Price elasticity of demand is the change in demand of a product based on the increase or decrease of the price of that product. It is of significant importance to the government because it is used to determine the tax incidence of each product.
The tax incidence is how the tax imposed on each product is divided between suppliers and consumers. When supply is more elastic (when consumers can substitute one product for another in response to an increase in price), suppliers pay more taxes than consumers. This is also known as inelastic supply. For example, when the price of rice increases, consumers will substitute the rice for a product such as pasta in response to the price change.
When demand is more elastic (when the demand for a product does not change regardless of the price), consumers pay more taxes than suppliers. This is also known as inelastic demand. For example, if the price of gas increases, consumers will still have to purchase gas in order to have transportation for their...
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