The concept of elasticity for demand is of great importance for determining prices of various factors of production. Factors of production are paid according to their elasticity of demand. In other words, if the demand of a factor is inelastic, its price will be high and if it is elastic, its price will be low.
How can price elasticity of demand be used by policy makers?
Price elasticity of demand can also be used in the taxation policy in order to gain high tax revenue from the citizens. One of the ways would be for the government to raise tax revenue in commodities which are price inelastic. For example: Government could increase the tax amount in goods like cigarettes and alcohol.
How is the price elasticity of demand used in government?
Formulation of Government Policies: Refers to an important significance of the concept of price elasticity of demand. The government takes into consideration the price elasticity of demand while planning taxes.
Why is price elasticity important to monopolistic competition?
If the demand for his product is elastic, he will profit more by fixing a low price. In case the demand is less elastic, he is in a position to fix a higher price. Similarly, a producer under monopolistic competition has to study the degree of elasticity of demand in pricing his product.
Why is elasticity of demand important in international trade?
1. International trade: In order to fix prices of the goods to be exported, it is important to have knowledge about the elasticity’s of demand for such goods. A country may fix higher prices for the products with inelastic demand.
Why is elasticity of demand important to finance minister?
The concept of elasticity of demand is of paramount importance to the finance minister. The finance minister has to find out how he can bring more Figure 11.18 revenue to the exchequer. For this, he must know the elasticity of demand of the product on which the tax is to be imposed.
