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Effect of Elasticities on Surplus

long-run effects - elasticities can change in the long run  

  • elasticity - generally the slope of the curves
    • will alter the shape of the triangles and areas between the curves and market clearing price
  • change elasticity >> change relative amount of surplus
  • demand and supply have same elasticities >> tax split evenly between consumers and producers
    • demand grows more elastic >> demand curve gets flatter >> less of tax falls on consumer
    • demand grows more inelastic >> demand curve gets steeper >> more of tax falls on consumer
    • same applies for supply curve

 

  • fraction of tax paid by consumer
  • fraction of tax paid by producer

 

  • demand curve gets more elastic
  • notice that the equilibrium stays at the same point and tax (pb - ps) remains the same
  • everything merely shifts
  • fraction of tax paid by consumer now exceeds fraction of tax paid by producer
Subject: 
Economics
Subject X2: 
Economics

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