📚 Topic Summary
The price elasticity of demand and supply significantly impacts tax revenue. When demand is elastic, consumers are highly responsive to price changes. Therefore, a tax increase can lead to a substantial decrease in quantity demanded, potentially reducing tax revenue. Conversely, if demand is inelastic, consumers are less sensitive to price changes, and a tax increase will have a smaller impact on quantity demanded, resulting in higher tax revenue. Similar principles apply to the price elasticity of supply.
Case studies provide practical insights into how these elasticities affect real-world tax revenues. By examining specific industries and tax policies, we can observe the actual effects of taxes on consumer behavior and government revenue. These studies help policymakers make informed decisions about taxation.
🧮 Part A: Vocabulary
Match the terms with their definitions:
| Term |
Definition |
| 1. Elastic Demand |
A. The percentage change in quantity supplied divided by the percentage change in price. |
| 2. Inelastic Demand |
B. A tax levied on the production or sale of a specific good or service. |
| 3. Excise Tax |
C. Demand where the percentage change in quantity demanded is greater than the percentage change in price. |
| 4. Tax Revenue |
D. The total income collected by a government through taxation. |
| 5. Price Elasticity of Supply |
E. Demand where the percentage change in quantity demanded is less than the percentage change in price. |
Answers: 1-C, 2-E, 3-B, 4-D, 5-A
✍️ Part B: Fill in the Blanks
Complete the following paragraph using the words provided: elastic, inelastic, revenue, taxes, demand.
When _______ are imposed on goods with _______ demand, the change in quantity demanded is minimal. This leads to higher _______ for the government. However, when _______ are imposed on goods with _______ demand, the quantity demanded decreases significantly, potentially decreasing the overall tax _______.
Answers: taxes, inelastic, revenue, taxes, elastic, revenue
🤔 Part C: Critical Thinking
Consider a city imposing a new tax on ride-sharing services like Uber and Lyft. How would you determine whether the demand for these services is elastic or inelastic in that city, and how would this information inform the city's revenue projections from the tax?