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Excise taxes tend to be thought to hurt mainly the specific industries they target. For example, the medical device excise tax, in effect since 2013, has been controversial for it can delay industry profitability and therefore hamper start-ups and medical innovation. But ultimately, whether the tax burden falls mostly on the medical device industry or on the patients depends simply on the elasticity of demand and supply.

Long-run vs. short-run impact

Elasticities are often lower in the short run than in the long run. On the demand side of the market, it can sometimes be difficult to change Qd in the short run, but easier in the long run. Consumption of energy is a clear example. In the short run, it is not easy for a person to make substantial changes in the energy consumption. Maybe you can carpool to work sometimes or adjust your home thermostat by a few degrees if the cost of energy rises, but that is about all. However, in the long-run you can purchase a car that gets more miles to the gallon, choose a job that is closer to where you live, buy more energy-efficient home appliances, or install more insulation in your home. As a result, the elasticity of demand for energy is somewhat inelastic in the short run, but much more elastic in the long run.

[link] is an example, based roughly on historical experience, for the responsiveness of Qd to price changes. In 1973, the price of crude oil was $12 per barrel and total consumption in the U.S. economy was 17 million barrels per day. That year, the nations who were members of the Organization of Petroleum Exporting Countries (OPEC) cut off oil exports to the United States for six months because the Arab members of OPEC disagreed with the U.S. support for Israel. OPEC did not bring exports back to their earlier levels until 1975—a policy that can be interpreted as a shift of the supply curve to the left in the U.S. petroleum market. [link] (a) and [link] (b) show the same original equilibrium point and the same identical shift of a supply curve to the left from S 0 to S 1 .

How a shift in supply can affect price or quantity

Two graphs that show an inelastic demand curve means that a shift in supply will mainly affect price and that an elastic demand curve means that a shift in supply will mainly affect quantity.
The intersection (E 0 ) between demand curve D and supply curve S 0 is the same in both (a) and (b). The shift of supply to the left from S 0 to S 1 is identical in both (a) and (b). The new equilibrium (E 1 ) has a higher price and a lower quantity than the original equilibrium (E 0 ) in both (a) and (b). However, the shape of the demand curve D is different in (a) and (b). As a result, the shift in supply can result either in a new equilibrium with a much higher price and an only slightly smaller quantity, as in (a), or in a new equilibrium with only a small increase in price and a relatively larger reduction in quantity, as in (b).

[link] (a) shows inelastic demand for oil in the short run similar to that which existed for the United States in 1973. In [link] (a), the new equilibrium (E 1 ) occurs at a price of $25 per barrel, roughly double the price before the OPEC shock, and an equilibrium quantity of 16 million barrels per day. [link] (b) shows what the outcome would have been if the U.S. demand for oil had been more elastic, a result more likely over the long term. This alternative equilibrium (E 1 ) would have resulted in a smaller price increase to $14 per barrel and larger reduction in equilibrium quantity to 13 million barrels per day. In 1983, for example, U.S. petroleum consumption was 15.3 million barrels a day, which was lower than in 1973 or 1975. U.S. petroleum consumption was down even though the U.S. economy was about one-fourth larger in 1983 than it had been in 1973. The primary reason for the lower quantity was that higher energy prices spurred conservation efforts, and after a decade of home insulation, more fuel-efficient cars, more efficient appliances and machinery, and other fuel-conserving choices, the demand curve for energy had become more elastic.

On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. After all, in the short run it can be costly or difficult to build a new factory, hire many new workers, or open new stores. But over a few years, all of these are possible.

Indeed, in most markets for goods and services, prices bounce up and down more than quantities in the short run, but quantities often move more than prices in the long run. The underlying reason for this pattern is that supply and demand are often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. But since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run.

Key concepts and summary

In the market for goods and services, quantity supplied and quantity demanded are often relatively slow to react to changes in price in the short run, but react more substantially in the long run. As a result, demand and supply often (but not always) tend to be relatively inelastic in the short run and relatively elastic in the long run. The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden, and when demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.


Assume that the supply of low-skilled workers is fairly elastic, but the employers’ demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams.

