Importance of Elasticity of
Demand
1.
. Determination
of price policy: While fixing the price of this product,
a businessman has to consider the elasticity of demand for the product. He
should consider whether a lowering of price will stimulate demand for his
product, and if so to what extent and whether his profits will also increase a
result thereof.
2. Price discrimination: Price
discrimination refers to the act of selling the technically same products at
different prices to different section of consumers or in different in
sub-markets. The policy of price-discrimination is profitable to the monopolist
when elasticity of demand for his product is different in different
sub-markets. Those consumers whose demand is inelastic can be charged a higher
price than those with more elastic demand.
3. Shifting of tax burden: To
what extent a producer can shift the burden of indirect tax to the buyers by
increasing price of his product depends upon the degree of elasticity of
demand. If the demand is inelastic the larger part of the indirect tax can be
shifted upon buyers by increasing price. On the other hand if the demand is
elastic than the burden of tax will be more on the producer.
4. Taxation and subsidy policy: The
government can impose higher taxes and collect more revenue if the demand for
the commodity on which a tax is to be levied is inelastic. On the other hand,
in ease of a commodity with elastic demand high tax rates may fail to bring in
the required revenue for the government. Govt., should provide subsidy on those
goods whose demand is elastic and in the production of the commodity the law of
increasing returns operates.
5. Importance in international
trade: The concept of elasticity of demand is of crucial importance in many
aspects of international trade. The success of the policy of devaluation to
correct the adverse balance of payment depends upon the elasticity of demand
for exports and imports of the country.
6. Importance in the determination
of factors prices: Factor with an inelastic demand can
always command a higher price as compared to a factor with relatively elastic
demand. This helps the trade unions in knowing that where they can easily get
the wage rate increased. Bargaining capacity of trade unions depend upon
elasticity of demand for workers services.
7. Determination of sale policy
for supper markets: Super Markets is a market where in a
variety of goods are sold by a single organization. These items are generally
of mass consumption. Therefore, the organization is supposed to sell
commodities at lower prices than charged by shopkeepers in the other bazars.
Thus, the policy adopted is to charge a slightly lower price for items whose
demand is relatively elastic and the costs are covered by increased sales.
8. Pricing of joint supply
products: The goods that are produced by a single production process are joint
supply products. The cost of production of these goods is also joint. Therefore,
while determining the prices of these products their elasticity of demand is
considered.
9. Effect of use of machines on
employment: The use of machines may reduce the cost of production and price. If the
demand of the product is elastic then the fall in price will increase demand
significantly. As a result of increased demand the production will also
increase and more workers will be employed.
10. Public utilities: The
nationalization of public utility services can also be justified with the help of
elasticity of demand. Demand for public utilities are generally inelastic in
nature. If the operation of such utilities is left in the hand of private
individuals, they may exploit the consumers by charging high prices.
11. Output decisions: The elasticity
of demand helps the businessman to decide about production. A businessman
chooses the optimum product- mix on the basis of elasticity of demand for
various products. The products having more elastic demand are preferred by the
businessmen. The sale of such products can be increased with a little reduction
in their prices.
From the above
discussion it is amply clear that price elasticity of demand is of great
significance in making business decisions.
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