What is elasticity

What is elasticity? It can be defined as the sensitive measurement of a particular variable, for example, quantity demanded or quantity supplied, towards the change in one of its determinants. The determinants here can be price or income. The importance is to explain the consumer and sellers respective behavior in the market; and also to show the intersection between demand and supply. In general, the value of elasticity can be calculated from:
Elasticity = Percentage (%) of change in quantity
Percentage (%) of change in determinant

There are few reasons why elasticity is measured using percentage (%), it’s allows subject measured in different units and also changes in quantity due to change of price in currency value. Problems can be avoided in determining size of unit used. The changes can only be seen if an initial value is provided; for example if the price of the item is RM4 and RM1.20 additional will be significant but if the price is RM48.90 then the RM1.20 is insignificant change. Basically if an initial price is higher and changes are small, then the changes is insignificant, why is this happening? The answer is some consumer can’t really see the different in the price change. There are items that can be elastic and items that can be substitute for example mineral water, chocolate etc. but item that can’t be substitute is petrol, coffee, cigarettes. These are item even the price increase the demand is still the same as everybody that owns a car need petrol, if you are addicted to cigarette, even the price increase you will still buy it.

Elasticity that is normally used is divided to four types which is; price elasticity of demand, price elasticity of supply, income elasticity of demand and cross elasticity of demand. Everyone in supply chain will face taxes increase. For example if a supplier is burden with high tax the possibilities that they will pass the burden to manufacturer or consumer in terms of price increase but most of the time the finished product can’t take up the liability, somebody will have to carry it either manufacturer or retainer or find ways to deal with the tax issue.


Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price will cause large changes in quantity consumed. If a curve is less elastic, then it will take large changes in price to effect a change in quantity consumed. Graphically, elasticity can be represented by the appearance of the supply or demand curve. A more elastic curve will be horizontal, and a less elastic curve will tilt more vertically. When talking about elasticity, the term “flat” refers to curves that are horizontal; a “flatter” elastic curve is closer to perfectly horizontal. As we have noted, elasticity can be roughly compared by looking at the relative steepness or flatness of a supply or demand curve. Thus, it makes sense that the formula for calculating elasticity is similar to the formula used for calculating slope. Instead of relating the actual prices and quantities of goods, however, elasticity shows the relationship between changes in price and quantity. To calculate the coefficient for elasticity, divide the percent change in quantity by the percent change in price:
Elasticity = (% Change in Quantity)/(% Change in Price)
The effect a particular tax has on the two parties of a transaction that the producer that makes the good and the consumer that buys it is known as tax incidence. The burden of the tax is not dependent on whether the state collects the revenue from the producer or consumer, but on the price elasticity of supply and the price elasticity of demand. To understand how elasticities influence tax incidence, it is important to consider the two extreme scenarios and how the tax burden is distributed between the two parties.
The manner of tax burden between buyers and sellers is divided by tax incidence. The 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. When demand is more elastic than supply, producers bear most of the cost of the tax. The more inelastic the demand and supply are called tax revenue. Typically, when tax is implemented by the government towards sellers for every unit of good sold, the tax causes the price paid by buyers to differ from the price accepted by the sellers. The difference between both prices is the revenue for the government. Tax gives burden to sellers in the form of a lower price received from every unit and a lower selling quantity. For consumers on the other hand, burden is in the form of a higher price that needs to be paid and a lower usage quantity. The tax burden is normally carried by both sellers and buyers, but the ratio of burden is determined by the elasticity or gradient of both demand curve and supply curve.
Comparison of inelastic and elastic demand

Thus, you can prove by using diagrams that if demand and supply curves are perfectly inelastic, equilibrium output is totally unchanged. Meanwhile, for the tax burden, if demand is perfectly inelastic, all burden is borne by the consumers. When supply is perfectly inelastic, all burden is borne by the producers. From the analysis of tax burden, we can summarize that if government wants to obtain a higher tax revenue, tax can be implemented towards commodities with low elasticity of demand and supply. This is because tax does not result in a high reduction of equilibrium quantity. Take cigarettes for example. We know that smoking can lead to addition. Therefore, consumers are not very sensitive towards price change because demand is inelastic. Tax implemented on cigarettes will definitely be borne more by the consumers.

Taxation is a means by which governments finance their expenditure by imposing charges on citizens and corporate entities. The official currency of Malaysia is the Malaysian Ringgit (MYR). The main purpose of taxation is to accumulate funds for the functioning of the government machinate. All governments in the world cannot run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. In other words, a government can run its administrative set up only through public funding which is collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is very simple and obvious for proper functioning of a state. Taxes are charges levied against a citizen’s personal income or on property or for some specified activity. As such, one purpose of taxation is to increase in effectiveness and productivity of the nation as government is able to implement various social-economic development projects such as the construction of roads and bridges, schools, health facilities and provision of social services.

Another reason is that taxation assists in reducing consumption of unwanted goods. Taxes as such can be used as an effective tool to reduce the consumption of unwanted goods like alcohol. Higher taxes on such goods reduce the consumption as the price of the product will be very high for the consumers. Government also uses taxes as a way to protect local industries and as such make them more profitable. Increasing tariffs on imports and charging lower taxes to local products may boost the demand for goods and services produced by domestic industry. Taxes on imports, which are called tariffs, can be used by government to correct an unfavorable balance of payment situation by increasing the tariffs. This will result in imports becoming expensive and will cause a fall in demand for the imported goods.

