Home > Economics FAQs Blogs > Regarding unemployment and immigration, why is it that wages will be lower in the short run and higher in the long run due to immigration?
This question pertains to topics in Microeconomics, such as Elasticity, Price Elasticity of Demand
Price Elasticity of Demand (PED): PED measures the responsiveness of the quantity demanded to a change in price. It's calculated as the percentage change in quantity demanded divided by the percentage change in price.
Tax Incidence: Tax incidence refers to how the burden of a tax is distributed between buyers and sellers. It depends on the relative price elasticity of demand and supply.
The
PED affects the division of tax burden between consumers and producers. When demand is more elastic (PED > 1), consumers are more sensitive to price changes. As a result, when a tax is levied, suppliers will bear a greater portion of the tax burden, as they cannot pass the full amount of the tax onto consumers without significantly reducing the quantity demanded.
On the other hand, when demand is inelastic (PED < 1), consumers are less responsive to price changes. In this case, a larger portion of the tax burden falls on consumers, as suppliers can pass on most of the tax to consumers in the form of higher prices with only a small decrease in the quantity demanded.
The reason for this distribution of tax burden is the principle of willingness to pay. If buyers are more willing to pay (inelastic demand), they end up bearing more tax burden. If sellers are more willing to sell (elastic demand), they end up bearing more tax burden.
Tobacco Tax: The demand for cigarettes is typically inelastic due to addiction. Therefore, increases in cigarette taxes tend to be largely passed on to consumers in higher prices, meaning consumers bear a larger share of the tax burden.
Luxury Goods Tax: Luxury goods, such as high-end cars, typically have more elastic demand. Consumers can easily choose less expensive alternatives, so suppliers often bear a larger share of the tax burden to maintain their sales volumes.
The Price Elasticity of Demand plays a significant role in determining the tax incidence, or how the burden of a tax is shared between consumers and producers. When demand is more elastic, suppliers bear a greater portion of the tax burden, and when demand is inelastic, consumers shoulder a larger share of the tax. Understanding elasticity is critical for policymakers when considering the impacts of taxation policies on different stakeholders.
