Economics – The allocation of resources - Price elasticity of demand (PED) | e-Consult
The allocation of resources - Price elasticity of demand (PED) (1 questions)
Login to see all questions.
Click on a question to view the answer
Impact on Consumers:
- Elastic Demand: Consumers will significantly reduce their cigarette consumption due to the higher price. This will lead to a decrease in the quantity of cigarettes consumed.
- Inelastic Demand: Consumers will continue to purchase cigarettes, albeit at a higher price. The decrease in quantity consumed will be relatively small.
Impact on Cigarette Producers:
- Elastic Demand: Cigarette producers will experience a significant decrease in sales volume. Their total revenue will likely fall.
- Inelastic Demand: Cigarette producers will continue to sell a large quantity of cigarettes, and their total revenue may even increase due to the higher price per cigarette.
Impact on Government Tax Revenue:
- Elastic Demand: The government's tax revenue might be lower than expected because the decrease in consumption offsets the higher price.
- Inelastic Demand: The government's tax revenue will likely be substantial because the price increase is not significantly offset by a decrease in consumption.
Summary Table:
| Demand Elasticity | Consumer Response | Producer Response | Government Revenue |
| Elastic | Significant decrease in consumption | Significant decrease in sales | Potentially lower than expected |
| Inelastic | Small decrease in consumption | Large sales volume | Potentially higher than expected |