ATAR Economics - Case Study of Elasticity

• The Availability of Substitutes

• Whether the Good is a Necessity or a Luxury

• Definition of the Marker

• The Proportion of Income Spent

• Time

• When D is elastic, price and total revenue move in opposite directions

• When D is inelastic, price and total revenue move in the same direction

• When D is unit elastic, a change in P does not change TR

• When demand is elastic, a decrease in price leads to a proportionally larger increase in the quantity demanded. This results in total revenue increasing because the gain in quantity sold outweighs the loss in price per unit.

• When demand is inelastic, a decrease in price leads to a proportionally smaller increase in quantity demanded. This results in total revenue decreasing because the loss in price per unit outweighs the gain in quantity sold.

• If bubble gum is elastic then businesses would lower prices as it would have an increase in a proportion of volume demanded since it compensates the loss in price.

• Unlike with inelastic, since let's say that bananas are inelastic, then businesses would lower prices due to the bananas being soon to expire, then they would have a decrease in proportion of volume demanded since the increase of quantity is so small that is doesn't compensate for the price loss making them lose total revenue.

that tax is important for the government as it a way for them to earn a source of income, on of them is called GST which is imposed into every good that is manufactured which goes under a broad based consumption tax. GST is important for government revenue as it is unavoidable and stable. Another is excise tax, an extra tax which is added to specific goods such as tobacco or gas. Most of the time the government usually argue that the reason for these extra taxes is for the safety of the health of its citizens and environment of the country or entire world. The governments often target inelastic goods as these gain the most tax revenue, which is why such goods such as gas or tobacco which are inelastic are included with an extra tax as they boost the profit the government gains. In the terms of burden/incidence we could infer that elastic goods have the most burden towards the produces whilst inelastic goods have the burden towards consumer. This is why price elasticity of supply and demand is important for government as it could determine if a certain good gains the move revenue for the government, especially if they calculate which good has the burden towards mostly to consumers as mentioned, the government usually targets inelastic goods for their ability to have a big tax revenue

Both the incidence of the tax and the amount of tax revenue are determined by price elasticity

• the incidence burden of a tax will fall more on the consumer side when demand is relatively inelastic compared with supply

• It will fall more on the producer side when demand is relatively elastic compared with supply

• Tax revenue will be greater on goods with inelastic demand

1. Types of Taxes:

   • You mentioned two types of taxes: Goods and Services Tax (GST) and excise tax. This shows an understanding of different taxation methods governments employ.

2. Reasons for Taxation:

   • You highlighted that governments often justify taxes, especially excise taxes, by citing reasons related to public health and environmental concerns. This shows an awareness of the rationale behind certain tax policies.

3. Targeting of Inelastic Goods:

   • You correctly noted that governments often target inelastic goods for taxation as they generate more tax revenue. This demonstrates an understanding of how price elasticity of demand influences tax policy decisions.

4. Incidence of Tax:

   • You mentioned the incidence of tax, noting that the burden of taxation falls more heavily on producers for elastic goods and on consumers for inelastic goods. This indicates an understanding of how elasticity affects the distribution of tax burden.