Importance of Elasticity of Demand/ Importance of Studying Elasticity of Demand/
Posted by Ripon Abu Hasnat on Monday, November 17, 2014 | 0 comments
The concept of elasticity of demand is of great
importance in practical life. Its main points are given as under:
1. Useful for Business: It enables the business in
general and the monopolists in particular to fix the price. Studying the nature
of demand the monopolist fixes higher prices for those goods which have
inelastic demand and lower prices for goods which have elastic demand. In this
way, this helps him to maximize his profit.
2. Fixation of Prices: It is very useful to fix
the price of jointly supplied goods. In the case of joint products like paddy
and straw, the cost of production of each is not known. The price of each is
then fixed by its elastic and inelastic demand.
3. Helpful to Finance
Minister:
It helps the Finance Minister to levy tax on goods. After levying taxes more
and more on goods which have inelastic demand, the Government collects more
revenue from the people without causing them inconvenience. Moreover, it is
also useful for the planning.
4. Fixation of Wages: It guides the producers to
fix wages for labourers. They fix high or low wages according to the elastic or
inelastic demand for the labour.
5. In the Sphere of
International Trade: It is of greater significance in the sphere of international
trade. It helps to calculate the terms of trade and the consequent gain from foreign
trade. If the demand for home product is inelastic, the terms of trade will be profitable
to the home country.
6. Paradox of Poverty. It explains the paradox of
poverty in the midst of plenty. A bumper crop instead of bringing prosperity
may result in disaster, if the demand for it is inelastic. This is specially
so, if the products are perishable and not storable.
7. Significant for
Government Economic Policies. The knowledge of elasticity of demand is very
important for the government in such matters as controlling of business cycles,
removing inflationary and deflationary gaps in the economy. Similarly, for
price stabilization and the purchase and sale of stocks, information about
elasticity of demand is most useful.
8. Determination of Price
of Public Utilities. This concept is significant in the determination of the prices
of public utility services. Economic welfare of the society largely depends
upon the cheap availability.
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