Why should policymakers care about elasticity?
Common sense tells us that when the price of a good falls, all other things being equal, people will purchase more of that good; that is, the demand for the good rises. How much demand increases depends on how “elastic” that good is. Elasticity of demand measures how responsive changes in demand are to changes in price. Similarly, elasticity of supply measures how responsive changes in supply are to changes in price. When a good is demand-inelastic, it means that changes in price have only a minor effect on the amount of the good demanded. By contrast, goods that are demand-elastic have significant responses to changes in price. Why should policymakers care about the concept of elasticity? One reason is that different goods have different levels of demand elasticity, and this has important implications for tax policy. For certain items, such as tobacco products or alcohol, demand is inelastic. This means that an increase in the price of these goods (through additional taxation, for exa
