Question

After a tax is imposed on the market for bottled water, the price buyers pay is $2.50 per bottle and the price sellers receive is $1.75. If the equilibrium price was $2.00 before the tax was imposed on the market, what can you conclude about the relative price elasticities of demand and supply?

Answer 1

The balance of the price in the market is determined by demand and supply, which are measured in terms of the price and quantity variables; When a tax is placed on a product, a change in the market equilibrium is generated, since buyers pay more and sellers receive less.

Thus, a tax causes the supply curve to move up and the demand curve to move down.

In order to know how the tax burden is distributed, the incidence is measured through the elasticity of the supply and demand curve, which measures the sensitivity of the quantity, demanded or offered, of products before a price change.

When the supply curve is more elastic than the demand curve, the impact of the tax is stronger for consumers, as the prices paid by consumers increase more than the price that sellers receive decreases.

Answer

It can be concluded about the elasticity of demand and supply prices that supply is more elastic than demand