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ELASTICITY OF SUPPLY AND DEMAND Name: Course: December 1, 2016 Introduction Tax is a mandatory contribution to the revenue of the state. The government levies taxes on income of its workers and profits of businesses as well as on the costs of certain goods and services. When a tax is imposed in a good, naturally the price goes up. When the price goes up, for a non-basic good with substitutes, the quantity demanded will naturally fall as people look for cheaper alternatives. However, certain goods are too essential that even an increase in price does not have any significant impact on the quantity that the consumers demand. A subsidy, on the other hand, is an advantage that the government offers groups or individuals in the form of tax cuts or cash payments. Governments typically give subsidies to relieve the public of some financial stress. When a subsidy is given on a product, the price goes down and the quantity of the commodity purchased naturally goes up. This paper will analyze the effect that tax or subsidies have on the quantities, prices, and economic welfare based on the elasticity of supply and demand model. The Theory of Elasticity of Supply and Demand Elasticity is used to refer to the level at which the supply and demand curves respond to price changes. It is expressed in equation form as “elasticity equals percentage change in quantity/ percentage change in price.” This fact means that goods and services with high elasticities will result in significant changes in the supply or demand following very tiny price changes. A number of elements can affect elasticity. The first factor is the existence of substitutes; where there are more

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