Answer to Question #144735 in Microeconomics for Shivanshu Mahato

Question

“Alcohol, tobacco, and gasoline have inelastic demand, so the buyers of these items pay most of the tax on them.” Show and explain this statement with the help of hypothetical demand and supply graph. 

Answer 1

Inelastic demand, a change in price causes a smaller percentage change in demand. Occurs when a price elasticity of demand is less than 1.

A tax will shift the supply curve to the left, leading to a higher price and a fall in demand. If demand is inelastic, then the tax will have the effect of raising the price high and reducing the quantity slightly.