Elasticity and Tax Incidence

• Elasticity of supply and demand determines tax incidence
• Inelastic side of the market bears bulk of tax effect

Demand and Supply Reconsidered

• Demand curve identifies the maximum price consumers would pay for a product
• Supply curve identifies the minimum price at which sellers are willing to sell

(Interesting perspective isn’t it!)

Economic Surplus

Surplus exists between demand and supply:

Price Floors/Ceilings

Price floors

• If the price floor is set above the equilibrium, it will raise the price, in which case it is said to be binding

<aside> ⭐ Binding price floors lead to excess supply. Either an unsold surplus will exist, or someone (usually the government) must enter the market and buy the excess supply.

</aside>

Price ceilings

• If the price ceiling is set below the free-market equilibrium, the price ceiling lowers the price and is said to be binding

<aside> ⭐ Binding price ceilings lead to excess demand. The quantity exchanged will be less than in the free-market equilibrium.

</aside>