ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The product has price elastic demand and price elastic supply.
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The product has price elastic demand and price inelastic supply.
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The product has price inelastic demand and price elastic supply.
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The product has price inelastic demand and price inelastic supply.
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Detailed explanation-1: -The imposition of an indirect tax distorts the market in the sense that the price signals from the consumer do not reflect the value that consumers place upon the good. In addition, consumer surplus and producer surplus are reduced.
Detailed explanation-2: -When a tax is imposed on sellers, consumer surplus and producer surplus both decrease. As the price elasticities of supply and demand increase, the deadweight loss from a tax increases. A tax on a good causes the size of the market to shrink.
Detailed explanation-3: -So, for a government wishing to raise revenue from indirect taxation, they will always tend to impose the taxes on goods with relatively inelastic demand. The more inelastic the demand, the more the price will rise and therefore the more of the tax will be passed on to the consumer.
Detailed explanation-4: -If demand is perfectly inelastic, consumers always buy the same amount and therefore pay the entire burden of the tax. Sellers therefore get the same price they received before.