All income tax information is summarized by KPMG Tax Services Sdn. Bhd., the Malaysian member firm of KPMG International, based on the Malaysian Income Tax Act, 1967 (the Act). Income tax is imposed on a territorial basis. Individuals, whether resident or non-resident in Malaysia, are taxed on income accruing in or derived from Malaysia. Foreign income remitted into Malaysia is exempted from tax. The income of a resident individual is subject to income tax at progressive rates after personal relief while the income of a non-resident individual is subject to income tax at the top marginal rate without personal relief. Everyone who works in Malaysia is required to pay income tax and all other taxes which are relevant and gained in their activities. The type of taxes in Malaysia are divided into two. The direct taxes are paid directly by those on whom it is levied. For example of direct tax are income tax, RPGT, stamp duty and petroleum income tax. Next is the indirect taxes are collected via third party. For example of indirect tax are sales tax, service tax and GST. These taxes will need to bear in mind if you are planning on relocating to Malaysia, and wish to draw up a budget and have a better idea of your net salary. You need to apply for tax clearance if your employment contract, or if you resign from your job or leave Malaysia for more than three months. For us to know whether we owe income tax, this is a certificate or letter from the Malaysian Inland Revenue (LHDN) gets to determines it. Once this letter has been received, your employer should release the balance of any money owed to you after you settle any outstanding taxes.

One of the clear example of indirect tax, Goods and Services Tax (GST) is a tax charged to the consumers that is based on the purchase price of certain goods and services, and it currently stands at 6% in Malaysia. GST is a levy on consumption and is essentially a territorial tax. This tax will replace the sales and service tax. The common features of GST are, the tax is collected at every stage of production process. The amount collected at each stage is based on the value added at that stage. It would improve collection of revenue for the Government in a manner that is more comprehensive, transparent and effective. Which means of increasing the Government tax base by reaching out to a broader group of people, namely consumers. The GST system has a self-policing mechanism due to inbuilt cross checking features which would improve tax compliance. Provides opportunity for the Government to lower corporate and individual tax rates. It also encourages greater foreign direct investment as well as foster saving among the taxpayers. The full list of taxable and non-taxable goods and services can be found on the website of the Royal Malaysian Customs Department.

Besides that, one of the clear example of direct tax is the real property gains tax and stamp duty. If you purchase a property in Malaysia, you will be subject to Real Property Gains Tax (RPGT) when you sell it. RPGT is a tax on the profit gained from the sale of a property and is payable to the Inland Revenue Board, and it will vary depending on the amount of time you have owned the property. If you buy a property in Malaysia, you will also need to pay Stamp Duty, which is a tax that is levied on the legal recognition of the S;P Agreement and Loan Agreement when you buy a house. You can calculate the stamp duty that you will owe on a property on the government’s Valuation and Property Services Department website.

The effects of elasticity on taxation. The most important objective of taxation is to raise required revenues to meet expenditures. Apart from raising revenue, taxes are considered as instruments of control and regulation with the aim of influencing the pattern of consumption, production and distribution. Taxes thus affect an economy in various ways, although the effects of taxes may not necessarily be good. There are same bad effects of taxes too. The effects on the allocation of resources is by diverting resources to the desired directions, taxation can influence the volume or the size of production as well as the pattern of production in the economy. It may, in the ultimate analysis, produce some beneficial effects on production. High taxation on harmful drugs and commodities will reduce their consumption. This will discourage production of these commodities and the scarce resources will now be diverted from their production to the other products which are useful for economic growth. Similarly, tax concessions on some products are given in a locality which is considered as backward.

There are some taxes which may produce some unfavorable effects on production. Taxes imposed on certain useful products may divert resources from one region to another. Such unhealthy diversion may cause reduction of consumption and production of these products. The next effects on the ability to work save is that the imposition of taxes results in the reduction of disposable income of the taxpayers. This will reduce their expenditure on necessaries which are required to be consumed for the sake of improving efficiency. As efficiency suffers ability to work declines. This ultimately adversely affects savings and investment. However, this happens in the case of poor persons. Taxation on rich persons has the least effect on the efficiency and ability to work. Not all taxes, however, have adverse effects on the ability to work. There are some harmful goods, such as cigarettes, whose consumption has to be reduced to increase ability to work. That is why high rate of taxes are often imposed on such harmful goods to curb their consumption. But all taxes adversely affect ability to save. Progressive rate of taxation reduces savings potentiality, since rich people save more than the poor. This means low level of investment. Lower rate of investment has a dampening effect on economic growth of a country. Thus, taxes have the disincentive effect on the ability to work, save and invest, on the whole.


The key concept when thinking about how to collect the most revenue is the price elasticity of demand. The price elasticity of demand also plays a key role in determining if a firm can pass the cost of key input price increases to consumers or benefit from reductions in input costs. Consumers will bear more of the burden of a tax than producers will, when supply is more elastic than demand. For example, producers will bear one-third of the tax burden and consumers will bear two-thirds of the tax burden, if supply is twice as elastic as demand. And when producers bear more of the burden of a tax than consumers, the demand is more elastic than supply. For example, consumers will bear one-third of the tax burden and producers will bear two-thirds of the tax burden, if demand is twice as elastic as supply.
Moreover, it’s a common mistake to assume that producers and consumers to share the equal burden of a tax. The analysis of the effect a particular tax has on the two parties of the producer that makes the good and the consumer that buys it in a transaction is called the tax incidence. The increase in a tax on a good that shifts the supply curve to the left, decreases the price for the sellers and increases the consumer price is known as the marginal tax. In fact, this only occurs when the price elasticity of demand is the same as the price elasticity of supply.