Now let's discuss how the elasticity of the curves relates to the taxes. Alright, so the way we're going to split the tax, right? The tax incidence to the consumer and the tax incidence to the producer is going to be based on the price elasticity of the curves, right? So remember when we were talking about price elasticity, so if we're talking about price elasticity of demand, price elasticity of demand, that was when we had the percentage change in quantity demanded over the percentage change in price, right? And with supply, it was quantity supplied on top. So this idea of elasticity, it helped us determine what the shape of the curve was going to look like, right? How kind of like how steep the curves are going to be kind of thing, right? So remember from our earlier discussion about taxes is that the party paying the tax does not necessarily bear the burden, right? Just because the buyer is paying the tax doesn't mean that they're going to take the whole burden. It's going to be split in some way and that split is going to be based on these elasticities. So let's look at a couple of examples. First, let's look at a situation where we have an elastic supply and an inelastic demand, right? So, demand is more inelastic and let's look on the graph and let's talk about this. So we've got our price and quantity axes and this is our downward demand and our supply curve, right? So it tells us that the supply is elastic which we know because it's crossing here, through the price axis, right? And the other thing that tells me that it's elastic is that it's very close to laying down. Remember when we're perfectly elastic, we're laying down and the supply curve is pretty close to that laying down so it's pretty elastic there. And how about the demand curve, right? That's pretty close to perfectly inelastic where we're standing straight up, it's just a little bit over to the side, so that one's quite inelastic. So look what happens to our tax in this situation. So remember, we're going to impose some tax that's going to put a difference between the prices the buyers pay up here and the price the seller receives down here, right? There's now this difference because of the tax and we're going to be able to say who paid more of the tax based on who has more of the line, right? So if this was our original \( p^{\ast} \) right here, right and I'll draw it in black this whole line to divide that tax. So the amount below the line is the part that goes to the supplier and you can see it's a little tiny piece right? This little red piece right there, that's going to the supplier and that big chunk is going to the buyer, right. So in this case, you're going to see that the buyer pays more. I'm going to say, pays more, right? They're going to have a higher tax incidence in this case. And now let's talk about the others, the opposite situation where we have an inelastic supply and an elastic demand. So once again right we've got our price and quantity axes and our demand downward and our supply upward. And again, let's confirm that we're inelastic or elastic, right? So supply is inelastic when it crosses the quantity axis which we see there, but we also can kind of confirm because it's almost perfectly inelastic, right? It's getting close to that standing straight up and we got elastic demand, right? It's getting pretty close to that perfectly elastic laying down. So that is our elastic demand that we see there. And now what happens? So we're going to have the same situation where there's this tax imposed, right? And we're going to have this difference where the price of the buyer is right here and the price of the seller is down here, right, and there's that tax in the middle. So just like we did before, let's see who's paying more of the tax in this situation, right? So the portion of the tax going to the buyer in this case is a little bit, on the top is small, right, compared to this large amount to the seller, right? So in this case, the seller is paying more. They have the higher tax incidence. Seller pays more, pays more and I'm going to_write_tax_on_each_of_these_just_to_be_clear, pays more tax, right? Okay. So what have we seen? What conclusion can we draw here, right? In both cases, in the first case we had inelastic demand and the buyer was paying more tax. In the second case we had inelastic supply and the seller was paying more tax, right? So we're going to make this conclusion that whoever is more elastic or excuse me, more inelastic, right? Whoever was more inelastic represents the group that will have more tax incidents, right? And the idea here is let's think about back to elasticity, right? When we're inelastic that means that our quantity demanded is not going to react so much to a price change, right? We're usually inelastic as consumers for something that we really need, right? Maybe like some sort of life-saving drug or if we're addicted to cigarettes, right? Cigarettes would be an inelastic demand that even if the price went up, we would still buy them. So that would that would be an inelastic product and you can imagine if you're inelastic and the price is changing, you can't really get out of the market. But if you're elastic and now you're seeing this higher price, you're going to get out of the market and that's exactly what we're seeing. So whoever's more inelastic is kind of more tied to the market and is going to have to suffer through that tax incidence. Alright, so whoever's more inelastic is more, has more tax incidence. So if the demand curve is more inelastic, consumers have a higher tax incidence. Consumers pay more tax, and if the supply curve is more inelastic, the sellers pay more tax. Right? Now up in our example, we had a situation where, one was elastic and the other one was inelastic, right? What if they're both elastic or they're both inelastic? How do we know who's going to share, the burden? Well in that case when they're both elastic or both inelastic, you're going to get something closer to a fair share, right? Where they're going to be splitting it more evenly. But remember it's the one that's more inelastic that's going to pay more. So even if they're both elastic, one might be more inelastic than the other. And in_that_case_they're_going_to_pay_more_of_the_tax, right? And usually you're not going to have to be able to decide that, usually it's going to be some sort of visual thing like we can see on this graph here, right? So more inelastic, more tax incidents, alright? So in the next video let's go through a couple of special cases, like the idea of having perfect perfectly elastic demand or perfectly inelastic demand and let's see what happens with tax incidents in those cases. Alright, let's do that now.