react to changes in price in the short run, but react more substantially in the long run. As a result, demand and

supply often (but not always) tend to be relatively inelastic in the short run and relatively elastic in the long

run. A tax incidence depends on the relative price elasticity of supply and demand. When supply is more

elastic than demand, buyers bear most of the tax burden, and when demand is more elastic than supply,

producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.

5.4 Elasticity in Areas Other Than Price

Elasticity is a general term, that reflects responsiveness. It refers to the change of one variable divided by the

percentage change of a related variable that we can apply to many economic connections. For instance, the
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