[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

be reflected more in changes in quantity than in price. If the supply curve is
relatively inelastic (approaching the vertical, as in panel B), shifts in the demand
curve will be reflected more in changes in price than in quantity. If the demand
curve is highly elastic (approaching the horizontal, as in panel C), shifts in
the supply curve will be reflected more in changes in quantity than in price.
Finally, if the demand curve is relatively inelastic (approaching the vertical, as in
panel D), shifts in the supply curve will be reflected more in changes in price than
in quantity.
The extreme cases can be easily seen by extending the graphs in Figure 4.7. If
one tilts the supply curve in panel A to be completely flat (perfectly elastic), a shift
in the demand curve will have no effect on price. If one tilts the supply curve in
panel B to be vertical (perfectly inelastic), a shift in the demand curve will have no
effect on quantity.
Long-Run Versus Short-Run Adjustments Because demand and supply
curves are likely to be less elastic (more vertical) in the short run than in the long
run, shifts in the demand and supply curves are more likely to be reflected in price
changes in the short run and in quantity changes in the long run. In fact, price
increases in the short run signal firms to increase their production. Therefore,
short-run price increases can be thought of as responsible for the output increases
that occur in the long run.
Tax Policy and the Law of Supply and Demand For many questions of
public policy, understanding the law of supply and demand is vital. One of the important
ways economists use this law is in projecting the effect of taxes. Assume that
the tax on a pack of cigarettes is increased by 10 cents, that the tax is imposed on
cigarette manufacturers, and that all the companies try to pass on the cost increase
to consumers by raising the price of a pack by 10 cents. At the higher price, fewer
cigarettes will be consumed; the precise decrease depends on the price elasticity
of demand. As demand falls, firms must reduce their price if demand is to equal
supply; the size of the reduction depends on the price elasticity of supply. The new
equilibrium is depicted in Figure 4.8A.
For firms to produce the same amount as before, they must receive 10 cents
more per pack (which they pass on to the government). Thus, the supply curve is
shifted up by 10 cents. Since the demand for cigarettes is relatively inelastic, this
shift will result in a large increase in price and a relatively small decrease in
quantity demanded.
When a tax on producers results in consumers’ paying a higher price, economists
say the tax is “passed on” or “shifted” to consumers. That the consumer bears
the tax (even though it is collected from the producers) does not mean that the producers
are “powerful” or have conspired together. It simply reflects the system of
supply and demand. Note, too, that the price does not rise the full 10 cents. Producers
receive slightly lower after-tax prices and therefore bear a small fraction of the
tax burden.
A tax imposed on a good for which the demand is very elastic leads to a different
result. Assume, for instance, that the government decides to tax cheddar
cheese (but not other cheeses). Since many cheeses are similar to cheddar,
USING DEMAND AND SUPPLY ELASTICITIES ∂ 87