# Econ - Tax Question yay!

For markets with perfectly elastic supply and perfectly inelastic supply, respectively the introduction of a tax will most likely: Markets w/ perfectly elastic supply Mkts with perfectly inelastic supply A. A price incrase, and the seller bears A price increase and the buyer bears the tax the tax B. A price increase, and supply remains No change in price, and the seller bears the tax the same C.A price increase, and the buyer bears No change in price, and the seller bears the tax the tax D.No change in price, and the seller bears A price increase, and the buyer bears the tax the tax I thought A but I was wrong, don’t know why, can someone explain? Thanks guys/girls/whoever can answer the question the best lol

little help here

B

Answer was C, don’t know why though

Perfectly elastic, if the price moves, the seller will sell nothing.

I’m sorry I get confused when it comes to Elastic and Inelastic Supply, can you explain why?

Perfectly elastic - If the price moves one way or another, they will go out of business since MR ~ MC. In the perfectly elastic pure competition market (Think salt, flour, etc), one producer cannot change their price since MR = MC. % change in price will be offset by a substantially larger % change in demand. Inelastic, well this is gasoline, cigarettes, etc. % changes in price will have a smaller % change in demand.

Got it, thanks man.

perfectly elastic supply has similar effects of prefectly inelastic demand when it comes to taxes, is that correct?

I’m going to need to review this myself. I’ll get back to you.

k thanks. Stalla doesn’t really explain it all the well in lamence (I think that’s how u spell lamence lol) terms

If demand is less elastic (steep demand curve) than supply, consumers will bear a higher tax burden than suppliers (gas/cigs). If supply is less elastic (steep supply curve) than demand, suppliers will bear a higher tax burden than consumers. Taxes effect elasticity of supply as such. More elastic supply curve means that consumers can substitute away from that specific product. The supplier must eat the tax cost or lose out on revenue. Less elastic supply curve means the consumer cannot substitute away from that product and thus will be forced to pay the tax. Bigger dead weight losses exist for elastic supplies (and demand for that matter) than inelastic supplies.

I think u have it mixed up, at least according to the answer of the question above. perfectly elastic demand means that consumers can substitute away that specific product perfectly elastic supply - the consumers are beat and they have to pay the tax. Inelastic Demand - like cigarettes, consumers had to eat the tax Inelastic Supply - The seller has to eat the tax and can’t raise the price otherwise no one will buy it Whoever has an inelastic curve eats the tax (demand = buyers, supply = sellers) Whoever has an elastic curve pushes the tax on the other party

Ah! I may need to break open the CFAI volume, now I’m confused! The last message was straight from Schweser.

JP_RL_CFA Wrote: ------------------------------------------------------- > I think u have it mixed up, at least according to > the answer of the question above. > > perfectly elastic demand means that consumers can > substitute away that specific product > > perfectly elastic supply - the consumers are beat > and they have to pay the tax. > > Inelastic Demand - like cigarettes, consumers had > to eat the tax > > Inelastic Supply - The seller has to eat the tax > and can’t raise the price otherwise no one will > buy it > > Whoever has an inelastic curve eats the tax > (demand = buyers, supply = sellers) > Whoever has an elastic curve pushes the tax on the > other party I dont think this is correct, i think ditchdigger had it correct.

I don’t know. The question above asks what happens with perfectly elastic supply (I’m thinking that is more elastic) and perfectly inelastic supply (less elastic) and the answer is Perfectly Elastic Supply: A price increase, and the buyer bears the tax Perfectly Inelastic Supply: No change in price, and the seller bears the tax

JP_RL_CFA Wrote: ------------------------------------------------------- > I don’t know. The question above asks what > happens with perfectly elastic supply (I’m > thinking that is more elastic) and perfectly > inelastic supply (less elastic) > > and the answer is > > Perfectly Elastic Supply: > A price increase, and the buyer bears the tax > > Perfectly Inelastic Supply: > > No change in price, and the seller bears the tax when supply is inelastic then supply is fixed and and price is determined by demand. so, taxes are paid by sellers, any change in price would lead to fall in demand. not a good thing for sellers. when supply is elastic then taxes would be paid by buyers. any change(downward shift) in price might lead to reduction in supply. not a good thing for buyers. i hope this helps.

It’s essentially asking you where the incidence of a tax will fall given A - perfectly elastic supply or B - perfectly inelastic supply The way I think of it is that if supply is perfectly elastic, then the seller has all the advantages (can change supply easily) so the buyer is hit with the tax. And if supply is perfectly inelastic then the seller is unable to alter supply easily, so the seller is hit with the tax. The same applies for elasticity of demand but opposite (perfectly inelastic = buyer is hit, perfectly elastic = seller is hit)

Thank you for helping