Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
   1. Price elasticity of demand (PED)
   2. PED values
   3. Determinants of price elasticity
   4. Calculating PED
   5. Elasticity along a straight line demand curve
   6. Elasticity and revenue
   7. PED - primary vs manufactured
   8. PED and taxation
   9. Cross elasticity of demand
   10. XED and business decisions
   11. Income elasticity of demand
   12. YED and business decisions
   13. Price elasticity of supply
   14. Possible PES values
   15. PES - calculation
   16. Determinants of PES
   17. PES - primary vs manufactured
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

PED and taxation

Syllabus: Examine the significance of PED for government in relation to indirect taxes.

The imposition of an indirect tax (tax on a good shifts supply curve upwards by the amount of the tax) usually means that the price increases. However, the amount of the price increase will depend on the price elasticity of demand PED. Compare Figures 1 and 2 to see the difference.

Figure 1 Tax imposed on a good with elastic demand

Figure 2 Tax imposed on a good with inelastic demand

1

Tax revenue If you aimed as a government solely to reduce the consumption of the good, which type of good would you be taxing? a) Elastic demand b) Inelastic demand Yes - if the sole intention was to reduce demand then this would be most effective if the good is elastic in demand. The tax would increase the price and reduce demand by proportionately more.No - if the sole intention was to reduce demand of the good then this will be less effective if the good was inelastic in demand. However, if the good has damaging external costs, then the government may nevertheless want to tax the good.Your answer has been saved.

2

Tax revenue (2) If you aimed as a government to tax goods simply to raise tax revenue, which type of good would you tax? a) Elastic demand b) Inelastic demand Yes - if demand is inelastic, then firms are able to increase the price without demand falling very much. This will mean that the revenue raised will be relatively greater than for a good with elastic demand.No, that's not right. If the demand is elastic, then little revenue will be raised. The tax will put the price up, but this will lead to a proportionately greater decrease in demand and the revenue raised from the tax will be lower.Your answer has been saved.

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.

Are tobacco, alcohol, petrol PED elastic or inelastic? Are they taxed highly or not taxed?