Who invented price elasticity

Coffee is an international crop. In these nations and others, 20 million families depend on selling coffee beans as their main source of income. These families are exposed to enormous risk, because the world price of coffee bounces up and down.

The reason for these price fluctuations stems from a combination of inelastic demand and shifts in supply. The elasticity of coffee demand is only about 0. When a major frost hit the Brazilian coffee crop in , coffee supply shifted to the left with an inelastic demand curve, leading to much higher prices. Conversely, when Vietnam entered the world coffee market as a major producer in the late s, the supply curve shifted out to the right.

With a highly inelastic demand curve, coffee prices fell dramatically. This situation is shown in Figure 1 a , above. Elasticity also reveals whether firms can pass along higher costs to consumers. Addictive substances tend to fall into this category. If society increases taxes on companies that make cigarettes, the result will be, as in Figure 2 a , that the supply curve shifts from S0 to S1.

However, as the equilibrium moves from E0 to E1, these taxes are mainly passed along to consumers in the form of higher prices.

These higher taxes on cigarettes will raise tax revenue for the government, but they will not much affect the quantity of smoking.

If the goal is to reduce the quantity of cigarettes demanded, it must be achieved by shifting this inelastic demand back to the left, perhaps with public programs to discourage the use of cigarettes or to help people to quit. For example, antismoking advertising campaigns have shown some ability to reduce smoking. However, if demand for cigarettes were more elastic, as in Figure 2 b , then an increase in taxes that shifts supply from S0 to S1 and equilibrium from E0 to E1 would reduce the quantity of cigarettes smoked substantially.

Youth smoking seems to be more elastic than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price. Also, casual smokers and low-income smokers are more responsive to changes in the price of cigarettes that is, their demand is more elastic.

Figure 2. Passing along Higher Costs to Consumers. Higher costs, like a higher tax on cigarette companies for the example given in the text, lead supply to shift to the left. This shift is identical in a and b.

However, in a , where demand is inelastic, the cost increase can largely be passed along to consumers in the form of higher prices, without much of a decline in equilibrium quantity. In b , demand is elastic, so the shift in supply results primarily in a lower equilibrium quantity. Consumers suffer in either case, but in a , they suffer from paying a higher price for the same quantity, while in b , they suffer from buying a lower quantity and presumably needing to shift their consumption elsewhere.

Elasticities are often lower in the short run than in the long run. On the demand side of the market, it can sometimes be difficult to change Qd in the short run but easier in the long run.

Consumption of energy is a clear example. In the short run, it is not easy for a person to make substantial changes in his or her energy consumption. EconTalk, June 23, Elastic and inelastic demand at time mark They discuss why Southern California experiences frequent water crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the economics of price discrimination. Alfred Marshall , biography from the Concise Encyclopedia of Economics.

The Elasticity of Wants , by Alfred Marshall. The elasticity of demand is great for high prices, and great, or at least considerable, for medium prices; but it declines as the price falls; and gradually fades away if the fall goes so far that satiety level is reached….

Water is one of the few things the consumption of which we are able to observe at all prices, from the very highest down to nothing at all. At moderate prices the demand for it is very elastic.

But the uses to which it can be put are capable of being completely filled: and as its price sinks towards zero the demand for it loses its elasticity. Nearly the same may be said of salt. Coffee is an international crop. In these nations and others, 20 million families depend on selling coffee beans as their main source of income. These families are exposed to enormous risk, because the world price of coffee bounces up and down. For example, in , the world price of coffee was about 50 cents per pound.

By it had fallen back to 46 cents a pound. The reason for these price fluctuations lies in a combination of inelastic demand and shifts in supply. The elasticity of coffee demand is only about 0. When a major frost hit the Brazilian coffee crop in , coffee supply shifted to the left with an inelastic demand curve, leading to much higher prices. Conversely, when Vietnam entered the world coffee market as a major producer in the late s, the supply curve shifted out to the right.

With a highly inelastic demand curve, coffee prices fell dramatically. Elasticity also reveals whether firms can pass higher costs that they incur on to consumers. Addictive substances, for which demand is inelastic, are products for which producers can pass higher costs on to consumers.

