Th1.2: Significance of PED Flashcards
What does PED (and PES) determine?
the effects of the imposition of indirect taxes and subsidies
The more elastic the demand curve…
the lower the incidence of tax on the consumer
- supplier will have to cover majority of tax
When demand is inelastic the tax will mainly be passed on to the…
consumer
If demand is inelastic, a tax will…
be relatively ineffective at reducing output and increase tax revenue for government
Refer to PP
What kind of demand does Graph 5 show and how can we tell?
inelastic - steep demand curve
Refer to PP
What kind of demand does Graph 6 show and how?
elastic demand - sloping demand curve
Which demand produces a greater consumer burden?
inelastic demand
Which demand producers a greater producer burden?
elastic demand
With a subsidy, elastic demand means that…
the consumer sees a small fall in price whilst the producer gains a lot in extra revenue
(following subsidy) The more inelastic demand…
the more the price falls
How does elastic demand affect output after subsidy?
large change
How does inelastic demand affect output?
little change
How do subsidies on goods with inelastic demand affect output?
ineffective at increasing output
Why are subsidies cheaper for the government to impose on inelastic goods?
output increases by less and so the government has to pay the subsidy on less goods
Refer to PP
Look at Graphs 7 and 8. What do they show?
that the government has to spend more for subsidies on elastic goods
