Who bears the burden under the following scenarios:
a)Perfect inelastic demand curve and normal supply curves
b)Perfect elastic demand curve and normal supply curves
a) Under a perfect inelastic demand curve and normal supply curves, the burden of the tax is borne entirely by the consumers.
b) Under a perfect elastic demand curve and normal supply curves, the burden of the tax is borne entirely by the producers.
To determine who bears the burden in different scenarios, you need to understand the concept of elasticity and how it affects the distribution of the burden between buyers and sellers.
Elasticity is a measure of the responsiveness of demand or supply to changes in price. When demand is inelastic, it means that the quantity demanded is not very responsive to price changes. On the other hand, when demand is elastic, it means that the quantity demanded is highly responsive to price changes. The same concept applies to supply - inelastic supply means that the quantity supplied is not very responsive to price changes, while elastic supply means that the quantity supplied is highly responsive to price changes.
Let's discuss the two scenarios you mentioned:
a) Perfect inelastic demand curve and normal supply curves:
In this scenario, the demand curve is perfectly inelastic, meaning that regardless of price changes, the quantity demanded remains unchanged. On the other hand, the supply curve is normal, which implies that the quantity supplied is responsive to price changes.
In this situation, since demand is inelastic, buyers do not adjust their consumption even if prices increase. Therefore, the burden of any price change falls entirely on buyers, while sellers (suppliers) are able to maintain their supply without any significant adjustments.
b) Perfect elastic demand curve and normal supply curves:
In this scenario, the demand curve is perfectly elastic, indicating that even small changes in price will cause a significant change in the quantity demanded. The supply curve, as before, is normal, meaning that suppliers would adjust their quantity supplied in response to price changes.
In this case, because demand is elastic, any increase in price would result in a sharp decrease in the quantity demanded. Buyers, therefore, bear the entire burden of the price increase as they are forced to significantly reduce their purchases. Suppliers, on the other hand, can continue to adjust their supply to meet the reduced demand without experiencing a significant impact on their revenue.
It's important to note that these scenarios assume that determination of price is solely based on the interaction of demand and supply curves, and other factors such as market structure or government regulations are not considered. In reality, the burden of a price change may be influenced by a variety of factors.
a) In the scenario of a perfect inelastic demand curve and normal supply curves, the burden will largely fall on the consumers. This is because, with inelastic demand, the consumers are less responsive to changes in price. Therefore, even if the price increases, the consumers will continue to purchase the same quantity of the product, and thus bear a larger portion of the burden.
b) On the other hand, in the scenario of a perfect elastic demand curve and normal supply curves, the burden will primarily fall on the producers or suppliers. With elastic demand, consumers are highly responsive to changes in price. If the price increases, consumers are likely to reduce their demand significantly or even switch to substitute products. As a result, the producers will have to lower the price in order to maintain or regain market share, putting the burden on them.