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Elasticity also reveals whether firms can pass higher costs that they incur on to consumers. Addictive substances tend to fall into this category. For example, the demand for cigarettes is relatively inelastic among regular smokers who are somewhat addicted; economic research suggests that increasing the price of cigarettes by 10% leads to about a 3% reduction in the quantity of cigarettes smoked by adults, so the elasticity of demand for cigarettes is 0.3. If society increases taxes on companies that make cigarettes, the result will be, as in [link] (a), that the supply curve shifts from S 0 to S 1 . However, as the equilibrium moves from E 0 to E 1 , these taxes are mainly passed along to consumers in the form of higher prices. These higher taxes on cigarettes will raise tax revenue for the government, but they will not much affect the quantity of smoking.

If the goal is to reduce the quantity of cigarettes demanded, it must be achieved by shifting this inelastic demand back to the left, perhaps with public programs to discourage the use of cigarettes or to help people to quit. For example, anti-smoking advertising campaigns have shown some ability to reduce smoking. However, if demand for cigarettes was more elastic, as in [link] (b), then an increase in taxes that shifts supply from S 0 to S 1 and equilibrium from E 0 to E 1 would reduce the quantity of cigarettes smoked substantially. Youth smoking seems to be more elastic than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.

Passing along higher costs to consumers

These two graphs show how a supply shift affects price and quantity. Figure (a) shows how supply shifts when demand is inelastic and figure (b) shows how supply shifts when demand is elastic.
Higher costs, like a higher tax on cigarette companies for the example given in the text, lead supply to shift to the left. This shift is identical in (a) and (b). However, in (a), where demand is inelastic, the cost increase can largely be passed along to consumers in the form of higher prices, without much of a decline in equilibrium quantity. In (b), demand is elastic, so the shift in supply results primarily in a lower equilibrium quantity. Consumers suffer in either case, but in (a), they suffer from paying a higher price for the same quantity, while in (b), they suffer from buying a lower quantity (and presumably needing to shift their consumption elsewhere).

Elasticity and tax incidence

The example of cigarette taxes showed that because demand is inelastic, taxes are not effective at reducing the equilibrium quantity of smoking, and they are mainly passed along to consumers in the form of higher prices. The analysis, or manner, of how the burden of a tax is divided between consumers and producers is called tax incidence    . Typically, the incidence, or burden, of a tax falls both on the consumers and producers of the taxed good. But if one wants to predict which group will bear most of the burden, all one needs to do is examine the elasticity of demand and supply. In the tobacco example, the tax burden falls on the most inelastic side of the market.

Questions & Answers

Explain the differences between aggregate demand shocks and aggregate supply shocks
Swagger Reply
what are the measures being taken to reduce inflation in LDCs
Athumam Reply
increase level of production,reduce rates of tax charged
mashauri
What is economic growth!
Doris Reply
Microeconomics can simply be refers to as the study of a unit economy while macroeconomics can be regarded as a study of economy as a whole or aggregate economy of a country.
Hamzat Reply
Full employment price stability economic growth
Hamzat
using geometry, discuss the four interrelated flows in the circular flows of income
Ahmed Reply
who is there?
SHAHRUKH Reply
Demand refers to the quantity of a commodity that one can buy supported by the willingness and the ability to buy
Noor Reply
Which of the following are assets of the Federal Reserve? a. Treasury bills held by the Federal Reserve b. cash in circulation c. Loans made by commercial banks d. the reserves of commercial banks at the Federal Reserve
Julya Reply
D
Neeha
a
Sushovan
d
Roger
what are the four functions served by money
Michele Reply
It serves as a medium of exchange
Zaharaddeen
It serves as a store of value
Zaharaddeen
It serves as a unit of account
Umar
It also serves as a standard for Differed Payment.
Umar
Acts as a measure of value.
Humphrey
acceptability
GGPS
hi
Shaxboz
hello
Md
welcome
Shaxboz
Hey, I am a new member.
Abdul
Store of value
Bokwe
Hello i want your help if there is someone online
Athumam
hello
Prem
how are you doing
Athumam
what is balance of payment deficit
Athumam
A nation or region, which is deficit in exports, and Imports more goods and services and for the payment for imports, it must be borrowed from other states or Nations. mostly, between countries.
Prem
Pls Wat ar D Factors to Consedered To Saving
IBRAHIM
savings
BENJAMIN
Yah
IBRAHIM
Yes
IBRAHIM
Hello guys how are you doing
Tantoh
I will say a balance of payment deficit is when a country import more goods,services and capital than it export.The country most borrowed from other countries to pay for it imports.
Tantoh
income
Vivek
can anyone tell me that why in the income and consumption curve the income is on x axis?
bechar Reply
why inflation in double digit is not good for economy
Obaid Reply
what is mean by zero inflation
Obaid
some time it is good but some time it is not...
bechar
the condition of that economy tell you. is it good are bad?
bechar
the definition of the law of demand
Aley Reply
law of damand states all else remains constant or what we can say is ceteris peribus,quantity demanded for a commodity extends with fall in price and vice versa. law of demand explains inverse relationship between price and qua ntity demanded
Gaurav
What is demand and supply
Antwi Reply
Demand refers to how much of that product, item, commodity, or service consumers are willing and able to purchase at a particular price. In other words, supply refers to how much the producers of a product or service are willing to produce and can provide to the market with limited amount of resou
Husna
Hello dear
habibrahman
what is gdp per capital and why it is used for?
Era Reply
gross domestic product
prince
gdp per capita is the gross domestic product per person (GDP/population) and is a better indicator of economic health and living standards than GDP alone.
Gina
thank you so much 😘
Era
please explain shift in production possibility curve
Kobby
advances in technology can cause a shift in the ppf because output can increase with use of the same amount of resources (laborers can produce more efficiently, and suppliers are willing to sell more)
Gina
but equally natural shocks ie earthquakes or war can move the ppf inward so reducing production capicity
jax
what is crowding out effect?
Sera Reply
What is SAT AND GPA
prince

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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