the price of a good rises and suppliers increase production significantly, supply is elastic.
Example: If a tax is imposed on cigarettes, the incidence may fall on consumers through higher prices.
Example: At a price of $10, 100 units of a product are sold, achieving market equilibrium.
Example: Insulin has inelastic demand; price increases do not significantly reduce quantity demanded.