Economics 101 would dictate that out of two goods, the one with the more inelastic demand will maintain its price better.
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"Apple is one of the few companies that throughout this very wageless recovery that we've seen over the last 10 years, they've actually maintained pricing power which suggests that demand for Apple is more inelastic than you might think," said Sanchez.
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This has a direct impact on inflation by raising aggregate demand. Also, the increase in the demand for labour resulting from higher demands for goods and services will cause a rise in money wages and unit labour costs. The more inelastic the aggregate supply in the economy, the greater the impact on inflation. The increase in demand for goods and services may cause a rise in imports.
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While an increase in geographic mobility increases overall economic efficiency, the increased competition for jobs on the local level in otherwise prosperous regions could lead to higher unemployment than before the migration. Female labor supply rates actually have larger statistical effect on mobility than male rates. Traditionally male jobs in the developing world have much more inelastic demand than female ones, so the variations in the female rate lead to more drastic changes in employment that more strongly affect mobility.
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Price elasticity also differentiates types of goods. An elastic good is one for which there is a relatively large change in quantity due to a relatively small change in price, and therefore is likely to be part of a family of substitute goods; for example, as pen prices rise, consumers might buy more pencils instead. An inelastic good is one for which there are few or no substitutes, such as tickets to major sporting events, original works by famous artists, and prescription medicine such as insulin. Complementary goods are generally more inelastic than goods in a family of substitutes.
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More generally, then, the higher the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more inelastic the demand compared to supply, the heavier the burden on consumers. The general principle is that the party (i.e., consumers or producers) that has fewer opportunities to avoid the tax by switching to alternatives will bear the greater proportion of the tax burden. In the end the whole tax burden is carried by individual households since they are the ultimate owners of the means of production that the firm utilises (see Circular flow of income).
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Theory states that in such a situation, prices of inputs for which supply is inelastic will rise relative to prices of more elastic inputs. Similarly, if the supply of a particular input increases at a faster rate than the supply of other inputs, the price of such input will decline relative to the price of the other factors of production used. Ideally then, farmers would be looking to replace or use less of the more inelastic and less responsive factors of production since they are the more expensive to use. Therefore, technical innovations that replace such inputs would guarantee less costs and hence more profits.
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When demand is more inelastic than supply, consumers will bear a greater proportion of the tax burden than producers will. Demand elasticity, in combination with the price elasticity of supply can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is perfectly inelastic, by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant. Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety.
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Depending on the price elasticities of demand and supply, who bears more of the tax or who receives more of the subsidy may differ. Where the supply curve is less elastic than the demand curve, producers bear more of the tax and receive more of the subsidy than consumers as the difference between the price producers receive and the initial market price is greater than the difference borne by consumers. Where the demand curve is more inelastic than the supply curve, the consumers bear more of the tax and receive more of the subsidy as the difference between the price consumers pay and the initial market price is greater than the difference borne by producers.
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This, for instance, weakens even more the financial system generating new incentives to default. On the other hand, persistent episodes of default weaken the tax system by encouraging tax avoidance and capital flight, making it more difficult to meet debt obligations. This forces countries either to acquire additional debt if available or to move towards more inelastic tax sources, exacerbating tax avoidance and capital flights and thus falling in a feedback loop that makes it more and more difficult for the country to commit to repay its debt. Institutional fragilities generate history dependence: past events have a decisive incidence on current outcomes because defaulter countries are more prone to experience future default episodes.
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Negative supply shock The diagram to the right demonstrates a negative supply shock; The initial position is at point A, producing output quantity Y1 at price level P1. When there is a supply shock, this has an adverse effect on aggregate supply: the supply curve shifts left (from AS1 to AS2), while the demand curve stays in the same position. The intersection of the supply and demand curves has now moved and the equilibrium is now point B; quantity has been reduced to Y2, while the price level has been increased to P2. The slope of the demand curve determines how much the price level and output respond to the shock, with more inelastic demand (and hence a steeper demand curve) causing there to be a larger effect on the price level and a smaller effect on quantity.
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Consider a 7% import tax applied equally to all imports (oil, autos, hula hoops, and brake rotors; steel, grain, everything) and a direct refund of every penny of collected revenue in the form of a direct egalitarian "Citizen's Dividend" to every person who files income tax returns. The import tax (tariff) will increase prices of goods for all domestic consumers, compared to the world price. This increase in the price of goods will result in two types of dead-weight loss: one attributable to domestic producers being incentivized to produce goods that would be more efficiently produced internationally, and the other attributable to domestic consumers being forced out of the market for goods that they would have bought, had the price not been artificially inflated by the tariff (import tax). The actual cost of the tax will be borne by whichever party (producers or consumers) has the more inelastic demand (see earlier section on relative elasticities), regardless of whether consumers buy domestic or foreign goods, and regardless of where the producers make their goods.
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