Essay: Elasticity of demand and supply

21 May

Essay: Elasticity of demand and supply

Sample Essay

The elasticity of demand (supply) is measured by the percentage in quantity demanded (supplied) divided by the percentage in price. When the incidence of tax is superimposed on the model, there is a change in price dependent upon the type of tax imposed. If the tax incidence is borne by the supplier then the prices don’t change and demand elasticity is intact. However supply elasticity changes as the cost of production rises and suppliers restrict supply as it is now more costly to produce. If the tax incidence is passed on to consumers then the quantity falls. If demand is very elastic, quantity falls more than the change in price and revenue decreases.

            As can be seen from the diagram below quantity supplied falls to QT, and prices rise to PT and this loss is borne by the supplier.

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