For durable goods, the price elasticity of demand may be greater in the short run than in the long run. The optimal price for the firm to charge is directly related to the marginal cost and inversely related to the absolute value of the price elasticity of demand. The price elasticity of supply measures the sensitivity of producers to price changes. It is equal to the percentage change in quantity supplied divided by the percentage change in price. The equilibrium price rises and the corresponding quantity falls.
People are sometimes interested in determining how the tax is split between suppliers and buyers.
The relative magnitude of the price elasticity of supply and the price elasticity of demand determines who bears the larger share of the tax burden. Specifically, the majority of the tax burden falls on the group that is relatively less sensitive to price changes. Let X is the portion of the tax borne by suppliers. For an interesting application, consider the payroll tax. Fundamentally, the payroll tax is a tax on employment.