<< Chapter < Page Chapter >> Page >

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.

Got questions? Get instant answers now!

Questions & Answers

What is the Cobb-Douglas production function about?
Dorothy Reply
The Cobb Douglas production function is a particular functional form of production,widely used to represent the technological relationship between the amount of two or more inputs and the amount of outputs that can be produced by those inputs.
how do produce
for whom to produce
Keynesian theory of employment
Saidul Reply
for whom to produce
what is equillibrium
riy Reply
Equilibrium is a state of balance e.g supply equals demand then there is no oversupply or shortage of goods
When price increases quantity demnd alway decreases
Sonu Reply
this is because when price increase,consumer can longer effort to pay as they usually do thereby leading to the fall in dd
Explain the impact of increase price of substitude goods an equilibirum price and equilibirum quantity
Again according to the first law of demand which state that more is demanded at higher price than at lower price.Because of this consumer believe that more can only be demand at low prices than higher prices meaning that a slide change in price will affect demand
what are the functions of money?
Liza Reply
medium of exchange
Medium of exchange,store of value,standard for differ payment and unit of account
A medium of exchange for goods and services
what is demand for labour?
boumols inventory theory?
Vyshnavi Reply
what is inflation?
Jestony Reply
the increase in general price level and the decrease in money value
Inflation can be define as the persistence rise in the general price level of goods and services in the market
what are the three reason tgat we study economics
armaan Reply
we may be rational people, know efficient where met profit maximization, know efficient allocation
1.How monetary and fiscal policy create stable economy. 2. How to create fairness for all citizens. 3. Determine drivers of human economic behavior.
To know that you we need understand the demand and supply and others important matters in economics
can you explain. what is the reasons for having international trade
atikah Reply
to aid productivity and efficiency, for economic growth, to help reduce dependence on local product
can someone please help differentiate between short and long run in microeconomics and macroeconomics
what is inflation in economic
Christopher Reply
a general increase price level and fall in purchasing value of money
a general increase in price level and fall in purchasing value of money
due to high supply of mony in the market the demand of goods will increase and price will high its call inflation.
how to calculate real and calculated unemployment rate for false information
James Reply
I think unemployment can't be calculated but I think due to economics survey that happens every year we come to know about unemployment rate and compares that with precocious year unemployment rate
are foreigners in our country helping our economy or not?
Nwabali Reply
foreign countries invest in India by two ways one for there business promotion(of their product ) through employment which employment generates in India and the 2nd is foreign aid fund means when a country suffers from flood,earthquake etc so other countries help them financial(called foreign aid)
simple answer is yes
Yes, this is through the investment as investors.
what is revenue commission?
Kelvyn Reply
is the organ which is collect tax from society for public servise
Where is determination of price is done?
Vidhan Reply
when price equal with marginal cost
what is demand
Fransis Reply
The willingness and ability to of a buyer to purchase a commodity
the thing that u r able to buy and which fullfill your want is called Demand
what u want to buy to fulfilling of yours desires is called demand

Get the best Macroeconomics course in your pocket!

Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Macroeconomics' conversation and receive update notifications?