Golf's Elasticity of Demand
In the market for golf clubs, the elasticity of demand is 0.56 and the elasticity of supply is 1.20.
If the government imposes a 0.5% tax, who bears the greater burden of the dead weight loss?
This section requires Javascript.
You are seeing this because something didn't load right. We suggest you, (a) try
refreshing the page, (b) enabling javascript if it is disabled on your browser and,
finally, (c)
loading the
non-javascript version of this page
. We're sorry about the hassle.
2 solutions
Determinants of Deadweight Loss How large will the deadweight loss be from a particular tax? It depends on how much a given tax reduces the amount that: consumers are willing to purchase and; producers are willing to supply. What determines how much the market will shrink? Reduction in quantity supplied as a result of a tax depends on the elasticity of supply. Generally, the more inelastic the supply, the smaller the reduction in quantity, and the smaller the deadweight loss. Reduction in quantity demanded depends on the elasticity of demand. Generally, the more elastic the demand, the more quantity demanded decreases and the greater the deadweight loss. In general, the smaller the decrease in quantity, the smaller the deadweight loss. This occurs since the main cost of a tax is that it shrinks the size of a market below its optimum level. Overall, the more elastic the supply and demand, the larger the dead weight loss of a tax. - See more at: http://www.basiceconomics.info/tax-and-deadweight-loss.php#sthash.7iscxdE1.dpuf
@Calvin Lin , the slope is upside down. If elasticity is percentage change in Q over percentage change in P, and if the graph Y-axis is P and X-axis is Q, then the slope of the demand curve in this case is 1/0.56. Similarly, the slope of the supply curve is 1/ 1.20. This means the demand curve is more elastic ( more sensitive) to price fluctuation if compared to the supply curve.
Log in to reply
You're right, the slope is the inverse of the elasticity. But the elasticity is elasticity. The demand curve slopes down but this is because the elasticity of the demand is always negative. We just always say it's positive since we take the absolute value. Also, the flatter it is, the more sensitive it is.
I sent u a friend request on facebook, we can talk more there if u like.
Whenever a tax is imposed. The more inelastic one (demand or supply) takes the greater burden.
The lower the elasticity, the higher the "inelasticity".
This here the more inelastic one is the demand so the buyers take the greater burden.
Elasticity measures the percentage change in price over the percentage change in quantity demanded. Since the demand curve is relatively flatter than the supply curve, wouldnt this imply that a small change in price will result in a larger change in quantity demanded, hence the flatter demand curve compared to the steeper supply one? I should say the demand curve is more elastic than the supply curve, resulting in a higher deadweight loss if a tax was imposed.
Log in to reply
Your reasoning is correct. However, the only thing wrong is that elasticity is quantity demanded divided by price. Not visa versa.
Log in to reply
Yes I think I got the elasticity upside down since the Y-axis is price and X-axis is quantity, which is the norm. So, in this case, the elasticity of demand of 0.56 means that the relative percentage change in Q over P is the inverse slope of the demand curve, hence the slope of the demand curve is 1/0.56 or 1.78. This translates to a 1 percentage change in price will result in a more than a percentage change in quanity demanded ( -1.78 units). Conversely, a one percentage change in price will result in a 1/1.2 or 0.83 change in quantity supplied. The effect of a percentage price change is obviously more for demand than suppliers. If that's the case shouldn't we conclude that the demand curve is more sensitive to price fluctuation?
Log in to reply
@Venture Hi – Close, but not exactly. Tip, don't try to flip the axes (idk what the plural of axis is lol). This will confuse you. It took me a while to get used to this as well, don't worry. Demand here is less sensitive.
Δ d = Δ P ⋅ e l a s t i c i t y d = Δ P Δ P Δ Q d and Δ s = Δ P ⋅ e l a s t i c i t y s = Δ P Δ P ↑ Δ Q s
where the ↑ means "larger" to show that the change in supply here is greater than the demand hence supply's larger elasticity.
Of the tax wedge, a greater deal will be on the demand side. This means that the difference between initial equilibrium price (assume they were initially at eq.) and price paid by consumers will be greater than the difference between initial eq price and the amount a supplier receives.
I can provide a diagram if you need. But for now, I gotta sleep, G'night!
Log in to reply
@Trevor Arashiro – the more elastic the supply and demand, the larger the dead weight loss of a tax. -http://www.basiceconomics.info/tax-and-deadweight-loss.php
Log in to reply
@Venture Hi – Once again, close, but not exact. The greater the product of elasticities , the greater the a) dead weight loss b) change in supply and demand.
However, the more inelastic of the two, supply or demand, undertakes the greater portion of the dead weight loss.
Oh, back to Econ 101.
The way I remembered it, if you are more elastic, you can easily escape from the tax. Thus, the buyer (who creates the demand) who is inelastic, and hence is less able to escape the tax, compared to the seller (who provides the supply) who is elastic.