Answer to Question #145476 in Microeconomics for Prachi

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 is when a change in price causes a smaller percentage change in demand. It usually, occurs when a price elasticity of demand is less than 1.

From the graph below it shows that the tax will shift the supply curve to the left from s₁ to s₂, leading to a higher price from p₁ to p₂ and a fall in demand from Q₂ to Q₁ of Alcohol, tobacco, and gasoline.