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Questions & Answers

Pls where can I found PRICE CONTROL on this app
Samuel Reply
top left corner
A situation in an economy with one producer but many consumers
Kabali Reply
What is the theory of population according to Malthus?
What is the Malthusian population theory?
The Malthusian theory of population state that, where there are means of substinence like food, human beings have the tendency to procreate (ie.give birth) without restraint (ie. control).
he stated that population unchecked grows at a geometric progression ie 1,2,4,8,16 while the means food subsistence grows at arithmetic progression ie 1,2,3,4,5---- he declared that population has the tendency to outstrip the means of subsistence
What is money?
money is any commodity that act as a medium of exchange
money is medium of exchange which is use in taking goods and giving some of it's worth or money value
what is a debit card and a credit card?
a debit card is a payment card used instead of cash while purchasing
a credit card is a payment card issued to users to enable cardholder to pay a merchant for goods and services
oky tanx
What is an inferior good.?
what is monopoly
Richmond Reply
a market situation when there is only one seller of a product representing whole industry.
where one business is the dominant one in that market. It determines the market price as they are price makers. No entry, no competition.
it is a market situation where is a single seller and many buyer hear the seller is the price maker the is no free entering and exit in this market
A situation in the economy where there is one producer and many consumers
A market situation where there is one producer and many consumers.
Balance of payments for 2018
Mahlatse Reply
what is monopoly and what is monopolaist
Javid Reply
what is the affect of rise in value of dollar ?
monopoly"a single firm or company owns all or nearly all of the market for a given type of product or service "monopoly is a price maker ...barrier of entry ,non availability of close substitute.
monopolistic competition or market is a situation where there are few or many firm producing identical but differentiated product .eg difference in advertisement ,packing etc
monopolistic competition or market is a situation where there are few or many firm producing identical but differentiated product .eg difference in advertisement ,packing
monopoly is a market situation ...where there is a single seller and large number of buyers deals with commodities having no close substitutes......here the sellers are price makers... there is restrictions in the entry and exit of new firms in this market structure....
what is money?
money is a medium of exchange.....through which...commodities are bought and sold
money is a medium/means of exchange that generally accepted by law
What is tranfer earnings
what is savings income?
transfer earning is the minimum income that a factor is willing to accept in an occupation,it is also call the supply price of a factor
what is envelope curve
what is depreciation
depreciation means decrease in value of a assets due to normal wear or year ,means decrease in value of assets like a machine due to its daily use
Refers to wear and tear of capital machinery
what is meant by currency depreciation?
an envelope curve is also call an umbrella curve it is any curve that is enclosed by being tangen t to a series of other curves
fall in the value of currency vis-a-vis any other currency usually $ due to marker forces is called currency depreciation. it is different from devaluation where in value of currency is deliberately reduced to improve BoT
depreciation in its broad sense means loss in the value of fixed capital say a tractor due to i) normal wear and tear ii) normal rate of accidental damage iii) expected absolescence to meet this, Depereciation Reserve Fund is created it is calculated by firms on the basis of their experience.
what is green revolution ?discuss the achievement of green revolution in India
Sweety Reply
green revolution is the third revolution of agricultural refers to a set of research and development of technology transfer initiative occuring between 1930s and the late 1960s that increased agricultural is called green revolution
the green revolution happened because to improve the agricultural sector towards adopting mordern methods and improvement of agricultural equipments
what calculation for demand and supply
Amoo Reply
what is nationalisation
Awuni Reply
it is a process of converting private assets into public assets by undertaking the control of government or state authority
so true
what are some the things that may lead to nationalisation
Over exploring of customers by the private individuals Also to make the nationalised organisation social reliable and accessible by all
feeling of one's is called nationalisation. unity among them self .
anything which is widely acceptable as a medium of exchange
Shabana Reply
money ,currency
Hello plz,what is the full mean of tertiary?
al Reply
tertiary also called philoshper
tertiary means third..for example primary sector ,secondary and tertiary sector... means three number..
ru 9ice tnk
your most welcome.
what is money
what is a bank
a financial institution which holds money for its clients ,which collect deposit and lend money at interest and trades generally in money...
what is bankers draft ?kindly explain with example .
money "anything which is widely acceptable as a medium of exchange"
yes u ryt #shabana
difference between cost and price
Shallow definition
cost"the value of input that is the amount of money which is used to produce a good or service . price"an amount of money which has to b paid to buy something.
Tertiary is an adjective(pre position) for stages or levels and refers to "top, final, full term ." ; Advanced.
bank draft is a type of cheque which a person buy for to pay someone who is not willing to accept a personal cheque .
tertiary sector is an providing any kind of services.
primary sector is 'agriculture', secondary sector is ' industrial sector ,and the tertiary sector is ,' service sector' ,
subana are you understand now the meaning of bank draft?
what is golden- diamond paradox
what is occupational structure
Madhu Reply
occupational structure refers to the distribution of occupation on the basis of educational ,socoial ,income level in a society or economy
no that is not a exact meaning
than what is exact meaning
It refers to also the what is the average income of the person
what is deficit
Obiajunwa Reply
deficit = expenses > revenue
yeah expenses over revenue results in deficit
What is What is Equilibrium
Bright Reply
from business point of view it is that point where business revanu are equal to its expenses.
in economy where demand is equal to supply is called equalibrium
Equilibrium in economics is where quantity demanded is equal to quantity supplied
what are the objectives of devaluation
how the government solve the problem of scarcity
how government solve the problem of scarcity
by deciding the output limit for every industry and providing resources to these industries according to output limit .the problem can be solved
and by controlling the activity of production like as a mixed economy this problem can be solved
by proper planning to cater the needs of people, demand & supply process may prove helpful. and by imposing heavy import duty on the product to shift the demand towards available alternative sources.
changing the methods of production, and tax system
In problems of scarcity government should adopt a plan or state budget, form a long term policy , deal with corruption , mobilise resources ,systems and monitor.
by doing various plans or scheme and providing various kind of free or in less price to the needy people
Plx anyone explain bankers draft by giving example.
what is price elasticity of demand?
Asamoah Reply
price elasticity of demand is the percentage in quantity demanded of a good or service to the percentage change in its price.
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes.
Price elasticity of Demand is a prepotionat change in the demand due to change in price of the goods and service
what is monopoly and monopolistic?
Price elasticity of demand is the economy measure to show the responsiveness and change in price due to change in quantity.

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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