For example, the demand for cigarettes is relatively inelastic among regular smokers who are somewhat addicted. If society increases taxes on companies that produce cigarettes, the result will be, as in [link] a , that the supply curve shifts from S 0 to S 1. However, as the equilibrium moves from E 0 to E 1 , governments mainly pass along these taxes to consumers in the form of higher prices.

These higher taxes on cigarettes will raise tax revenue for the government, but they will not much affect the quantity of smoking. If the goal is to reduce the quantity of cigarettes demanded, we must achieve it by shifting this inelastic demand back to the left, perhaps with public programs to discourage cigarette use or to help people to quit.

For example, anti-smoking advertising campaigns have shown some ability to reduce smoking. However, if cigarette demand were more elastic, as in [link] b , then an increase in taxes that shifts supply from S 0 to S 1 and equilibrium from E 0 to E 1 would reduce the quantity of cigarettes smoked substantially.

Youth smoking seems to be more elastic than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price. The example of cigarette taxes demonstrated that because demand is inelastic, taxes are not effective at reducing the equilibrium quantity of smoking, and they mainly pass along to consumers in the form of higher prices.

The analysis, or manner, of how a tax burden is divided between consumers and producers is called tax incidence. Typically, the tax incidence, or burden, falls both on the consumers and producers of the taxed good. However, if one wants to predict which group will bear most of the burden, all one needs to do is examine the elasticity of demand and supply. In the tobacco example, the tax burden falls on the most inelastic side of the market.

If demand is more inelastic than supply, consumers bear most of the tax burden, and if supply is more inelastic than demand, sellers bear most of the tax burden. The intuition for this is simple. When the demand is inelastic, consumers are not very responsive to price changes, and the quantity demanded reduces only modestly when the tax is introduced.

In the case of smoking, the demand is inelastic because consumers are addicted to the product. The government can then pass the tax burden along to consumers in the form of higher prices, without much of a decline in the equilibrium quantity. Similarly, when a government introduces a tax in a market with an inelastic supply, such as, for example, beachfront hotels, and sellers have no alternative than to accept lower prices for their business, taxes do not greatly affect the equilibrium quantity.

The tax burden now passes on to the sellers. If the supply was elastic and sellers had the possibility of reorganizing their businesses to avoid supplying the taxed good, the tax burden on the sellers would be much smaller. The tax would result in a much lower quantity sold instead of lower prices received.

In [link] a , the supply is inelastic and the demand is elastic, such as in the example of beachfront hotels. By introducing a tax, the government essentially creates a wedge between the price paid by consumers Pc and the price received by producers Pp.

In other words, of the total price paid by consumers, part is retained by the sellers and part is paid to the government in the form of a tax. The distance between Pc and Pp is the tax rate. The new market price is Pc, but sellers receive only Pp per unit sold, as they pay Pc-Pp to the government. Since we can view a tax as raising the costs of production, this could also be represented by a leftward shift of the supply curve, where the new supply curve would intercept the demand at the new quantity Qt.

For simplicity, [link] omits the shift in the supply curve. The tax revenue is given by the shaded area, which we obtain by multiplying the tax per unit by the total quantity sold Qt. The tax incidence on the consumers is given by the difference between the price paid Pc and the initial equilibrium price Pe. The tax incidence on the sellers is given by the difference between the initial equilibrium price Pe and the price they receive after the tax is introduced Pp. In [link] a , the tax burden falls disproportionately on the sellers, and a larger proportion of the tax revenue the shaded area is due to the resulting lower price received by the sellers than by the resulting higher prices paid by the buyers.

The tax incidence now falls disproportionately on consumers, as shown by the large difference between the price they pay, Pc, and the initial equilibrium price, Pe. From this analysis one can also predict whether a tax is likely to create a large revenue or not.

The more elastic the demand curve, the more likely that consumers will reduce quantity instead of paying higher prices. The more elastic the supply curve, the more likely that sellers will reduce the quantity sold, instead of taking lower prices.

In a market where both the demand and supply are very elastic, the imposition of an excise tax generates low revenue. Some believe that excise taxes hurt mainly the specific industries they target.

For example, the medical device excise tax, in effect since , has been controversial for it can delay industry profitability and therefore hamper start-ups and medical innovation.