Uses of elasticity of demand. What are the various uses of elasticity of demand? 2022-12-07
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Elasticity of demand refers to the degree to which the quantity demanded of a good or service changes in response to a change in its price. It is a measure of the responsiveness of consumers to changes in prices and is an important concept in economics and business. There are several uses of elasticity of demand, some of which are discussed below:
Setting prices: Elasticity of demand can be used by firms to determine the optimal price for their products. If the demand for a product is elastic, it means that a small change in its price will result in a significant change in the quantity demanded. In this case, firms may choose to set a lower price in order to increase the quantity demanded and maximize their profits. On the other hand, if the demand for a product is inelastic, a small change in its price will not have a significant impact on the quantity demanded. In this case, firms may choose to set a higher price in order to maximize their profits.
Price discrimination: Elasticity of demand can also be used by firms to practice price discrimination. This is when a firm charges different prices to different groups of consumers based on their willingness to pay. For example, a firm may charge a higher price to consumers who have a higher elasticity of demand for a product and a lower price to consumers who have a lower elasticity of demand. This allows the firm to capture a larger share of the market and maximize its profits.
Government policies: Elasticity of demand can also be used by governments to design economic policies. For example, if the demand for a product is elastic, the government may choose to increase taxes on that product in order to reduce its consumption and achieve certain policy goals, such as reducing pollution or improving public health. On the other hand, if the demand for a product is inelastic, the government may choose not to increase taxes on that product in order to avoid a significant reduction in its consumption.
Market analysis: Elasticity of demand is also useful for market analysis and forecasting. By analyzing the elasticity of demand for a particular product, firms can predict how changes in its price will affect its sales and revenues. This can help them make informed business decisions and adjust their pricing strategies accordingly.
In conclusion, elasticity of demand is a useful tool for firms, governments, and analysts in understanding how consumers respond to changes in prices and making informed decisions. It plays a crucial role in setting prices, price discrimination, government policies, and market analysis, and is an important concept in economics and business.
Uses or Importance of Cross Elasticity of Demand
. As a result the tax revenue of the government falls from TP 1X 1Y 1 to TP 2X 2Y 2. The price of each one is then set on the basis of its demand elasticity. If the advertisement elasticity of demand during a particular time then the promotional spending could be increased and vice versa. This will occur whether the economy is in the expansionary or contractionary phase of the business cycle. The products whose income elasticity is positive for all levels of revenue are termed normal products. So given the value of elasticity of demand, future demand forecasting would become easy.
Uses of Income Elasticity of Demand in Business Decision Making
The resulting curve is downward-sloping; thus, increases in price result in a fall in demand for a given product. This is because the use of electricity for industrial purposes can be replaced with other fuels. Thus, elasticities differ with respect to variety of product in question. The coefficient of income elasticity of these items is always positive. If the value of price elasticity of demand is relatively lower, then the businessman will shift more burden of tax on the hand of buyers and vice versa.
What are the various uses of elasticity of demand?
In economics, the demand for a certain good or service is represented by the demand curve. For this reason, the finance minister takes into account the elasticity of demand when introducing new taxes. A businessman chooses the optimum product- mix on the basis of elasticity of demand for various products. And a zero-income elasticity of demand for products means if income rises or falls, the need for things or services will not change. Staffs are also opposed to the use of automated devices for fear of unemployment.
Uses of Elasticity of Demand for Managerial Decision Making
For supply, you can measure: 4. This creates a problem in the area of law enforcement. Suppose a firm introduces a labour- saving machine. Generally, the lower price is fixed for the elastic product and the higher price is for the inelastic product. This variable is of greatest significance in determining the responsiveness of changes in quantity demanded of almost all consumer durable goods like cars, bicycles, T. A country may fix higher prices for the products with inelastic demand.
In contrast, if trade volumes are relatively inelastic to price changes, devaluation will not succeed, that is, an increase in import prices results in a less than proportionate fall in import volume, increasing the total amount of foreign currency required to finance the import bill, while the decrease in export prices results in a less than proportionate increase in export volume, bringing about a fall in total foreign currency earnings on exports. Pricing policy: Large firms produce different related goods. Forecasting demand Forecasting demand applies to the idea that the income elasticity of demand tends to predict demand for commodities in the future. However, if demand is inelastic, then he is in a position to fix a high price. However, if the good in question is considered a harmful one and has an elastic demand, then the government can deliberately levy a huge tax on it with the objective of reducing its consumption. It will be better for him to leave things as they originally are.
Use of Elasticity of Demand in Business Management Problems
If the cross elasticity is high there is an imperfect market. The income effect tells us that demand for normal goods will increase as income increases and decrease when income decreases. Thus their demand is directly affected by the pricing policies of other producing firms. It helps to solve managerial issues, especially those related to pricing and production decision-making. Pricing of Joint Product In the case of a joint product like wool and mutton, paddy and straw, chicken and eggs, etc. This implies high prices are charged from consumers whose demand does not change with change in the price of products.
It is important in the fields of manufacturing, trade, and commerce. Inferior goods are such commodities. For those involved in drug trade this means increased revenues and profits. A nation will be able to import cheaply those items whose demand in the home market is elastic. Here Y d is the income demand curve showing the relationship between Y d disposable income and Q. In certain instances, where the cost and prices of products with elastic demand are reduced by machines, the amount requested may increase.
In practice, an accurate estimate of the probable response of volume of sales to price changes is extremely difficult. For instance, a company producing expensive goods should concentrate its marketing efforts on different media that reach high income individuals. If there is a substantial change in wages, the change in demand for products will also be significant. Factor Pricing The elasticity of demand concept is also useful to determine the price of factor inputs. Government economists often use this concept in contingency planning exercises during recent oil crisis. Price Elasticity of Demand The measured value of elasticity is sometimes called the elasticity coefficient.
So help the farmers the government will have to impose restriction of agricultural out- Use 3. As a result, all economic decisions by the government, business firms, investors, and consumers, etc. Therefore, in the interest of general public, the government owns and runs such services. If the quantity demanded of a commodity rises falls with an increase in income, the commodity is called a normal inferior good. When planners know the income elasticity of demand for public goods and services, they can take appropriate measures to balance supply and demand. The demand curve is plotted on a graph with price labeled on the y-axis and quantity labeled on the x-axis. Helpful to Government for Policy Formulation The governmental organs also use the concept of income elasticity of demand in the formulation of different types of policies.
