Government helps to fix the prices of necessities of life. Wage determination The idea of elasticity of demand helps to wage determination. Thus, instead of gaining from the increase in price, it will lose if the demand for a product happens to be elastic. On the other hand, if the demand for imports is inelastic, the increase in prices as a result of devaluation will adversely affect the balance of payments, because at higher prices of the imports and almost the same quantity of imports, the country would have to spend more on the imports than before. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. For stabilizing agricultural prices, the government may adopt either output control or purchase surpluses and other similar operations.
As for instance the demand for drinking water remains static in spite of its rise in price. Degree of elasticity of commodity has potential to affect the wage to be paid to the labor. They fix high or low wages according to the elastic or inelastic demand for the labour. In Price Discrimination by Monopolist: Under monopoly discrimination the problem of pricing the same commodity in two different markets also depends on the elasticity of demand in each market. If the demand is inelastic, there will not be any use in currency devaluation.
As a result, demand will stimulate greater production and hence more employment. A country will benefit from international trade when: i it fixes lower price for exports items whose demand is price elastic and high price for those exports whose demand is inelastic ii the demand for imports should be inelastic for a fall in price and inelastic for arise in price. As a result, their total income goes down. The one most relevant to businesses, however, is the price elasticity of demand, which measures the change in demand as a result of a change in price. More information: If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:.
In the case of perfect competition this may be an exception as the producer can expect perfectly elastic curve for his product. Elastic goods are more sensitive to increases in price, while inelastic goods are less sensitive. Therefore, while determining the prices of these products their elasticity of demand is considered. Demand elasticity is calculated as the percent change in the quantity demanded divided by a percent change in another economic variable. The incidence is on the buyer, if demand is perfectly inelastic. Generally as rules of thumb, if the quantity of a good demanded or purchased changes more than the price change, the product is termed elastic.
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. While price elasticity plays a significant role in pricing of a product to maximize the total revenue of an organization in the short run, income elasticity of demand is important for production planning and management in the long run. Therefore, increasing price of its products to maximize profit is one of the primary concerns of producers. A higher demand elasticity for an economic variable means that consumers are more responsive to changes in this variable. As they skip smoking there will be very minimal chance of holding it as they grow adult.
By increase in its price the government is actually preventing the upcoming generation to get into its hold. And, producers must evaluate the degree of elasticity of each product in order to extract maximum profit from all products. At that minimum price the Government should be prepared to buy the crop from the farmers. In one concept of pure monopoly demand curve is perfectly inelastic. The Finance Minister has to take into account the elasticity of the product on which he proposes to impose the tax if the revenue for the Government is to be increased.
Patents or high cost of advertising could make it hard for new firms to enter the market 2. After levying taxes more and more on goods which have inelastic demand, the Government collects more revenue from the people without causing inconvenience to the people. The problem of Incidence of taxation bearing the burden of taxation depends upon the elasticities of demand and supply of the commodities taxed. The government will distribute these products at fair price. Categorizing goods: Implies that income elasticity of demand helps in classifying goods, such as normal goods, essential goods, or inferior goods. Devaluation helps to increase exports. These kinds of products are subject to elasticity in demand.
The products having more elastic demand are preferred by the businessmen. Given how these are the commodities people choose to purchase regardless of the price tag, the tax revenue would significantly rise. Raw materials — If raw materials are readily available, it will be relatively easy to expand production 3. Economic welfare of the society largely depends upon the cheap availability of the essential products like water, electricity, cooking gas, transportation etc. In the case of price discrimination, the markets are divided mainly on the basis of difference in elasticities of demand for the same product in different markets. Thus, the goods or services are often charged high prices in such market.
However, according to Begg, Fischer and Dornbusch 2008 , there are some products whose demands diminish or increases with the rise and fall of its price. The producer will be guided mostly by demand and its nature while fixing his price. Finally, if the quantity purchased changes less than the price say, -5% demanded for a +10% change in price , then the product is termed inelastic. Whereas, if in a monopolistic competition or oligopoly, where your product is highly elastic, you wish to raise the price of your good, beware of losing your customers by a fair deal! In such industries, sellers earn high profits when there is increase in national income. It has been found by some empirical studies that business firms often fail to take elasticity into account while taking decisions regarding prices, or they given insufficient attention to the coefficient of elasticity.
When a tax is imposed on a commodity, its price will rise. And as the elasticity of demand for a product becomes less and less, the degree of monopoly power becomes more and more. Assuming that there are no costs in producing the product, businesses would simply increase the price of a product until demand falls. An elasticity of between zero and one is said to be relatively inelastic, when large changes in price cause small changes in demand. This proves that if the social cost is greater than the actual present price, then the level of social efficiency can be further increased by means of making the smokers pay true social cost.