What is the importance of elasticity of demand in business?
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.
Why is elasticity important to business man and government?
Elasticity helps businesses determine the prices for goods. Elasticity also helps the government create policies. If the government wants to get more revenues from tax, it will look at the goods’ elasticity. In most cases, the government will increase the levy on products with inelastic demand.
What is the importance of income elasticity of demand to producers and government?
Income elasticity of demand might be useful to governments as they consider tax and spending policies. Income elasticity of demand is a measure of how much the quantity demanded of a good or service changes when consumers’ incomes change. Governments can have an impact on the incomes of their citizens.
Why is the price elasticity of demand value important?
The price elasticity of demand value allows to have a reliable economic indicator to decide the best price strategy. Products and services with an absolute elasticity value of 1 refers to unitary elasticity, whereas the proportion in change of sales is equal to proportion of sale in price.
What is the difference between elastic demand and inelastic demand?
In general, for items having inelastic demand, the producer will fix a higher price and items whose demand is elastic the businessman will fix a lower price. 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.
How does a monopolist take into account the market elasticity?
A monopolist takes into account the market elasticity when setting the price for his product (1) when the market for his product is elastic, by setting a low price, he can benefit more. Low price means large sales and, thus, large overall sales If demand is inelastic, high prices can be set.
Why is elasticity of demand important to the Minister of Finance?
The idea of demand elasticity is of utmost importance to the Minister of Finance. The Minister of Finance must figure out how to add more money to the exchequer. For this reason, the finance minister takes into account the elasticity of demand when introducing new taxes. i) Taxes on commodities with elastic demand would produce less revenue.