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If demand is price elastic, firms will face a bigger burden, and consumers will have a lower tax burden. The tax incidence will mainly be borne by consumers. If demand is price inelastic, then a higher tax will lead to higher prices for consumers (e.g. Students with more elastic demand get lower price.Ĥ. Some people pay higher prices for tickets for trains because their demand is more inelastic.Īdults (with more inelastic demand) face higher prices. Instead, they could try advertising to increase brand loyalty and make demand more inelasticģ. If demand is elastic, firms would be unlikely to increase revenue as this could lead to a fall in revenue. Graph showing increase in Revenue following increase in priceĢ. This is why OPEC try to increase the price of oil. If demand is inelastic then increasing the price can lead to an increase in revenue. If the price of chocolate increased demand would be inelastic because there are no alternatives, however, if the price of Mars increased there are close substitutes in the form of other chocolate, therefore, demand will be more elastic.ġ.In the short term, demand is usually more inelastic because it takes time to find alternatives.They cost a small % of income or are bought infrequently.if you have a car, you need to keep buying petrol, even if price of petrol increases They have few or no close substitutes, e.g.Goods which are inelastic tend to have some or all of the following features: Inelastic demand PED These are goods where a change in price leads to a smaller % change in demand therefore PED <1 e.g. if Sainsbury’s put up the price of its bread there are many alternatives, so people would be price sensitive. Goods with many substitutes and a very competitive market.They are expensive and a big % of income e.g.Goods which are elastic, tend to have some or all of the following characteristics. If price increase from £50 to £55 and PED was 0.5 How much did quantity demanded fall?ĭefinition: Demand is price elastic if a change in price leads to a bigger % change in demand therefore the PED will, therefore, be greater than 1.
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If you need help calculating a percentage, see: How to calculate a percentage