Yr 11 IB Econ T1 Wk8
PRICE ELASTICITY OF DEMAND AND EXCISE TAXES
Governments often levy taxes on specific goods eg (excise taxes) also known as indirect
taxes. Like businesses, governments must consider the price elasticity of demand for the
goods to be taxes if they are interested in measuring tax revenues.
 The lower the elasticity of demand for the good being taxed, the larger the tax
revenues for the government
 The higher the elasticity of demand for the good being taxed, the smaller the tax
revenues for the government
Normally when a tax is imposed on a good, the impact will be a _______ in the ________
curve to the _________. So that the vertical distance between S1 and S2 is equal to the
amount of the tax per unit of output.
In the diagram, the new after tax equilibrium occurs at P1 and Qt, the shaded area
represent the government tax revenues.
???Thinking Point – What do you notice when comparing the two diagrams?
Conclusion:
______________________________________________________________
______________________________________________________________
______________________________________________________________
ZD 1
Yr 11 IB Econ T1 Wk8
PRICE ELASTICITY OF DEMAND AND AGRICULTURAL (PRIMARY)
PRODUCTS
Food produced in the agricultural sector, has a highly price inelastic demand, because it is
a _____________ and has no ______________. The same applies to a variety of
primary products including: fishing, agriculture, forestry and extracted products such as
oil and minerals) known as commodities.
In Developed countries food PED is estimated to be between (0.20 and 0.25). This low PED
in combination with the fluctuations in agricultural output in the short term, create serious
problems for agriculture due to fluctuating product prices which in turn impact farmers’
incomes. WHY ????
Agricultural products depend on many factors beyond the farmer control such as:
______________________________________________________________
______________________________________________________________
______________________________________________________________
When any of these factors occur, they affect the __________ of farm products
and ___________ curve shifts to the ___________(
conditions or shifts to the ___________(
) in adverse (bad)
) in favorable conditions. Diagram (a)
shows demand for food products (inelastic) and diagram (b) shows demand for
manufactured or industrial products (elastic).
WHAT IS PRICE VOLATILITY - Price Volatility – refers to large price fluctuations
occurring over short periods of time (Volatility means instability or high variability).
??Thinking Point - What do you notice when comparing the two diagrams?
ZD 2
Yr 11 IB Econ T1 Wk8
Conclusion:
______________________________________________________________
______________________________________________________________
______________________________________________________________
2 IMPORTANT RESULTS FROM THIS ANALYSIS:

As agricultural prices fluctuate so does the farmer income WHY???
______________________________________________________________
______________________________________________________________

As agricultural supply changes so does the farmer revenues. WHY???
If Demand for farm products is elastic then:
______________________________________________________________
______________________________________________________________
If Demand for farm products is inelastic then:
______________________________________________________________
______________________________________________________________
If farmers work more efficiently (produce more with the same resources) what
happens to the equilibrium price in agricultural markets, ceteris paribus?
____________________________________________________________
What happens to farm income (total revenues)? ________________________
To sum up: A good harvest (season) is beneficial for consumers who pay lower
prices while farmers are worse off because their revenues fall (because demand
for agricultural good is inelastic) i.e. falling prices do not result in significant
increases in quantity demanded of these goods - ultimately impacting on the
revenues of farmers. This is why governments intervene and normally support
farmers by setting minimum or maximum prices for agricultural goods or offer
subsidies.
ZD 3
Yr 11 IB Econ T1 Wk8
PRICE ELASTICITY OF DEMAND AND MANUFACTURED
(SECONDARY) PRODUCTS
Manufactured products tend to be more price elastic than agricultural
products. This is because although these goods may be necessities in
some instances, they usually have substitutes and can be made
(supplied to the market) in a shorter time frame than agricultural
goods. Therefore, quantity demanded tends to be more responsive to a
given percentage price change for manufactured goods compared to
agricultural products.
Note: There are exceptions. Medications are manufactured goods but
their PED tends to be inelastic due to medicine being a necessity and
often manufactured under patent protection. Computer chips are
manufactured goods, however, their prices tend to behave like
agricultural commodities because the manufacturing technology is so
productive that they are relatively inexpensive and mass produced
(sold in large quantities!).
Do questions 3-5 page 58
ZD 4