demand for home heating is generally inelastic. Each household cut back on what it valued least on the

margin. For some it might have been some dinners out, or a vacation, or postponing buying a new refrigerator

or a new car. Sharply higher energy prices can have effects beyond the energy market, leading to a widespread

reduction in purchasing throughout the rest of the economy.

A similar issue arises when the government imposes taxes on certain products, such as on gasoline, cigarettes,

and alcohol. Say that a tax on alcohol leads to a higher price at the liquor store. The higher price of alcohol

causes the budget constraint to pivot left, and alcoholic beverage consumption is likely to decrease. However,

people may also react to the higher price of alcoholic beverages by cutting back on other purchases. For

example, they might cut back on snacks at restaurants like chicken wings and nachos. It would be unwise to
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